Boards must combat fraud

Auditors could avoid bearing the brunt of future corporate disasters if radical proposals in a new fraud report backed by the English ICA are adopted.

Published today, the first annual report of the Fraud Advisory Panel suggests public companies should be forced to comply with tighter fraud regulations, which should be written into the Stock Exchange listing rules.

Bringing together the expertise of top accountants, lawyers, academics and civil servants, the research panel labels the ability of companies to deal with fraud as inadequate, and says directors’ duties regarding fraud are not clearly defined.

The fraud panel’s chairman, George Staple, a partner at law firm Clifford Chance, said: ‘Fraud is getting worse. It is very easy to set up a company as a front for fraud and I think directors should have to accept a heavy responsibility to ensure that companies are governed properly.’

The report also insists that company directors should review their fraud prevention measures and discuss them with auditors. It suggests raising the powers of non-executive directors to enable them to police these measures.

A committee insider added privately that the external auditing profession had carried the blame for a lot of company fraud, particularly during cases of ‘collusive fraud’, where management joined together to hide incriminating evidence.

‘It has often been the case that the only people to be disciplined during these instances have been the accountants,’ he said.

PricewaterhouseCoopers professional affairs specialist Roger Davis agreed that the law should contain a statement of directors’ duties and that one of the roles of company stewards should be to prevent fraud.

However, he warned against putting more emphasis on non-executive directors and argued that building fraud prevention into an act would be unlikely to have any real effect on the persistent fraudster. He said: ‘This is another reason to get proportionate liability into law. The fact that there is disproportionate liability distorts the relative responsibility of the other parties involved in corporate governance.’

The new report follows moves to reform the criminal code relating to fraud by the Law Commission in the consultation paper issued on 27 April.

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