control, and governance
Fraud findings | From the Headlines
Fraud expert Art Stewart responds to real-life fraud cases — ripped from the media headlines — by sharing tips aimed at helping internal auditors navigate the massive fraud universe and deter would-be fraudsters.
April 14, 2014
A LAPSE IN GOVERNANCE
The co-manager of the Taykwa Tagamou Nation in Cochrane, Ontario, has been charged with fraud and theft and relieved of his duties, the Canadian Press reports. Police say the fraud allegedly was committed in August 2012 in the nearby northern Ontario reserve of Attawapiskat, when the accused, Clayton Kennedy, had been co-manager in charge of the native band’s finances. Reserves in Canada are similar to Native American reservations in the United States. In recent years, Attawapiskat has struggled financially, resulting in its chief — who is Kennedy’s common law wife — declaring a state of emergency in December 2011. An audit commissioned by the Canadian government of 505 transactions between 2005 and 2011, involving millions of dollars, revealed that less than 20 percent could be fully documented and most had no documentation explaining the reason for the payment.
This story provides a good opportunity for auditors to reflect on the importance of good corporate governance and the need for internal audit to examine the adequacy and effectiveness of an organization’s corporate governance regime. This may be even more important when particular groups within society — such as native peoples in Canada, the United States, and other countries — have a significant degree of autonomy to manage their political, cultural, and economic interests.
Corporate governance typically describes the internal policies, processes, and people that serve the needs of shareholders and other stakeholders, by directing and controlling management activities with objectivity and integrity. The term encompasses principles such as transparency and accountability. In the broadest sense, it is the way in which an organization is run.
Good corporate governance is embodied in practices such as a well-defined decision-making structure with clear roles and responsibilities; quick and accurate reporting of quality information; the establishment of clear, credible, and well-documented decision-making and review processes; and effective two-way communication with shareholders and other stakeholders. It also should provide tools to prevent, identify, and address potentially fraudulent or other criminal and unethical activities and business practices.
The specific nature of governance arrangements that organizations should have in place will depend on organization size, the nature of the business, the jurisdictions in which it operates, and the associated risks that it faces. A fundamental underpinning of a good governance regime is the existence of and conformity with governance standards — a code, regulation, or even legislation that clearly sets standards of expected practice in relation to issues such as board composition and development, remuneration, ethics, conflict of interest, accountability and audit, and relations with shareholders. Even if an organization is not obliged to completely comply with the provisions of these standards, following at least certain guidelines will enable the organization to highlight and act upon areas where fraud risk is more likely. Unfortunately, much of this does not appear to have been in place in Attawapiskat.
One of the key tenets of good governance and standards is the separation between the roles of chairman of the board of directors and the organization’s CEO, such that no one individual has unfettered decision-making powers. Related to this is the requirement that the board comprise a balance of executive and nonexecutive directors so that decision-making cannot be dominated by any one faction of individuals. In conjunction, these two principles prevent one director or a small group of directors from making decisions contrary to an organization’s best interests. In the Attawapiskat case, it appears that there was neither sufficient oversight of the organization’s financial controls and activities, nor any audit or review of its existing management structure to evaluate the extent to which these principles were observed — at least not until considerable time had passed and fraudulent activity had occurred.
A major aspect of good corporate governance is self-imposed regulation of the way in which the day-to-day affairs of an organization are managed. Few elements of this are more important than the way in which an organization enters into relationships with other businesses, or how it permits its funds to be accessed. In particular, where individuals — directors or otherwise — have been granted power of attorney to sign contracts or other documents, or to authorize expenditures on behalf of the organization, the scope of such powers should be carefully reviewed, monitored, and periodically audited. Certainly, restricting the power to sign to only those contracts below a certain financial limit, within a particular time frame, or for a specified purpose are good practices.
Additionally, organizations should consider the extent of control required to access bank accounts. A common practice is to require multiple signatories for withdrawals over a fixed value, noting that this still leaves the door open to lower-value but more frequent access by a sole signatory. The organization needs to be clear about who is in control of its cash, put in place strong controls, and regularly assess how well they are working.
Finally, with regard to the need for effective oversight and the setting of clear governance standards, governments themselves may need to be more proactive in balancing the recognition of the special circumstances and political autonomy of particular groups with respect for their country’s legislation and values. For example, the Canadian government recently enacted legislation aimed at increasing financial transparency on native reserves. This law requires those governments to publicize audited financial statements and the salaries and expenses of their chiefs and councilors.