Management Fraud

Manual A. Tipgos, PhD, CPA, and Thomas J. Keefe, PhD, both at Indiana University Southeast, put forward a plan in The CPA Journal to “rebalance power” in corporate governance to control management fraud and assure better financial reporting. The essence of the plan is to empower employees and make them one of three elements of corporate governance—stockholders (represented by the board of directors), management, and employees.

Two sea change events during the last 10 to 15 years bear on this proposition. First, management principles began to recognize the importance of employees’ contributions to governance, and second, employees, through 401(k) plans (and ESOPS ) are increasing their ownership interests in the companies. 

The collaboration of these three groups will promote better financial reporting, reduce fraud by management, and renew the reliability of the financial markets.

One of the corporate functions that can be delegated to the employee groups is internal control. This will prevent management from superseding internal control requirements, a problem in the recent corporate scandals.

The board of directors will no longer be a “rubber stamp” for management decisions. It will develop a mechanism for a collaborative relationship between management and employees in working to attain the company’s goals.

Ethical and moral standards will be the responsibility of management. Management will be the leader of internal control initiatives rather than the enforcer.

Employees will have enhanced self-value, which will motivate them to be more effective. 

Management will not have the power to supersede internal control mechanisms, so management fraud will be reduced if not eliminated.

Management reprisals are crimes under Sarbanes-Oxley, but that does not mean employees will believe they can blow the whistle with impunity. However, the power to report misconduct directly to the board or the audit committee will inspire them.

Safeguarding the public trust requires an informed CPA community. CPAs with the appropriate training, skills, and reputations should be essential to corporate America. 

The audit committee will be independent and have two basic functions, 1) to assure the correctness of financial statements, and 2) to supervise the process of detecting misbehavior, including the encouragement of potential whistle-blowers.

For more, see The CPA Journal, December 2004, or

http://www.nysscpa.org/cpajournal/2004/1204/essentials/p46.htm