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Financial Fraud Prevention and Detection: Governance and Effective Practices by Michael R. Young

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CHAPTER SEVEN

Detection and Its Aftermath

ONE CONSEQUENCE OF REFORM is that the means of detection of financial fraud have been vastly improved. Audit committees have installed early-warning mechanisms and vehicles for information about potential problems to flow upward more easily. Internal audit systems have been made more robust. Outside auditors have developed new approaches and procedures to enhance their detection capabilities. Corporate cultures have changed in ways that encourage resistance among lower-level employees to potentially improper accounting and that encourage escalation when it is found.

WHISTLEBLOWERS

Perhaps the mechanism of detection getting the most recent attention is that of the whistleblower. In a sense, the groundwork for whistleblowing was laid by the Treadway Commission itself in its encouragement of audit committees to vigilantly pursue weaknesses in the financial reporting system and encourage bad news to flow upward. Sarbanes-Oxley undertook a more explicit encouragement of whistleblowing through statutory provisions that sought to protect whistleblowers from retaliation. The popular press contributed a broader awareness of whistleblowing through stories that sought to portray whistleblowers as heroes of corporate America. Time magazine at one point proclaimed three corporate whistleblowers as “Persons of the Year.”

Still an additional step was taken in the wake of the 2008 financial crisis with the enactment of a potpourri of legislation known ...

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