Increasing corporate audit committees to prevent executive mgmt.

Daily Record, The (Baltimore), Feb 24, 2006 by Dan Dreibelbis

Responsibilities for members of corporate audit committees are increasing as a result of the Sarbanes-Oxley Act and a series of executive management fraud cases totaling billions of dollars in losses.I recently attended an American Institute of Certified Public Accountants (AICPA) Conference titled: Fraud - Can Audit Committees Make a Difference?The primary focus of the conference was how to stop or discover executive management fraud.

The prime examples of executive management overriding internal controls were the usual suspects, WorldCom and Enron. Many of the conference recommendations were based on the AICPA's Antifraud Programs and Controls Task Force publication: Management Override of Internal Controls: The Achilles' Heel of Fraud Prevention.During a discussion of executive management overriding internal controls one AICPA panelist said 83 percent of the corporate financial statement fraud cases were the responsibility of the chief executive officer and/or chief financial officer of the victim company.The AICPA task force had several recommendations for audit committees to deter or detect the overriding of controls by executive management. The task force recommended audit committees should:- Maintain a sense of skepticism and awareness of different fraud possibilities.- Understand the accounting and economics of the business entity and industry.- Brainstorm about possible fraud techniques and possible weaknesses.- Use the company code of conduct to measure executive management's commitment to ethics.- Develop and maintain a Whistleblower Program to report fraud and ethical violations.- Develop an information network made up of internal auditors, independent auditors, compensation committee of the board and key employees.I find the creation of an information network of key employees by the audit committee members to be the most controversial recommendation. I also believe an information network could be the most proactive and successful in stopping or deterring executive management fraud.This recommendation is controversial because it means audit committee members will need to break out of the information cocoon constructed by the CEO and CFO. CEOs and CFOs are not going to like losing control of the data flow to the audit committee and the other members of the board. The CEO and CFO desire for control is not illegal or wrong, it is a management style that conflicts with the AICPA recommendation.Audit committee meetings with key employees could include division heads, sales and marketing management and accounting personnel. Marketing department revenue estimates and controller department accounting journal entries can make the difference between the CEO getting a bonus or stock options worth millions of dollars.The implication of the AICPA task force is for audit committee members to develop a relationship with these key employees. The idea would be for key employees to reach out to the audit committee members if they suspect or detect an executive management override of internal controls. One audit committee director attending the conference freely admitted this new style of operation was not winning them friends with CEOs and CFOs. Based on the Enron and WorldCom accounting scandals, the AICPA task force recommendations are a profound change in the audit committee's relationship with the CEOs and CFOs.Only the passage of time will determine if audit committees can protect companies from executive management fraud, the Achilles' heel of corporate America.What does an audit committee do once an executive management override of internal controls is detected? Next month I will cover a corporate board's response to executive management fraud.Dan Dreibelbis, a certified public accountant with the valuation forensic services practice of Clifton Gunderson LLP in Timonium, wrote this column for The Daily Record. The opinions expressed are his own and not necessarily those of this newspaper. Prior to joining Clifton Gunderson, he served 25 years with the FBI as a special agent investigating bank fraud, drugs, public corruption and terrorism cases.