Corporate frauds and scams greatly erode corporate wealth. Independent directors on audit committees provide one of the best ways of reinforcing the impact of internal audit and annual statutory audit. Their independence must be strengthened to benefit from these requirements. However, the solutions to corporate fraud must be comprehensive and all encompassing.
1. What Australia has in it’s legislation is probably the direction to go, if we are to reduce frauds. Section 176A of the Crimes Act states:
“Whosoever, being a director, officer, or member, of any body corporate or public company, cheats or defrauds, or does or omits to do any act with intent to cheat or defraud, the body corporate or company or any person in his or her dealings with the body corporate or company shall be liable to imprisonment for 10 years”.
In order for the Police to prove their case in Court, they must prove each of the following matters beyond a reasonable doubt:
The accused was director, officer or member of a body corporate or public company.
The accused either:
(a) cheated or defrauded;
(b) did an act with intent to cheat or defraud; or
(c) omitted to do an act with intent to cheat or defraud.
The act of cheating or defrauding was upon:
(a) the body corporate (public company); or
(b) any person in his or her dealings with the body corporate (public company).
It will be necessary for the police to prove that the accused was the person who committed the offense.
2. To curb the recurrence of corporate frauds, the statutory auditor’s report should state that sufficient systems exist in the company for early detection of frauds. For this purpose their scope should be widened so that forensic expertise can be introduced to audit teams or a separate report should be obtained by public interest entities to be provided to regulators.
3. The Company Law should provide statutory powers to a Corporate Frauds Office with investigating teams consisting of corporate lawyers, forensic accountants and senior officers seconded from the police departments. This office could be regulated by the SEC and the Central Bank, provided they don’t succumb to other pressures in the country. Having regulations in books and implementing it are two different aspects.
4. Incentivise or regulate a ‘whistle blowing system’ to deter directors. The process should be independent and be result oriented. Otherwise an ineffective whistle—blowing system could increase the number of frauds.