Fraud is a word with which no company wants to be associated. Being the victim of it can send a bad message to consumers about a company’s ability to manage itself and its employees. Because of the potential embarrassment, many frauds are never reported and handled internally. But the Securities and Exchange Commission and Department of Justice recently announced plans for inter-agency cooperation that will help root out fraudulent activities.SEC initiative
In 2013, the SEC created the Financial Reporting and Audit Task Force in an effort to help companies identify potential fraud risks. Its goal is to develop a list of “red flags” that would lead to further investigations of individuals or companies that might be the perpetrators or victims of fraudulent reporting.
The hope is that the processes developed by the SEC could be released to private sector companies to help them discover potential fraud before it becomes a serious problem. While auditors have long claimed that fraud cannot be discovered in annual reports, the intent is that auditors who fail to identify fraud that is discovered later could also be held responsible.
The long term goal is to help private sector companies work to stop fraud as early as possible, which will save money for companies and their investors.
As the SEC is limited only to civil enforcement, the DOJ has stepped up the criminal side of fraud investigations. The U.S. Attorney’s Office in Chicago created a new division in April designated for prosecuting securities and commodities fraud.
As the two agencies cooperate, more research will be done on effective ways to find signs of fraud as quickly as possible. Auditors will also likely be consulted in an effort to discover new ways to approach report analysis so red flags can be spotted.
What it means
For CFOs, this new venture is a positive step. By bringing in private-sector help, the government agencies are opening the door to an improved understanding of where fraud begins. It also can mean increased effectiveness of punishments – both civil and criminal – for those who commit fraud. Stiffer penalties will only help to eliminate fraud from the business world.