The Handbook of Board Governance, 2nd Edition

28Accountant's Advice to Company Directors: Directors' Obligations to Detect Top-10 Frauds

Dr. L. S. (Al) Rosen FCA FCMA FCPA CFE CIP

Founder, Rosen & Associates Limited

Background

This chapter is based on our personal experiences as forensic financial investigators over the past 40-plus years. It summarizes actual situations where directors could have acted promptly but somehow did not. Not all of what is described was testified to in courts. Nevertheless, the available material should prove educational.

Frankly, some massive financial frauds have been so embarrassing to directors, officers, external auditors, and others that a credible defense was incapable of being assembled. Out-of-court settlements in the millions of dollars thus became required.

Ranking of a “top 10” had to be arbitrary and was primarily based on the number of times we encountered such a general scenario, and the dollars required to settle. Certainly, patterns of fraud repetition, or copycats, exist. For example, a too-common director “mistake,” or choice, is to assume that “someone else” was monitoring the at-issue situation and would have had the motivation to exert a thorough effort. External auditors, for instance, have tended to detect huge fraud schemes for only 1 in 15 to 20 discovered frauds. Internal auditors' results are better, unless they might be subjected to intimidation at a senior level. Thus, directors have to assume responsibility and not try to “buck-pass.”

The most costly frauds that ...