Executives have the means to commit and cover up the largest frauds.

They have access to the information and computer systems, they have power over all employees and they have access to the money. The finance function is riddled with fraud risks and the company’s executives are in the best position to take advantage of those risks.

Because of the risk of losing large sums of money to fraud by executives, companies must ensure owners and boards of directors are actively involved in creating and maintaining an environment that is not conducive to fraud. This involves active oversight of daily operations, continuous monitoring of potential red flags of fraud and swift action when fraud is discovered.

How to determine the right mix of expertise for a fraud investigation.

By Tracy Coenen, Contributor to CFO.com

It’s every CFO’s worst nightmare: despite your best efforts, your company’s compliance program has failed. There are credible reports of fraud and corruption inside the company, and an initial analysis of the situation confirms a problem. An internal investigation is necessary to determine the magnitude of the fraud, the parties involved, and the company’s financial and reputational exposure under government regulations.

How should you proceed? These investigations are often high stakes, so it is important to do things the right way from the start. In-house counsel should be involved in any situation involving allegations or evidence of fraud. Once executives have sufficient reason to believe the allegations are credible, they should involve outside counsel as well.

When a business owner or executive encounters proof of a fraud-in-progress, a natural reaction is often to immediately begin investigating. After all, someone has to get to the bottom of the situation. Yet that’s not usually the best way to go.

Just like on television, we need to give owners and executives a warning that they should not try this at home. It’s tempting to dig right into a potential fraud and start to unravel what’s happened. While the immediate gathering of information is helpful to a fraud investigator, when an inexperienced person tries to go further and actually investigate, bad things can happen.

My article in the AICPA Corporate Finance Insider Newsletter

Reasonable accountants can disagree about whether a move to International Financial Reporting Standards (IFRS) will improve financial reporting. One key concern is that principles-based financial statements are much more susceptible to fraud. Rather than relying on strict rules, management’s judgment will guide much of the reporting. Clearly this creates a risk of fraud, but how big is the risk?

Today’s Compliance Week article, “SEC Pursues Small Company Over Lax Internal Controls,” [subscription required] discusses the SEC settlement with Koss Corp over the $34 million embezzlement by former Vice President of Finance Sujata (Sue) Sachdeva.

The article explains the settlement, which is essentially a clawback of some of Michael Koss’s compensation:

From my Thought Leadership series at Securities Docket:

When a whistleblower goes to a government agency with allegations of fraud and corruption, no one knows whether the government will act. The more detailed and credible the allegations, the more likely the government will ask questions.  The company may even have the great “fortune” of being subject to a full-blown government investigation.

Guest Post by Michael Volkov

In-House counsel and corporate compliance officers dodge bullets everyday as they stare down the barrels of aggressive prosecutors, regulators, civil litigants, whistleblowers, disgruntled employees and shareholders prodded by trial attorneys to file derivative suits at the drop of a hat. In the face of all of these risks, internal investigations have become commonplace and a standard defensive tactic for a company to regain some leverage, learn the scope of a potential problem and then develop a plan for resolving a particular issue.

All too often, companies follow the rote formula developed in the Sarbanes-Oxley era of the early 2000s. Those same formulas are being applied in the Foreign Corrupt Practices Act, and in more discrete global anti-corruption, money laundering, export compliance and antitrust enforcement matters.

The steps to take when an employee comes forward with a fraud tip, whether the allegations are false or not.

By Tracy Coenen, Contributor to CFO.com

You think your company has a robust compliance program to prevent financial-statement fraud, asset misappropriation, Foreign Corrupt Practices Act violations, and other financial frauds. There are checks and balances in place, with lawyers, internal auditors, executives, and the board of directors keeping an eye on things.

Still, the unthinkable happens. Reports of a major internal fraud surface, and the scheme may involve several members of middle or upper management. The information – received through an employee’s whisper, an internal hotline, or the rumor mill - has enough substance to be deemed credible, yet not enough to know exactly who is involved, how wide-reaching the fraud may be, the amount of money stolen, or the exposure to government action and penalties.

Recently I wrote about an internal investigation I did for a company which received a whistleblower complaint, sent to executives, the board of directors, and the Securities and Exchange Commission. Upon receiving notification that allegations of fraud were being made by a former employee, management immediately started evaluating the claims. The board of directors began planning for an independent investigation.

This was the right thing to do, particularly as the SEC’s whistleblower program gives a 120 day window of time for companies to react to internal allegations of securities fraud. If someone reports allegations to a company, 120 days pass, and then the informant goes to the SEC, the SEC will consider the person making the report to be a whistleblower eligible for a bounty.

Compliance professionals can talk at length about the importance of conducting internal investigations when there are whistleblower reports of fraud, corruption, and other questionable behavior. But what actually matters is doing something when the time comes. This case study  illustrates how one public company did it right to head off big trouble when the SEC came knocking.

A supervisory employee in the company’s accounting department was having performance problems. She was counseled repeatedly, and management decided that one final warning was in order. The employee had a “last chance” meeting with management, in which she was told that the next step would be termination if her she did not meet certain performance expectations.