A Wake Up Call for Boards and CECOs

In the July 2011 edition of Fraud Magazine (published by the Association of Certified Fraud Examiners)., Sheila Keefe, CFE, CPA writes a wonderful article about how Audit Committees should be worried: it seems that the SEC is finally holding Boards of Directors, particularly those serving on Audit Committees, responsible for the shenanigans that go on right under there noses at the companies they "direct". 

Sheila sites a February 28 SEC decision to charge three ex-directors and audit committee members of DHB Industries for failure to address a growing fraud in their organization.  This follows the conviction last last September of the DHB CEO and COO on multiple counts of securities fraud, insider trading, and obstruction of justice.  The SEC is now prosecuting the ex-directors because their lack of oversight allowed senior management to manipulate results and to funnel millions of dollars to DHB's founder to pay for luxury cars, vacations, art and even prostitutes.  The SEC noted that , "as the fraud swirled around them," the directors "ignored the obvious".

The SEC's action is a clear wake-up call for Boards of Directors.  Equally as important, it is a wake-up call for CEOs and Chief Ethics and Compliance Officers (CECOs), whose duty it is to create an ethical culture that promotes integrity from the Board room to the mail room.  While CECOs can't control a Board's actions or inactions, they can take a number of simple steps to get the Board actively involved in the company's Ethics and Compliance activities: 

1. Develop a Board training curriculum (not a one-time Powerpoint presentation) to promote their awareness of, and engagement in, ethics and compliance in the company..

2. Use a combination of relevant, targeted statistics and real world examples from the frontlines to underscore the risks and the efforts of the program to mitigate those risks.

3.  Ensure that all reports to the Board are directly in support of the Board's oversight role, and articulate this clearly and often.

4.  Collaborate with other functions in the company to reduce redundancy, clarify inconsistencies, and maximize relevancy of the CECO report

5.  Cultivate a balanced judgment on what Boards really need to hear to support their oversight role.  Avoid both "the sky is falling" and "everything is coming up roses" scenarios and provide credible, objective reporting in proper context, supported by compelling facts

"Tone at the Top" is a commonly used phrase to describe what the CEO and executives need to do to promote an ethical culture.  Clearly, if we are to succeed in creating real ethical change, accountability of the Board, as recently implemented by the SEC, will help redefine exactly where the "top"  might be.