Fraud Prevention: Rising prominence of independent directors in fraud risk management

Per the survey results, independent directors appear to play an important role not only in fraud prevention and reporting but also in helping an organisation respond to fraud. Respondents indicated that independent directors could significantly improve fraud risk management efforts in the future, specifically by providing guidance in fraud reporting (26.09 percent respondents), fraud prevention (21.74 percent respondents), and improving fraud response (22.83 percent respondents).

Compliance penalties, personal liabilities, and reputational impact faced by independent directors were uncommon in the past, making the role riskier than before. Despite the authority vested in independent directors, their ability to effectively discharge their duties can be constrained by the following factors:

  • Lack of adequate time/involvement by IDs in the organisation’s operations, including financial, business, and other matters.
  • Lack of timely access to critical information; for example, often, the board meeting agenda and related data are not circulated well in advance.
  • Possibility of distortion or misinterpretation of facts, given the volume and complexity of data shared with IDs.

To fulfill regulatory obligations and meet stakeholders’ expectations, independent directors could undertake the following measures to safeguard themselves in this environment of heightened risk:

  • Scrutinise in detail the financial statement compilation process to obtain comfort on the sanctity of information presented in financial statements.
  • Scrutinise and challenge high-value complex or “extraordinary” transactions, which form a part of the financial statements, by seeking additional information, including business rationale, appropriate documentation, approvals, and compliance aspects. 
  • Provide recommendations on the appointment of independent experts for opinion on key matters and keep in mind the credibility of such experts, especially for matters, including assessment of internal controls and aspects requiring technical expertise to maintain sanctity and confidentiality of the information (e.g., unpublished price sensitive information and corporate governance).
  • Consider whistleblower complaints/tips diligently and ensure that they are addressed adequately with internal/external investigation. Investigations’ outcome and remediation mechanism, if any, taken by the management should be properly overseen. 
  • Ensure that the company has implemented an adequate system of continuous monitoring in place for critical areas of concern to identify red flags, if any, in real time. IDs should take cognisance of key potential issues identified, if any, and their closure with satisfactory justifications.

COVID-19 has adversely affected organisations and many have lowered their growth-related guidance and estimates. At such a time, while it may be tempting to showcase better

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