The audit committee, which performs the audit, plays a very important role in preventing financial reports from being fraudulent. The auditors should be independent members with suitable accounting and financial expertise, to appraise the policies underlying the financial reports and to assess their validity. Auditors should ask pertinent questions to clearly understand every transaction, allegation or investigation that has happened. An audit aims to draw out the essence and truth from every answer and helps to examine the controls and processes, employed by the company, in any complex transaction that may be out of the normal process of controls.
The requirement of an annual audit prompts companies to establish an effective compliance programme, which will have anti-fraud controls, to detect fraud, and proper investigation conducted, if fraud is detected. An audit is like a tool that ensures that financial reports would be accurately created and updated, internal control system would be in place and proper reporting and investigation of improper actions would be made.
Most corporate fraud cases have originated at the highest managerial level. The multi-billion dollar cases of fraud involving WorldCom, Enron and Tyco International, were all results of the fraudulent activities of the respective chief executives of the companies. Tyco International’s CEO, Dennis Kozlowski, was charged with misappropriating 400 million USD of company money on an extravagant lifestyle and personal expenditure. Similarly, the cofounder and CEO of telecom giant WorldCom, Bernie Ebbers, got convicted for a fraud of 11 billion USD, in 2005. Kenneth Lay, CEO of Enron, was charged with a corporate fraud that ultimately resulted in the collapse of the company.
However, in spite of strict laws that have been instituted to prevent huge losses to shareholders, employees and investors, corporate fraud is