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Fraud factor increases with technological advances.

Massive bankruptcies resulting from fraud in large western world companies have left a crisis in confidence in the markets and through the governments.

"What we are looking at is an awareness in North America and around the world that there have been problems with corporate governance," Leonard Brooks, professor of business ethics and accounting and director for diploma in forensics at the Rotman School of Management at University of Toronto says.

Scandals like Enron have triggered a change in the governance structure and approach throughout the world, Brooks explains.

Now companies "have to be registered in the Security and Exchange Commission (SEC) in the United States, and they have to obey the rules, which are being changed by the Sarbannes-Oxley Act."

The Act, created in June 2002, requires the SEC to establish new rules for corporate governance.

"That is changing the corporate world," since the "largest corporations around the world raise money in the United States."

The shift in the corporate structure standards has business people struggling to determine what leaders need to do to improve the governance within their corporations, he says. As a result, more interest in business ethics has become evident.

"It makes sense from several perspectives that business people do what is right, not just what makes a profit."

Historically, certain professions have built-in conflicts regarding ethics. For example, the accounting profession has inherent conflicts of interest that have to be guarded against, Brooks says. A manager whose job is to increase profits often works close with the auditor.

"(Auditors) are often the ones who suggest to the directors 'yea we like this honour, let's appoint him for the next year."

A recent study by PricewaterhouseCoopers (PwC), Global Economic Crime Survey 2003, indicates companies with over 1,000 employees are more susceptible to fraud. James Hunter, president of KPMG forensic, echoes the same sentiment. He says the increase in fraud cases is directly linked to the onset of technology (computers).

"People like myself tend to be investigating much larger frauds than we would have been doing a generation ago,"

Hunter uses Barings Bank in England, which was around for 230 years, as an example.

"Within a 10-day trading period that bank collapsed because of a rogue trader. He could not have done that without the technology."

So what can companies do to reduce the possibility of fraud occuring in their business? Hunter says having a well-developed system of internal controls is one of the best ways of deterring employees from stealing. For example, having two signatures on the cheque instead of one will remove any temptation on behalf of the employee. Another form of protection is to have what Hunter refers to as an "open culture."

"If fellow employees see any wrong doing they can feel comfortable in speaking up. If someone is stealing in the organization, very often many people know about it."

However, many employees who have brought fraud to the attention of the company are not considered ethical heroes.

"Whistle blowers have an unhappy history. They are seen as rats ... and generally they get fired," Hunter says.

Implementing a confidential help line or hiring an ombudsman would allow more of an open communication within the company, Hunter says.

Having an active board of directors will also go a long way in shielding the company's assets.

"A good board of directors will ask all the challenging questions, they will be tough minded and would ensure that the system of internal control is in place."

In addition to these safeguards, managers must complete a search on potential employees to make sure the person is who she or he says they are.

"Very often they might have a nice certificate, but there is a good market in fake university diplomas."

As well, doing a credit and criminal check may eliminate a great deal of stress in the long run.

"You need the individuals consent to do that, but if someone does not consent that tells you something."

Companies can have the best system of internal control, but when they are not screening people coming in, the company is very vulnerable. Hunter says this is true particularly for companies who have merged or are buying an entire operation.

Ultimately, employees need to be reminded of their duty. People who become fraud artists do not start off with the intention of creating crime, Hunter says. If the environment for theft is ripe, then he or she will start cutting a few corners and in the end they get caught up in something that is larger than they expected.

"If you are regularly reminding them about what the path of righteousness entails, they are much more likely to do the right thing."
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Title Annotation:corporate regulation
Author:Louiseize, Kelly
Publication:Northern Ontario Business
Geographic Code:1CANA
Date:Aug 1, 2003
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