Explain the link between the opportunity to commit fraud and corporate governance systems

Question

What will be an ideal response?

Answer 1

An important factor in whether the opportunity to commit fraud exists is whether the corporate governance system is operating as intended. If not, the opportunity to commit fraud is greater. In cases such as Tyco, the board members were allowed to use company funds for personal purposes to bring them along with the CEO's similar fraud (Dennis Kozlowski), and presumably to buy their silence.

Prior to SOX, most boards of directors were not independent of management and, in many cases including Tyco, board members were beholden to management for their positions. It was highly unlikely the board served as a check on unethical behavior or fraudulent financial statements. SOX requires an independent audit committee with one member being a financial expert. The New York Stock Exchange requires a majority of board members to be independent of management. These outside directors should meet separately with the internal auditors and external auditors to get candid comments about management's performance, whether the internal controls are operating as intended, and whether the financial statements are accurate and reliable. PCAOB Standard No. 16 also requires specific communications between the external auditors and the audit committee. Corporate governance has been tightened up in almost all companies thereby making it less likely that, at least in the corporate governance arena, the opportunity will exist to commit fraud.

Another factor that influences opportunity is organizational dissonance. Dissonance creates an unhealthy organizational culture that can lead to fraud because employees so affected feel more justified in committing fraud. When organizational ethics are low and an individual's ethics are low, fraud is more likely to occur. On the other hand, if organizational ethics are high while an individual's are low, there must be mechanisms built into the corporate governance system such as a hot line and/or compliance officer to monitor ethical systems. Other employees should be encouraged to speak up when they notice another employee violating ethical standards. The hot line helps in that regard.