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Corporate governance goes up in smoke

Amidst the sensational allegations surrounding operations at the News of the World, there are points for all finance directors to note, argues Paul Smethurst

21 Jul 2011

By Paul Smethurst, Carter Backer Winter

An activist outside the Wapping offices of News International burning the last edition of the News of the World (Picture from PA)

Once you get beyond the media feeding frenzy surrounding the operations of News International and the dramatic events of the select committee hearing that is already being dubbed "pie gate", it is clear that the spotlight of commentators and investigators alike is coming to rest upon corporate governance and the culture in place within Rupert Murdoch's businesses, both in the UK and overseas.

The implementation and maintenance of good corporate procedures and a strong ethical culture is an area where the finance director has to step up and take a leading role.

Following the scandal involving the one-time media proprietor Robert Maxwell, auditors and investors were particularly alert to the "environmental" risk factor associated with the presence of a driven and dominant individual with a cadre of enforcers who might override by sheer force of personality whatever controls or procedures were in place to protect the integrity of a business.

Many thought that this is the sort of picture that would be emerging now in respect of the Murdoch business empire – instead we may be starting to glimpse the equally unattractive prospect of a senior management that appears to have been completely out of touch with the workings and culture of the organisation they were meant to be leading.

With the Bribery Act 2010 effective from 1 July, it is worth noting the characteristics of an environment in which fraud and corruption can thrive:

• an incentivised and pressured environment to get results (and rewards) whatever the cost;
• the opportunity for fraud or corruption afforded by weak systems or management;
• a rationalisation that it's OK – everyone else is doing it;
• no expectation of being caught or, if you are, that nothing will happen.

Does any of this sound familiar?

Many financial directors rely upon their external auditors to provide reassurance that all is well, but this is misplaced. The auditor's job is to reach an opinion on the financial statements – by the time the auditor gets to review the figures, the horse will not only be in another county but the stables will probably have been turned into a Tesco car park.

In any event, most of the payments that we will be hearing about in the coming weeks will have been too small individually or in aggregate to feature in the work of an auditor.

So what should the financial director be doing?

The financial director should take the lead in establishing a corporate culture where it is clear that there is a zero tolerance policy towards corruption and fraud. The lead for this has to come from the top and the zero tolerance culture has to have a high profile and permeate all areas of business activity:

• recruitment – the credentials of potential employees should be checked;
• training – all staff must be made aware that fraud and corruption are unacceptable;
• suppliers and customers – know who you are doing business with;
• reporting and monitoring – clear reporting lines and appointed individuals to have responsibility for this policy.

As a first step, the financial director needs to conduct a thorough review of all business activities – identify where the business is at risk by considering your products/the business sectors you are involved with, where you do business, who you do business with and whether you deal with any governments or officials.

This review should form the basis of an internal assessment of risk and the determination of a proportionate response (if your company has only two employees, segregation of duties is going to be difficult).

In terms of practical anti-fraud measures that should be considered, I have already mentioned the misplaced confidence in respect of the auditor's role. Some financial directors may rely upon internal audit, surprise inspections or computer controls and protection, but none of these will be as effective as the establishment of a strong anti-fraud culture within the business.

One of the most powerful instruments that can be used to enforce an anti-fraud culture is the establishment of a fraud hotline which employees, suppliers or customers can use to report inappropriate transactions and suspicions of fraud.

Of course, you are bound to get some disgruntled individuals who will see this as an opportunity to cause trouble for others, but the incidence of this is rare. The hotline should be well advertised internally and on stationery, and ideally operated by individuals trained to ask the right questions (there are organisations that offer this).

Alongside this culture must run the clear message that there will be no repercussions for any "whistleblower". This will be for your own individual organisation to promote and practice.

However, within UK plc it is clear that there is more work to be done in implementing legislation that will protect whistleblowers. It is no accident that fraud and corruption are usually discovered thanks to a whistleblower and, in furthering a national culture that will not tolerate and proactively deters fraud and corruption, improved legislation protecting the whistleblower should be a priority.

In the meantime, it is down to the FD to lead the way in creating an environment and culture that all employees can be proud of.

Paul Smethurst heads the forensic and investigation team of accountancy firm Carter Backer Winter LLP ("CBW"). He can be contacted at paul.smethurst@cbw.co.uk

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