Corporate fraud and auditing challenges – 5 lessons

By Robert Lewenson, Head of Responsible Investment Old Mutual Investment Group

At the very core of King IV is the principle of ethical leadership of the governing body. This highlights the critical role that a board plays in interrogating financial statements and the correct use of the different audit functions and resources.

Combatting corruption lies in sound ethics, governance and authentic leadership

Lesson #1: Sticking to a strategic vision

Strategy theory suggests that strategy development over time is more about making wise choices initially and deepening one’s competitive position than going too broad and trying to be all things to everyone. Although the diversity of businesses might give some people the impression that the company lacks a core identity and has chased acquisitions, the company’s long-term vision should be to control its various value chains, thereby moderating costs, keeping competitors at bay and striving for ever-higher levels of efficiency and market share.

This is an important element in fundamental strategy in sourcing and manufacturing goods in low-cost countries and selling them to value-conscious buyers in more lucrative markets.

Lesson #2: Growth does not always equate to profit or success

 Organisations that deliver consistently strong performance over extended periods of time, invariably practice a controlled growth strategy in which future expansion and investments are carefully planned and executed. The hallmark of truly great companies is that they have the discipline to hold back and moderate their growth plans to avoid experiencing resource constraints and fatigue, or end up in financial difficulties during lean times when the cash they accumulated during bumper years is depleted.

Lesson #3: Strong governance is not just about financial and regulatory compliance; it is a mind-set

Most organisations extol the virtues of strong governance, as evidenced in prudent financial management, transparent reporting, and an engaged and accountable executive team and board. However, all too often compliance ends up being a box-ticking exercise, with the goal being to meet minimum standards, mostly only to satisfy the relevant authorities.

Basic compliance may satisfy shareholders on an elementary level but can lead to operational mediocrity if not backed up by committed management, which is key to sustainable profits and a satisfactory return on investment.

An important dimension of sound management is a commitment to ethical business practices that are based on values, not just rules. Values should be entrenched in the moral fibre of any business, helping people to distinguish between right and wrong and therefore, regulating their behaviour. Rules provide behavioural guidelines but are susceptible to being challenged, manipulated or ignored.

Strong governance in an organisation is heavily dependent on an accountable and capable board to exercise rigorous oversight while also motivating the executive team to follow their vision.

Lesson #4: A charismatic leader can either be very good or very bad for a company

There is a general belief that if an organisation is fortunate enough to have a charismatic leader, its chances of success improve dramatically. Charismatic leaders can engage people at all levels, speak their language, keep their attention and earn their respect. Yet charismatic leaders are not always brimming with charm and goodwill. They are also capable of extortion. The world has bared witness to many brutal dictators that have kept populations under control by projecting a charisma that is laced with menace. Charismatic leadership is often viewed as ambiguous because the extraordinary power and influence that go with it can be used in either a positive or a destructive way.

Lesson #5: Even ethical business people are corruptible

Human morality is fragile, notwithstanding most people’s good intentions. Deep-seated stirrings of envy, greed, self-absorption, arrogance or a sense of entitlement could infiltrate people’s moral fibre at any stage.

No skimping

Of course, this does not mean that wrongdoing should simply be pardoned – particularly when, in an organisational sense, the culpable parties are savvy or senior enough to know better. What it does mean is that no organisation can afford to skimp on introducing the appropriate checks and balances, particularly where organisational finances are at stake.