High-profile financial reporting fraud cases in the early years of the century caused a number of bankruptcies and significant turmoil in the U.S. capital markets. It brought about an examination into the governance failures at those companies. A number of new laws and regulations resulted, including the Sarbanes-Oxley Act of 2002, which improved governance and helped efforts to deter and detect fraud.

Financial reporting fraud remains a concern and unfortunately always will. Research continues to explore conditions that were present in organizations where a fraud was uncovered. A consistent finding from research is that the risk of financial reporting fraud tends to increase when the entities that comprise an organization’s financial reporting supply chain management, the board of directors, audit committee, and internal and external auditors do not fully understand their responsibilities and/or do not execute them appropriately. In such organizations, one or more of the following situations are often found:

• Lack of a strong “tone at the top” and an ethical culture;
• Insufficient skepticism on the part of all participants in the financial reporting supply chain; and
• Insufficient communication among financial reporting supply chain participants.

If all who have a role in the financial reporting supply chain understand their responsibilities, know how to exercise skepticism, encourage an ethical tone through both word and deed, and communicate consistently and effectively with all relevant parties across all geographic locations, an environment conducive to financial reporting fraud is less likely to occur.

Learn more about the Anti-Fraud Collaboration’s priorities in the following areas:

• Corporate Culture
• Skepticism
• Communications