18 Nov

Overriding Internal Controls (With Permission?)

It’s clear that there is a time and place for management to occasionally override a control. Everything in business is not routine, and there are times when special situations require special treatment. It would be silly to prohibit management from ever overriding the policies and procedures that are in place. There has to be guidance in place to direct employees when they may consider overriding controls.

However, it’s important to recognize that the override of controls should be the exception rather than the rule. Employees should be able to circumvent the system only on an infrequent basis, and these instances must be actively monitored to determine if the override process is being abused.

For example, there may be a policy specifying levels of approval before a payment can be issued. What if the person who normally approves the payment is on emergency sick leave and a payment needs to be made? There must be a process for getting an alternate employee to approve the payment. This transaction should then be flagged for later follow-up to determine that the payment was still proper. In this case, there is a need for overriding the normal control, but this is something that should happen infrequently.

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20 Nov

Financial Statement Fraud: Olympus Makes It Look Easy

What is a company to do when it wants to hide losses? Manipulation of the financial statements is the obvious first choice. It’s not hard. Sure companies have “internal controls,” which are supposed to include policies and procedures which ensure that financial information is properly recorded. But companies of all sizes have problems with their internal controls, such that it’s not terribly difficult to issue fraudulent financial statements.

Michael Woodford was dismissed in October as CEO of Olympus, and subsequently disclosed that he was fired because he raised questions about some acquisitions by the company. He alleges that Olympus paid incredibly high prices for companies it acquired, and also paid huge “advisory fees” to agents who supposedly represented Olympus in the transactions. The purpose behind these transactions? To cover up investment losses that were decades old without drawing any attention to the issue. Read More

10 Oct

Article at CFO.com: When Your Compliance Program Fails

cfo.comThe 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. Read More

22 Jul

Permission to Override Internal Controls?

It’s clear that there is a time and place for management to occasionally override a control. Everything in business is not routine, and there are times when special situations require special treatment. It would be silly to prohibit management from ever overriding the policies and procedures that are in place. There has to be guidance in place to direct employees when they may consider overriding controls.

However, it’s important to recognize that the override of controls should be the exception rather than the rule. Employees should be able to circumvent the system only on an infrequent basis, and these instances must be actively monitored to determine if the override process is being abused. Read More

27 Jun

Dodd-Frank Whistleblower Rule Adopted by SEC Discourages Internal Reporting

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, established a whistleblower incentive program requiring the Securities and Exchange commission to provide monetary awards to whistleblowers who come forward with information about the violation of federal securities laws, including violations of the Foreign Corrupt Practices Act (FCPA). The Act also prohibits employers from retaliating against those who provide information about securities violations.

The reward for providing information that leads to a successful enforcement action by the SEC which results in monetary sanctions over $1,000,000 can be 10% to 30% of the penalty paid. Read More

12 Sep

Whistleblower Provisions Under Dodd-Frank

There has been lots of chatter about the whistleblower provisions under Dodd-Frank. A whistleblower  can earn 10% to 30% of any penalty the federal government imposes against a company. And companies have to be very careful, because there are anti-retaliation provisions in the legislation too.

One problem with this legislation that I hadn’t thought about is the impact it could have on employees using fraud hotlines. One of the most common ways that fraud is detected within companies is via tips from employees, vendors, or customers. An anonymous hotline helps encourage the reporting of these tips. Read More

02 Nov

Why Audits Are Near Worthless (Yes, Internal Audit Too)

Francine McKenna at re: The Auditors has an interesting post and set of comments about internal audit functions at public companies and the importance of internal auditors.

External auditors look at a company’s financial statements and a small amount of underlying transactions in order to issue a report that the financial statements are properly presented. (It’s really a check of math and application of accounting rules.) The financial statement audits aren’t designed to detect fraud, and so they almost never do.

In contrast, the internal audit function is engaged in ongoing audits of the financial reporting process and other numbers-related projects. The scope of internal audit work varies greatly from company to company. Read More

09 Jun

From Whistleblower to Charges of Financial Fraud

The New York Times published a very interesting story about Joseph Ripp, the former AOL CFO who went from being a whistleblower, to finding himself with civil charges of financial fraud.

Ripp became a whistleblower in May 2001 when he faxed a letter to auditing firm Arthur Andersen about one of AOL’s business partners. He told Andersen that their client (AOL’s business partner) had forged a signature on a contract and booked millions of dollars of phony revenue. Read More

09 May

Former Herbalife Director of Venezuela and Columbia Comes Forward With Fraud Claims, Reports Fraud Discovery Institute

Herbalife (NYSE: HLF) whistleblower says illegal acts likely responsible for region’s dramatic supervisor growth

Herbalife (NYSE:HLF) executives identified Venezuela as a Top 10 market for the company in their May 2, 2008, conference call, and indeed, triple digit new supervisor growth was reported there in the first quarter. However, according to former Herbalife Director of Venezuela and Columbia, Ricardo Hollander, all is not as it seems in Venezuela.  Read More

05 Apr

“Whistleblowers” barred from testifying as witnesses in State Farm Insurance Hurricane Katrina case

Back in August 2006, I reported on Kerri Rigsby and Cori Rigsby, sisters who worked as independent adjusters for State Farm. The sisters were deemed “whistleblowers,” for their allegations of corruption at State Farm Insurance.

The sisters came forward, claiming that there was fraud in the Biloxi and Gulfport field offices related to the processing of Hurricane Katrina claims. They said that supervisors were pressuring adjusters and consultants to attribute hurricane damage to water, rather than wind, so that claims would not have to be paid. Under the State Farm policies, water damage is not covered, but wind damage is. Read More