It can’t be easy for compliance executives to talk with the audit committee these days. Just two quarters ago, many of you probably met with the committee to discuss conditions in a slowing economy, but nothing so dire as to leave boards alarmed or panicky.

Now, of course, the picture is radically different. Wall Street is in free fall, businesses of all stripes are suffering, and suddenly boards are worried about issues such as whether the outside auditors will slap a “going concern” warning on their report or whether fraud controls are effective with droves of the accounting department laid off.

How did we get here so fast? And for ethics and compliance officers, what are you supposed to tell boards as you meet in the eye of the storm?

Every Wall Street analyst, financial adviser, economist, and pundit has a different perspective of the economic horizon. Almost universally, however, they agree that we are in uncharted waters. While businesses brace for the worst and adjust their financial and operational strategies, the indicators from an ethics perspective are equally daunting:

Business confidence has reached a record low; companies are generally pessimistic about the future;

70 percent of workers admit that they have already downloaded confidential company data for future personal use if they find themselves looking for a new job; and

90 percent of compliance, legal, finance, and risk executives surveyed say they expect fraud activity to remain steady or increase in 2009.

Taken together, these findings point to some troubling possibilities. Even at the highest levels, where the longer term is easier to see, business leaders are viewing the future negatively. That almost inevitably translates into a change in the tone coming from the top, and it’s difficult to continue talking about the value of high ethical standards and the importance of individual action when the outlook for the company overall is grim. Sadly, we are beginning to see how that shift in tone translates at lower levels. Employees are nervous, they don’t trust the information coming from the top, and they’re willing to do what it takes to protect their livelihoods. This only increases the likelihood of fraudulent activity, and already experts indicate that such misconduct can be expected.

Unfortunately, our current crisis is not limited to finance, and it’s time for some preventative action from the ethics and compliance department. You might think that action from the audit committee wouldn’t be high on the list of prophylactic steps the company should take. You would be wrong.

Surprisingly, audit committees have a big role to play, and they need the help of the ethics and compliance department more than ever. The chief ethics and compliance officer should be communicating several messages to his or her governing bodies.

Conditions are ripe for financial fraud, even in your business. More organizations than ever are expected to receive going concern opinions in their audits, particularly if they are dependent on bank lending; the watch is on for this trend to surface as the calendar and fiscal year come to a close. Faced with the possibility, it’s easy to imagine that businesses will undertake extraordinary measures to avoid the issuance of such a warning. And most assuredly, the steps they take to prevent such an outcome will consist of small, almost insignificant activities: backdating sales, holding the books open a bit longer, and finding creative ways to characterize the financial well-being of the organization. They may sound like noble efforts to maintain auditor and investor confidence in the organization, but they still constitute financial fraud.

Even if your business isn’t likely to face a going-concern warning, the financial pressures are only mounting—and when that happens, the temptation to skirt the rules only grows. The most important message that compliance department can send to the audit committee is that those conditions are present, so the potential for fraud exists. Pressures rising, revenues falling, and a perception that the future will only be worse (at least for a while) are the ingredients for taking “out of the box” survival strategies too far. Audit committees that still use Enron as their litmus test for substantive financial fraud are likely to adopt the NIMO complex (“not in my organization”). Yet as many as 17 percent of employees witness some form of fraud each year; the sooner the audit committee recognizes this possibility, the better.

Transparency should be your company mantra. One need only go as far as the headlines in the media to understand the need for better communication. According to a recent article in MarketWatch: “Investors can be forgiven for losing faith in the financial markets. Only a year ago there was reason to believe that there was light at the end of the tunnel. In truth, it was an oncoming train.” The media is fixated on the economic situation, and as a result, stakeholders are developing impressions of corporate activity from sources wholly apart from your organization’s formal communications. Even further, every day investors and consumers are being told to be wary. As that MarketWatch article continued: “The age of austerity has replaced the age of avarice, and we will have to adjust purse strings and investment portfolios accordingly.”

The key to success will be stakeholder trust, and trust is built through consistent transparency. The ethics and compliance department, as a primary advocate for corporate standards, should be calling on the audit committee to help set the tone for communication and disclosure. Particularly with regard to financial statements and explanations in the audit, experts are advising company leaders to provide more information to their investors and the public at large. Even if a company has cash in the bank, in this present period few observers are confident even that money is safe.

The challenge for the audit committee is not only to ensure that reviews of the financial statements are done accurately, but also to ensure that auditors support their interest in disclosing the factors that will affect future funding of the business. This is certainly a difficult task, so the ethics and compliance department should be helping the audit committee to define the parameters for transparency in their activities. Provide working definitions and examples of transparency, and lead discussions with the audit committee as to the decisions they make that uphold that standard.

Internal and external auditors need extra support from the audit committee. When problems are detected, auditors become whistleblowers. Even though they are expected to ask questions and work with management to resolve any potential problems, in the current economic environment, the pressure to overlook red flags is very real. An external auditor who sheds light on material fraud is, in essence, condemning the client who pays the bills for his or her firm. An inherent conflict exists; especially when pressure is on the rise, this situation should not be ignored.

Audit committees should take steps to ensure that protections are in place for individuals who raise bad news during the audit process. Most audit firms and client organizations have anonymous help lines, but let’s be real: Auditors aren’t going to use that method to alert senior management about financial fraud. Encourage your audit committees to ask audit firms for evidence that giving clients bad news isn’t a career-ending move. The same questions should be asked of your internal auditing process: How well does your company protect, and even encourage, internal auditors to make potential problems known? What actions have been taken in the past where management suppressed an auditor’s initiative?

Gauge the pressure in your organization. Perhaps the most important step an audit committee can take is to monitor the levels of pressure that are being placed on employees, particularly in finance, audit, and procurement. Research has shown that where pressure to compromise standards exists, 90 percent of employees say they’ve observed actual misconduct taking place. Ask employees about the extent to which they perceive that they must make the numbers “by any means necessary.” Find out if they are observing activities that are out of the ordinary at higher levels in the organization. Such information can be very helpful in monitoring the ongoing well-being of your organization.

It is certainly out of the ordinary to raise these kinds of issues with the audit committee, I know. But extraordinary times call for extraordinary measures. Be courageous in talking with your audit committee members; they need your help.

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