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ETHICS
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Posted by Tim Reason | CFO.com | US
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January 26, 2007 9:04 AM ET
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"No amount of regulation will stop someone who is intent on committing financial fraud."
In the world of corporate finance, that argument is both as potent, and debatable, as the gun control debate's "guns don't kill people, people kill people" argument.
Wherever you stand on the fraud/regulation argument (let's leave the gun one for some other forum, please), you can't help marvel at yesterday's news that an NBC Universal treasurer allegedly stole some $800,000 from a company whose parent company, GE, is reputed to be one of the finest finance training grounds in this country.
If the story is true — let's keep in mind that the treasurer, Victor Jung, has not had his day in court — it will turn into debating gold. "Think internal controls can stop fraud? Look at NBC Universal."
At the same time, in his comments to the article, reader Mike Corcoran immediately chalked this up to "Deficiency in internal control design. Authorization to set up bank acounts; authorization to set up a legal entity; authorization to procure and authorization to pay."
Whaddya say folks? Which one is it?
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Comments (8)
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| By the time internal controls kick in, the horse has already left the barn. Internal controls won't stop a fraud, they detect it once it has occured. Management control which includes culture, hiring the right people and making sure you pay attention to what people are doing can lessen the liklihood of fraud happening but I don't think there is anyway to prevent fraud. Keep an eye on the people living a lavish life style, people who are having family or financial problems and the people who are least happy in the company. Regulation will not prevent fraud. |
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Posted by Dave Guenthner | January 29, 2007 02:21pm |
| Again, more proof that regardless of the controls in the best companies, people determined to commit fraud can do it. In the context of GE this is not a significant amount. The implementation of 404 in the US, besides choking off access to capital and placing the US capital markets in third place from first in just 5 years in the global IPO tables, cannot stop fraud. As another participant has stated, it may help you detect it faster, but determined and clever people will find a way. Now, when management, needing to make an earnings forecast, colludes among itself, how easy do you think it will be to spot that fraud? The concept of auditing internal controls and guaranteeing that no fraud or a significant error does not exist in the accounts is just a dream. |
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Posted by Phil Klein | January 30, 2007 12:33am |
This is the season for knocking SOX and internal controls - and it is getting to be fashionable to be so.
Although, I agree that internal controls can not COMPLETELY eradicate fraud, it can reduce the possibility through prevention, detection and deterrence.
This is analogous to wearing seat belt when you are driving. Can you still get killed in an accident? I will let you answer that.
But let me ask you, are we advocating abandoning reasonable measures? Hope not - because that only will make things worse.
For all its costs and other problems of implementation (or interpretation by auditors), SOX did what it intended to do - re-establish confidence in the marketplace. As the standards (404 in particular) are evolving, we all should participate in the evolution to make it reasonable and better instead of complaining about it after. |
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Posted by Amir Amir | January 30, 2007 10:11am |
To combat white collar crime you require a preventative approach. Our approach today is still "catch me if you can, when you can." We require an adequately educated, skilled, experienced, and knowledgeable accounting profession.
Unfortunately today, most accountants never take a single specific college level course in fraud, criminology, internal, controls, or securities laws prior to obtaining a CPA license. After obtaining a CPA license it is only recommended but not required that they take just 10% of their continuing education credits in the subject area of fraud.
You cannot expect a relatively under-trained profession to enforce regulations like Sarbanes Oxley or conduct effective audits.
Respectfully,
Sam E. Antar (former Crazy Eddie CFO & convicted felon)
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Posted by Sam Antar | January 30, 2007 09:11pm |
Let's not forget that the internal control system has worked when you catch the thief. Finding the the problem represents a good internal audit process - not finding the problem is bad. Why criticize a successful audit? It's what we don't know that's the real problem.
Did the 'paperwork' created by 404 help find this internal problem - I doubt it. But that doesn't change the need for solid internal controls. |
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Posted by Charles Thayer | January 31, 2007 08:03am |
| Before I was a CPA and working my way up the ladder, I was an investigator for the USMC and worked as a Deputy Sheriff while attending college. Just as the possibility of punishment does not decrease crime, internal control as currently set up will not stop corporate thief. The first objective of internal control is to control the opportunity to stop thief but as we move up the hierarchy we tend to think internal control substracts from the position and we decrease internal control. The second objective of internal control is detection. We in the corporate role rely on the auditor. We need incorporate 3rd party review and investigation of all authority poisitions which report to board level. The 3rd objective of internal control is reporting activity and as most of the audit, accounting and financial staff report to operations and not to board levels this objective is activily shut down. The current requirements of self-certification of compliance is more of an henderance than active control. |
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Posted by Milton Bulloch | January 31, 2007 10:22am |
| It would be interesting to find out how the cost was recorded - who authorized the ledger transaction and where was it recorded? |
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Posted by Ken Foley | January 31, 2007 10:27am |
| The purpose of Sarbanes-Oxley is to ensure greater transparency and make it easier to prosecute. It is a detective control not preventative. It would seem that this has happened in the case of NBC Universal. |
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Posted by Rod Scott | February 01, 2007 09:26am |
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