Something gender balance on boards may not address

In principle, the people with the strongest incentives to detect fraud should be the shareholders, who pay the cost of fraud. But shareholders are dispersed and need to delegate the task. To whom? Not the board members of corporations, for starters: they rely on external auditors to detect fraud. A good friend of mine who sits on the board of a large company once asked the firm’s head of purchasing what prevented him from overpaying for an item and having part of the difference rebated to a secret Swiss bank account. A lawyer on the board interrupted him, arguing that board members were responsible for making sure that procedures existed, not ensuring that they were effective!

from A Capitalism for the People: Recapturing the Lost Genius of American Prosperity by Luigi Zingales.

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8 Responses to Something gender balance on boards may not address

  1. Pyrmonter

    Auditors are, in form, though not substance, appointed by shareholders, yet they are in reality chosen by the very managers on whose records of performance they are to report. Why? How is that institutional investors don’t insist on more rigorous audits?

    (As an aside, as all auditors know, it is not an auditor’s job to detect out fraud, but to test to see whether the financial statements are materially missstated. Without doubting Zingales’ acquaintance’s eminence, any director of a public company who thinks he can rely on the company’s auditors to do the board’s job should resign. ASA 240 in its various forms (and its forerunners) has made this clear for decades: https://www.auasb.gov.au/admin/file/content102/c3/ASA_240_Compiled_2019-FRL.pdf , see at para 4)

  2. RobK

    …for making sure that procedures existed, not ensuring that they were effective!
    The effectiveness of any leakage control is the main measure justifying any proceedure to address it, obviously. It is wholly the interest of the proprietor, or by proxy, the board to see to this, even if the measures are prophylactic, in my view.

  3. Bruce of Newcastle

    Not the board members of corporations, for starters: they rely on external auditors to detect fraud.

    Recall the Enron Scandal was in part because of the auditors, Arthur Andersen. One of the Big Five audit firms, they did a fine Norwegian Blue impersonation as a result. They’ve ceased to be.

  4. Bruce

    An interesting link between Arthur Andersen and Andrew Weissmann who prosecuted the conviction against Andersen , which was subsequently overturned. The same Weissmann who was the lead investigator in the Russia collusion farce. Many who’ve worked with him paint a very unflattering opinion of the man. A case of déjà vu?

  5. Amadeus

    Procurement fraud and cosy connections between suppliers and their clients is endemic. I know that for a fact as I specialise in this field.

    In 2001, my associated company developed procurement and contract management software which meets corporate and government probity requirements, accountability and international best practice for procurement and risk management. The software is automated end-to-end, including automated evaluation, ensuring complete transparency of process. It eliminates both internal and external interference with the processes of tendering, contract management and performance monitoring.

    Tenderers must complete their offers electronically and their responses only are loaded up into the software.The outcome of a tender can be known with minutes of the formal closing of a tender.

    Our systems have been upgraded further for 24/7/365 online access with bank-level security protocols.

    The corporate enterprise and government pricing for our entire system costs less than $A0.5 million with very modest annual maintenance charges. Less secure and less featured overseas developed computerised systems by software giants runs into multi-millions.

    We have had reasonable success in Australia but we constantly come up against bureaucratic resistance at all levels. If supervisory boards, CEOs, permanent heads of government departments, councillors knew of the level of resistance towards modernising their entire procurement processes they would be horrified at the mis-management and financial losses from over-paying for goods and services they procure annually.

    Our research indicates that upwards of 80 per cent of government bodies and corporate entities continue to rely mostly on paper-based systems and sweet-heart deals with preferred suppliers. Would you believe that in 2019, most outfits still use simple MS Word and Excel documents to management massive procurement and contract management requirements. Taxpayers and shareholders would be appalled at the lax standards which surround the annual multi-million and multi-billion dollar procurement programs.

  6. Hydra

    Excuse me, but as an external auditor, detecting fraud is NOT our responsibility. It is in fact Management’s. And the Board is responsible for Management. We cannot test millions of transactions to ensure Joe Blogs receives inventory correctly 100% of the time.

    Our responsibility was auditors is to conduct testing to provide reasonable (Not absolute) assurance that the financial statements are free from material misstatement. As part of this, our procedures MUST include procedures designed to detect material fraud. Please read an audit opinion.

    A lot of things have changed since Enron, though there is a lot of cleaning up to do still, and companies are becoming more and more complex.

  7. Amadeus

    Agree Hydra. As cost management consultants our role is to identify wasteful expenditure, supplier rip-offs, fraud and deals failing the “arms length” and “probity” tests. We are normally engaged by CEOs, CFOs, and COOs. We drill into information to conduct forensic financial/expense analyses and can save our clients millions of dollars. In many cases, it can take months to sift through massive amounts of data to be 100% certain of the conclusions reached. Fraud is almost always the failure of systems, supply chain manipulation and the unethical/unscrupulous behaviour of individuals – it applies equally to corporate and government entities.

  8. max

    All an auditor can do is to vouch that a financial statement is broadly consistent with Generally Accepted Accounting Principles (GAAP), and to make a professional judgment about the integrity of the reported numbers. The auditor must take at face value many of the numbers presented to it by the company, which is why a nationally reputable auditor like ArthurAndersen was not able to detect accounting abuses committed by Enron. No amount of regulation can stop human beings from committing fraud if they are determined to do so.

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