Forensic Accounting Investigating a Potential Fraud DISCUSSION OF CORPORATE GOVERNANCE AND ENRON
A good deal is made in the reform of corporate governance literature about the need for strong corporate codes of ethics.
The importance of a corporate code of ethics is presumed to be that it sets the tone ‘from the top’ that everyone is expected to follow.
This is consistent with the requirements of Sarbanes Oxley that firms have strong internal control systems. A strong internal control system has the virtue of keeping those in lesser positions from making off with corporate assets without being detected (or at least makes escaping from detection more difficult).
Forensic Accounting Investigating a Potential Fraud
The problem with strong internal control systems is that they are always violatable by those at the top of the power pyramid.
A perusal of the SEC report on corporate fraud shows that many of the most egregious corporate frauds were committed by those at the top of the corporate power structure, who had the power to override the internal control system and do as they wished.
Similarly, strong codes of ethics are only as good as the enforcement mechanisms and manifest dedication to their implementation that top management shows. The Doc Sharing folder of this course contains a file entitles Enron code of ethics. Obviously, this code of ethics wasn’t effective at Enron.
With the Powers Report being the report of a special investigative committee of the Enron board of directors which investigated how things went so badly at Enron, shows–along with other investigations of Enron, people like Fastow were given the right to act in direct contravention of Enron policies regarding being on both sides of transactions with the company.
Forensic Accounting Investigating a Potential Fraud
My question is:
What does this tell you about the need for caution by forensic accountants investigating potential fraud, or claim of fraud?
In reviewing the information about Enron, consider also the problems of its counterpart Arthur Andersen. Research an article about the interactions between the Enron Partner-in-Charge David Duncan and Carl Bass of Andersen’s professional practice group.
What light does comparing the most well-known interactions within Enron with the goings-on at Andersen suggest, in terms of forensic accounting practice and the organization of such a practice?
In this regard, you might wish to read
http://www.forensicmag.com/news/north-carolina-newspaper-questions-sbi-practices
Why do you think I point you to that article? Given how forensic accountants are paid, what are the related issues here?
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