CAQ Reports on Fraud Best Practices, Launches New Effort

The key to deterring would-be corporate fraudsters is a strong tone at the top, a skeptical approach to financial reporting, and strong communication among those in the reporting supply chain, according to a recent report from the Center for Audit Quality.

The CAQ conducted five roundtables and 20 in-depth interviews to develop consensus on how companies can best create a financial reporting environment where fraud has little potential to seed or take root. The CAQ published the findings as a cornerstone to further collaborative efforts with other professional groups to share ideas and best practices on how to derail fraudulent financial reporting.

While the current report doesn’t break any new ground on how companies can deter or detect fraud, it does give audit committees and management in charge of the financial reporting process some important “points to ponder,” said Cindy Fornelli, executive director of the CAQ. “It contains some provocative points to get us all thinking in the right direction,” she said.

The report also provides an appendix that assembles all the resources CAQ could dig up that might be helpful to companies looking to be more proactive in deterring and detecting fraud, said Fornelli. The four-page bibliography lists reports, surveys, studies and standards from professional groups, services firms, regulators and others that form a library of the best available thinking on addressing fraud risk.

While tone at the top has been a compliance theme since the emergence of Sarbanes-Oxley, the CAQ report says a strong, highly ethical tone at the top must permeate the corporate culture. An effective fraud risk management program would go a long way to establish such a tone, the CAQ said.

The financial reporting process must be driven by a “skeptical, questioning mindset that strengthens professional objectivity” for everyone involved with the reporting process, the CAQ said in its report. Strong communication channeled through the audit committee enables sharing of information that further deters anyone from trying to fudge the numbers.

With the report, the CAQ is launching a collaborative effort with groups such as Financial Executives International, the National Association of Corporate Directors and the Institute of Internal Auditors. The four groups plan to work together in what Fornelli called “the first cross-functional effort” to tackle the fraud problem.

The groups plan to pool their collective resources, tools and information to advance current approaches to monitoring and mitigating fraud risks, Fornelli said. The groups envision they will eventually produce practice aids, alerts, webcasts, white papers and other resources.

Michele Hooper, co-vice chair of the CAQ’s governing board, said the collaboration will focus on developing a better understanding of the conditions that tend to fuel fraud, encouraging a greater sense of skepticism in the financial reporting process, combating the persistent focus on short-term results, and looking for ways to better leverage technology. The CAQ said the four groups are still formulating their plan of attack to achieve their objective.