Proactive Fraud Prevention

While these programs have been primarily designed to demonstrate that a company is serious about acting ethically and within the law, we have seen a record number of financial restatements in the past year. One can surmise that this is due to a lapse in the effectiveness of those companies' ethics and compliance efforts.

Now, along comes the Sarbanes-Oxley Act, which contains a specific provision requiring chief financial and chief executive officers of SEC registrants to make certifications concerning their company's quarterly and annual reports that, if found to be made knowingly or willfully false, may subject the signing officer to criminal penalties. On October 22, 2002, the SEC issued rule proposals that, if adopted, would also require certifying officers to design, establish, maintain, evaluate and report the effectiveness of the company's “internal controls and procedures for financial reporting.” The SEC proposes that “internal controls and procedures for financial reporting” mean controls that pertain to the preparation of financial statements for external purposes that are prepared and presented to conform with generally accepted accounting principles (GAAP) as described in the Codification of Statements on Auditing Standards section 319. This section describes internal controls as “a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurances regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.” This certainly sheds new light on the importance of a company's ethics and compliance efforts. Corporate executives now have a never-before seen level of professional and personal interest in insuring that ethics and compliance programs, as well as the entire internal control structure, operates effectively at all times.