This paper will discuss the relationship between corporate governance and prevention

of Fraud. One can safely argue that corporate governance is a medicine to cure

corporate fraud in an organisation. The systems, procedures and policies set by the

organisation to curb anomalies such as fraud and corruption largely entail corporate

governance. To make this task easier, this paper shall define in detail the meaning of

corporate fraud and later proceed by way of analysing how it can curbed by corporate

governance.Wikipedia defines fraud as follows: It is a deception made for personal

gain at the expense of an entity. According to GAW Kachali, it involves deception,

confidence and trickery.

There is local, national, regional and global resurgence of interest on how to prevent

all forms of unethical practices such as corruption and fraud in both private and public

sector including public bodies. Generally institutions with resources to prevent or

combat corruption and fraud in all sectors seem to thrive. This is mainly successful

through the setting up of strong pillars which promote transparency, fairness,

professionalism, integrity and democracy in running the organisation; this is made

possible by corporate governance. Corporate governance provides a positive direction

which an entity must take.

The most common definition is fraud is a generic term, and embraces all the

multifarious means which human ingenuity can devise, which are resorted by an

individual, to get an advantage over another by false representations.(G.A.W

Kachali,2005) It is done with the purposes or intention of gaining advantage over

another through false pretence for example someone can enter wrong information in a

report deliberately to justify trickery he or she should have done for his or her own

benefit at the detriment of a company.

To prove that it can be done by anyone in the organisations, types of frauds have been

put in place, which explains why there is need of a code of conduct of employees in as

much as there are also regulatory mechanisms for the employers such as external

audits and boards. Fraud is classified into following categories: A way some people

classify fraud is to divide

frauds into: Those committed against organizations, and those committed on behalf of

organizations.

In employee fraud, for example, fraud committed against an organization, the victim

of the fraud is the employee’s organization. Usually this is done by diverting goods or

services meant for the organization for personal use. A good example is a situation

whereby goods meant for a promotion are sold for the benefit of the employee

carrying out that project.

Usually such culprits take advantage of lack of efficient and effective monitoring

mechanisms or abuse the trust which is bestowed upon them by their companies. In

some instances they divert clients made for the organization they work for to other

companies to get kickback or they even create bogus companies.Procecedures of

awarding a tender a seriously flouted for the selfish benefit of fraudsters in control of

granting those tenders.

On the other hand, with financial statement fraud, for example, executives usually

commit fraud” on behalf of an organization, usually to make its reported financial

results look better than they actually were or are In this case, the executives of a

company usually benefit because a company’s stock price increases or remains

artificially high and the victims are investors in the company’s stock.

Sometimes, executives misstate earnings in order to ensure a larger year end bonus.

Financial statement fraud often occurs in companies that are experiencing net losses

or have profits much less than expectations. Some of these even connive with external

auditors in order for them to portray a false picture to their advantage and detriment of

the company.

As stated by G.Mugaga, usually such anomalies are created by the companies

themselves by creating weak systems in the company and also powerful individuals in

the name of top management such as directors and chief executive officers. This is

also resulted by poor follow up mechanisms by the companies. For example when the

board meets they spent most of the time quarrelling on what should be done so that

they obtain more power at the expense of more important issues to do with corporate

governance. They do not have much time to discuss about how to implement

recommendations made either by external auditors or external evaluators.

There is social concern that massive frauds in the private sector can jeopardise

economic and political institutions (Recent cases of Enron and the Crunch).This can

also be done to dummy whoever concerned into releasing whatever resources for the

institution. A prominent constitutional expert Lovemore Madhuku was convicted after

duping the law firm he worked for $20 000 by making clients pay to him through the

backdoor whilst using the name of the lawfirm.This was only discovered after whistle

blowers had tipped Manase and partners, a law firm which he was working for,

investigations followed.

Usually such unethical acts are facilitated by weak systems and policies, systems

which create powerful individuals in an organisation. The organisation becomes more

of their briefcases and it becomes difficult to challenge them. Corporate governance

seeks to wash away such anomalies which are detrimental to the growth of

organisations rather than individuals

.On the other hand perpetrators take advantage of trust bestowed upon them by the

corporate they work for. As stated by G.Makunike, Fraud perpetrators are the least

suspected and most trusted of all the people with whom victims associate.

Examiners Association of Certified Fraud defines fraud as the use of one’s

occupation for personal enrichment through the deliberate misuse or misappropriation

of employing organisation’s resources or assets. Occupational fraud results from the

misconduct of employees, managers or executives. The report to the nation on

occupational fraud and abuse by the association of Certified Fraud Examiners states

that, the key to occupational fraud is that the activity is clandestine, violates the

employees’ fiduciary duties to the organisation, committed to the purpose of direct or

indirect benefit of the employee.

The ACFE includes three major categories of occupational fraud; Asset

misappropriations which involve theft or misuse of an organisation’s assets,

corruption, in which fraudsters wrongfully use their influence in a business

transaction in order to procure some benefit for themselves or another

person ,contrary to their duty to their employees or the rights of another and

fraudulent statements which generally involve falsification of organisation’s

statements.

The types of fraud include employee embezzlement, vendor fraud, management fraud

whereby financial statements are frauded, customer fraud, investment scams and

miscellaneous fraud. All these types are fraud are carried out easily in the event of

poor systems and policies and failure to implement the recommendations made to

ensure that corporate governance prevails in a company.

Blurred reporting lines leave gaps in control systems, nowhere more obvious than in

the case of Barings, where no one believed that they had overriding responsibility for

the activities of rogue trader Lesson. Reporting must be periodical, hence deadlines

for reports must be set and ensure that such time timelines are adhered to. The

authenticity of such reporting must be taken seriously, whilst recommendations are

seriously considered at every level. Feedback by the superiors is also a pre-requisite

for efficient systems in an organisation.

Dispersed departments can add to the problems: it is more difficult to pool knowledge

of goings on when departments do not work closely together. In WorldCom, where

the finance and legal functions were scattered over several states, communications

were poor and employees lacked support to question the CFO’s (Scott Sullivan’s)

actions.

Departments must be coordinated to ensure joint implementation of the policies and

systems.Fraudlent activities are easily done whenever there is discord in an entity as

this results in different interpretations of the organisational policies. Important issues

like audits are easily done when the corporate is well coordinated as there will

generally be uniformity in the operations

This also led to biased decision-making, where Ebbers relied on a small clique of

insiders (not all the most senior personnel) to discuss strategy.

knowledge of goings on when departments do not work closely together.

In WorldCom, where the finance and legal functions were scattered over

several states, communications were poor and employees lacked support

to question the CFO’s (Scott Sullivan’s) actions.

Unity of purpose in a company promotes transparency, professionalism and integrity

as opposed to biased decision making which creates a lot of divisions, hated and

tensions which result in insubordination and undermining each other, this also grooms

fraudulent activities as a way of tying to fix those on top.

Changing the organisational structure can often leave gaps in information

flow and responsibilities until the new one matures. Vital data can be

overlooked. At Marconi, the delegation of responsibility to division heads

and the abandonment of Weinstock’s famous ratios and trend lines meant

that the deterioration in the working capital position was not addressed

early enough. It becomes very difficult to trace where challenges associated with

misappropriation of funds or fluting of procedures would have occurred if there is no

continuity in the operations of companies organisational structures.

Remote operations, far from head office, are often difficult to manage

since head office is heavily reliant on local management and cannot

always judge whether correct and sufficient information has been transmitted. This

normally results in the cooking of reports and financial statements. The company will

have to rely on an individual who heads such remote corporates.This gives room for

clandestine actives and in general it distorts the uniformity of the company hence an

easy task to resort to corrupt and fraudulent activities.

This is particularly a problem with new, or unfamiliar, operations such as in the cases

of Barings and Ahold.Under-resourced risk management departments (if indeed they

exist) together with inadequate information systems can be a fatal weakness in a

trading operation, as witnessed in both Barings and Enron who lost 5 million dollars

due to e-fraud, whereby technology will be in full use to perpetrate fraud and/or

corruption.

Another fundamental contributor to failure is a weak, or ineffective, internal audit

function. Often this is regarded as an expensive and unnecessary

overhead. As a result, in many companies, such as Barings and

WorldCom, the function is understaffed, and has chosen, or been forced, to

perform mostly operational audits with the objective of uncovering potential

cost savings rather than financial audits with the objective of safeguarding

company assets.

Corporate governance is the most significant development in business strategy for the

first century based on management strategies, but on a culture of performance with

conformance to stakeholders, business and community stakeholders in a unique

partnership. Corporate governance entails the establishment of relevant systems to

promote the smooth running of an institution. It creates checks and balances in an

organisation to promote the growth of the organisation through efficient and effective

management; it allows positive delivery of the goods and services as offered by the

organisation from the top management to the least ranked employee. Businesses that

succeed have good systems and controls.

Corporate governance does not start with the corporation but with people such as

directors, managers and employees. In individual governance process important

attributes include: consistency uprightness, wholeness, truthfulness and honest.

Equally important are visions for success that embraces other people, these include

self control, self discipline and intellectual integrity. John Hendricks and Leigh

Hendrikse have coined formular triangles for business success: It is illustrated by way

of a corporate governance success triangle: Attitude which is made up of

honesty ,integrity and intention and aptitude made up of tripple bottom,line success

and expertise. Commitments starts ethics ought to provide the basis for accountability

The concept and practice of accountability is expected to make public officials

including trustees responsible for their actions or inactions. It is supposed to increase

the transparency of governments/state corporations It is supposed to emphasize and

enhance government or state corporation responsiveness and its legitimacy

.

With the right attitude and the right approach to work in the best interest of

shareholders, company and stakeholders. Corporate governance does not just

happen ,there has to be a commitment to develop and educate the directors and

managers as to the expertise and skills of governance.

Corporates have policies and systems in place to give a direction to be taken in the

direction. These include constitutions, codes of conduct, policies and in some cases

rules and regulations, nonetheless before the organization resorts to those issues,

individuals must be able to be committed to doing their best to deliver for the

organisation.Attitudes that drive talents and skills include self control, self discipline,

personal character building, intellectual integrity and a willingness to do things right.

Attributes such as open communication in company does away with unethical

practices such as fraud. A culture of regular meetings ensures that all the possible

anomalies can be done away with, equally important are full disclosure, participative

leadership, managerial resourcefulness, strategic partnership, technical and

innovation., Another critical factor are values. Values can be defined as relatively

stable convictions about what is good or desirable. These are categorized into

strategic values whereby the shared conviction of the organization about the desired

objectives.

For any organization to function optimally, good relations and interactions between

stakeholders are required .Typical ethical values are

respect,transparency,fairness,justice.Adherence to ethical values ensures that

stakeholders inside and outside the organization get along well with one another.

Apart from upbringing, the social setting of organizations that individuals work in;

can also have either a good or corrupting influence on their moral character

The company also has to consider the following: rewards for employees, personal

success, a respected leader, a respected executive and increasing wealth making a

difference.

The checks and balances must also be in place to ensure that single individuals or

units are powerful at the expense of a corporate as a whole. The total family of

shareholders and stakeholders has to be part of the governance mission to make a

company a better place for all. A win-win situation for recognition and rewards for

stakeholders must also be made in place. Procedures must also be followed in very

strict manner because once one step is jumped it creates confusion and disarray in the

organization.

In corporate governance the other most important programmes are monitoring,

evaluation and audit. They provide a mirror in which the organization sees whether

there is progress or not, it also shows shortfalls in all sectors of the corporate’s

operations. Audit is the most important of all for it brings out clearly the systems are

being followed in line with resources and procedures within the corporate.

The audit committee is the principal governance watchdog in most

companies/parastatals and was the first governance committeee to gain broad

acceptance in the business community. According to M .Davidson, an annual audit is

an essential part of the checks and balances required, and it is one of the cornerstones

of corporate governance.

Its purpose is to provide additional focus on financial issues that are vital to

corporation but which often cannot be fully examined by the main board because of

shortage of time made available to it. The composition of audit committee should be

diligent and knowledgable.The recent Enron collapse provides ample evidence of the

need for the audit committees to examine corporation’s company’s accounting

policies thoroughly to ensure that they are appropriate to its business and satisfy the

needs of its stakeholders. Special attention should be given to any unusual policies or

policies which rely on fine distinctions of interpretation for their legitimacy.

The relationship between management and auditors is also critical in coming up with

an objective audit, for example disagreements between management and auditors.

This is echoed by G.A.W Kachali who states that, professionalism and skill on the

part of auditor and management are critical in ensuring a credible audit. Any

disagreement in this context is serious and needs careful consideration by an audit

committee in the first place and even by the board as a whole

.A decision to dismiss auditors should have the support of the audit committee and

should be made by the full board. This avoids unilateral decisions which might be to

the advantage of an individual. The initial selection of external auditors is

usually the responsibility of the audit committee. Normally when a vacancy occurs,

proposals from suitably qualified firms are invited then each firm submits proposals to

the audit committee.

Auditors ought to be faithful and prudent, knowing their businesses and all the points

and articles of the account in rents, outlays, returns of stock(W.Henly:1400). A

fundamental contributor to failure is a weak, or ineffective, internal

audit function. Often this is regarded as an expensive and unnecessary

overhead.

As a result, in many companies, such as Barings and

WorldCom, the function is understaffed, and has chosen, or been forced, to

perform mostly operational audits with the objective of uncovering potential

cost savings rather than financial audits with the objective of safeguarding

company assets.

Traditionally, external auditors partially filled the gap with their financial,

transaction-based audits. Today, ‘risk-based’ audits are more

common, where the focus is on areas identified as being the most exposed.

This has left gaps where internal controls are rarely, if ever, audited. The

door is left wide open to fraud.

Internal audit’s independence is further undermined when it reports solely to the

CEO or CFO or when the audit programme, findings and employee remuneration are

dependent on the CEO or CFO, such as in the examples of WorldCom, Barings,

Enron and Tyco.

A recurring feature is poor cash control: at Marconi the spiralling level

of working capital was not detected and dealt with early enough; at

WorldCom, revenue was more important than collecting debts; at Enron,

profit over the life of a contract was more important than the fact that it

made losses and consumed cash in its early years.

The objective an audit is to enable the auditor to express an opinion as to whether or

not the financial statements fairly represent in all material aspects, the financial

position of the entity at a specific date, and the results of its operations and cash flow

information for the period ended on that date, a accordance with an identified

financial reporting framework and/or statutory requirements.

External auditors are ultimately responsible for reporting to shareholders on the

financial statements.Inorder to do so they must place reliance on risk management and

internal controls in corporation/company Before doing so the external auditor will

evaluate the quality of the work done by internal auditor to ensure it is smooth

flowing .The annual report should disclose the remuneration and expenses of the

auditors giving details of the fees and the purpose of which they were incurred to

avoid manipulation of the process by management or administration.

Evaluation and monitoring is also very important to check on the sustainability of the

activities which are being done by the company, the level of involvement of relevant

stakeholders in the organization and possible changes which can be done to ensure

that threats are countered whilst opportunities are pursued for the benefit of the

organisation.This allows the rooting out of bad practices such as fraud, it also

identifies possible issues which can result to this bad practice. Again it works better if

it is carried by a credible consultancy firm assisted by the internal monitoring and

evaluation department.

The most critical thing in issues of audit and monitoring is the independence of the

service providers, hence appointment of such should be done in a very transparent

manner with enough consultations, lest the process is used the advantage of

individuals in a company. Evaluation results should be reviewed by the nomination

committee or such similar committees of the board.

There is also need to ensure that heads of institutions are kept with serious monitoring

and evaluation to avoid hijacking corporate to their advantage. Individual director

evaluation, directors contributing and reporting to the board should measure against

their duties

.The nomination of a director at the A.G.M should not be an automatic process and

should only occur after the proper evaluation of the performance and attendance of

the director in question. Should a deficiency in directors performance be identified, a

plan should be developed and implemented for the director to acquire the necessary

skills or develop appropriate behavioral pattern.

It is important that the directors’ evaluation be approached in an open, constructive

and non-confrontational manner. The chairperson should also be evaluated. The

chairman should not be present when his performance is being discussed by the board.

The chairman, or a committee appointed by the board, should evaluate the

performance of the C.E.O at least once a year.

People tend to be naturally greedy, rarely content with what they have

achieved. High achievers, such as top executives, are particularly ambitious

and eager for more power and wealth.

Since there is a clear, positive correlation between size of corporation (measured by

revenue or by capital employed) and executive pay and status, CEOs have every

incentive to grow their companies. Since, it has already been argued, the quickest way

to grow a company is often by acquisition, the greedy CEOs of WorldCom,

Tyco, A hold, Parmalat and others, needed little encouragement to embark

on a spending spree (S.Hamilton and A. Micklethwait, 1989)

These individuals usually emerge after a period of successful (or apparently

successful) management. The company becomes packed with likeminded

executives who owe their position to (usually) him and are

reluctant to challenge his judgement.

A complacent board, lulled by past achievements, stops scrutinising detailed

performance indicators and falls into the habit of rubber-stamping the CEO’s

decisions. His drive, commitment,(often) charisma and streak of ruthlessness have

contributed to the previous success. To ensure that the company is saved from such

greedy and corrupt people the organisation must ensure that they have credible boards

in their organisations.

Improved board performance and effectiveness can be achieved though regular and

timely appraisals of the board.Perfomance of the board, its commitment and

individual directors should be evaluated annually. Board should be made of experts,

management and shareholders to have the right direction. Even the principles adopted

in the evaluation of the board should be applied to the board should be applied to the

board committees, chairmen and members.

The most important stage in corporate governance is implementation-putting it all into

practice, personal action plan initiated by the head of the institution, chairperson, with

all executives delegated with responsibility of implementation. It is implentation at

grassroots level, in the boardroom, in the broiler room, creating a win-win opportunity

for recognition and rewards for shareholders and stakeholders. Corporate governance

is not good intentions; it is good actions flowing out of good intentions. Most

organisations fail to put into practice what is written on paper. They try to portray an

expected picture through reports and financial statements. This causes

underdeliverence on the part of the corporate.

The failure to implement is caused by either lack of will to do so or lack of capacity

on the part of personnel which is supposed to play that role. Technical expertise can

be a major setback, for instance in introducing system to do with technology, people

with skills must take a front role. Without such a kind of arrangement such an action

plan will fail dismally. The corporates apart from the systems, policies and procedures

used for corporate governace, there must be capacity building initiatives, staff

development, motivation of employees, strategic planning meetings and other related

processes. They help in ensuring the reality of implementing measures which promote

corporate governance.

There can also deliberate neglection of the genuine company policies and systems for

the sole reason of deceiving the stakeholders in that company. There can also be

issues such as dissatisfaction on the part of employees, having been demotivated by

the behaviour of their bosses or poor renumeration.So inorder to undermine them they

can flout the procedures, they can even do it in the name of trying to make a living

having realised that the company does not even care about them.

The politics can also be at the top whereby, in the struggle for power juniors in the

company can be used to disrespect their immediate supervisors hence the need to

ensure that outside the parameters of the policies, procedures and systems, there is

need of other critical pillars to support these initiatives.

The issue of individual characters also comes back into picture as discussed earlier. It

only takes people who have the company at heart, people who do their work

obediently, people who are not crooks, people with a reputation to protect. People

who have principles and ethics, this makes the implementation process easy to

achieve.

In conclusion the issue of corporate governance can just be a lip service if there are no

strategies put forward to ensure that it is taken from paper to the ground. It takes the

whole corporate from the largest shareholder to the toilet cleaner to ensure that

corporate fraud does not occur in the organisation. If there is no commitment in the

company to implement then it will remain a dream. The importance of corporate

governance to cure the cancerous disease of fraud and corruption can only be realised

when the entity is already in taters.The saying prevention is better than cure really

makes sense in this vain, given that corporate fraud is only avoided by having tight

controls to human manipulation through strong systems which strengthen the

institution at the expense of greedy individuals who are bent on amassing their power

and wealth at the expense of the generality of stakeholders in the company. Such a

stance coupled with innovation at all levels to ensure excellence ensures that

corporate fraud is avoided.

Corporate governance therefore should be a glowing light in the direction of the

organisation starting from recruitment and placement, management of an employee,

disciplinary measures of the latter, dismissal and retrenchment and even high profile

appointments in a corporate. As long as there is such a direction they won’t be any

problems in the context of corporate fraud.