As Internal Audit Staffs Shrink, Will Fraud Rise?

A new study finds that compliance staffs haven't escaped layoffs, leaving companies more exposed to risk.

Few corporate departments have been spared layoffs in recent months, and internal audit and compliance are no exceptions. According to a new poll by Deloitte Financial Advisory Services, 27% of executives reported reductions in these areas at their companies in the past 18 months, despite the fact that compliance experts and internal auditors were heavily recruited just a few years ago, in the wake of the Sarbanes-Oxley Act.

The implications for companies are worrisome. “We know that in a recessionary time, fraud risk and corruption risk rise, so there’s a tension there,” says Kerry Francis, chairman of Deloitte Financial Advisory Services. “You’ve got a decrease in compliance personnel, and in this economic environment there’s pressure on employees and pressure on management — and that causes some people to do things that they shouldn’t.”

For those compliance staffers left behind, the role becomes more daunting. Particularly as companies cut travel budgets, the ability to do thorough site visits is limited, says Francis. “How does internal audit now execute their responsibilities?” she asks. “How can they be more strategic in their review and monitoring? There are lots of challenges facing the remaining personnel.” More than ever, close coordination among internal audit, legal, and compliance personnel “is critical,” she says.

Despite the reduction in compliance personnel, 50% of respondents to the Deloitte survey, who included CFOs, CEOs, board members, and middle managers in finance and risk management, said their compliance and ethics programs are strong. Another 36% said they are adequate. Many public companies and some private companies invested significantly in their compliance programs after the passage of Sarbox in 2002, notes Francis, and they may now feel confident that those programs are effective even with a reduced staff. But that confidence may not always be justified. “What seems to be slipping is the actual testing or review or active monitoring of transactions or behaviors,” she points out. “That’s the risk.”

Companies may be able to offset some of the increased risk by setting a very strong ethical tone at the top. But CFOs will have to wait a few years to see whether highly visible ethical leadership can truly compensate for fewer compliance checks, as much of the fraud being committed today won’t come to light for years. The average Securities and Exchange Commission fraud case today spans seven years from the beginning of an alleged scheme to settlement or litigation, says Francis.

 

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