Patrick Taylor: No "perfect solution" for fraud prevention
Five years ago, in the wake of the Enron and WorldCom scandals, Sarbanes-Oxley (SOX) was enacted to prevent financial fraud. However, a recent survey of more than 80 US fraud examiners indicates that most believe fraud is more prevalent today than it was in 2002 when SOX was introduced.
Three-quarters of respondents to Oversight Systems’ most recent annual study on corporate fraud said institutional fraud was more prevalent today, compared with two out of three respondents in a 2005 survey. Only 3% of respondents felt that fraud was less prevalent. “The first several years of SOX has not been effective [in preventing fraud],” says Patrick Taylor, CEO of Oversight Systems, which develops auditing software.
Furthermore, 43% of respondents believe that corporate vigilance around fraud prevention has slackened off in the five years since SOX’s introduction. Only 13% said there was a perception of greater corporate vigilance. Compared with 2005’s findings, the 2007 report also revealed “double-digit” percentage increases in incidents of expense and reimbursement scheme fraud (41%) and bribery/economic extortion (35%).
Although there is no “perfect solution” for preventing corporate fraud, Taylor says that the “checklist” approach, which SOX vindicated, is not working and that the Securities and Exchange Commission (SEC) is right to revise its guidance on SOX to a more principles-based risk management approach. In May the SEC announced amendments to controversial Section 404 of SOX, placing more emphasis on internal controls that best protect against the risk of a material financial misstatement.
Instead of focusing on segregation of duties and the potential for someone inside a company to modify back-up tapes, which was part of the SOX “checklist,” Taylor says the emphasis should be on where the big risks are in terms of the potential for financial fraud, which for most companies is in the general ledger process. As for the reasons why top executives committed fraud, an overwhelming 81% of survey respondents highlighted the pressure on execs to meet financial goals.