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When rampant organizational fraud occurs, where was the board?

Martin T. Biegelman (martin.biegelman@sunhawkconsulting.com) is Managing Director & Investigations Practice Leader at SunHawk Consulting LLC in Phoenix, Arizona, and the author of the book, Building A World-Class Compliance Program.

The importance of corporate governance and a resilient board of directors is not a new concept. It has long been held that effective board oversight can do much to reduce the risk of management misconduct. In fact, this concept was reinforced many years ago in the October 1987 Report of the National Commission on Fraudulent Financial Reporting. The Report opined on the increased prevalence of fraud with “the absence of a board of directors or audit committee that vigilantly oversees the financial reporting process.”[1] Unfortunately, that premise has not been universally embraced, and fraud and other misconduct persist.

Whether it is the headline-grabbing corporate fraud cases of Enron, WorldCom, Adelphia, and a host of others from 20 years ago or the more recent ones at Volkswagen, Theranos, Luckin Coffee, and Wirecard, we are compelled to ask the provocative questions: Where was the board; what did they know; and when did they know it? Or did they not even know? While we have seen very few cases where the board was complicit in management fraud, in such cases we must ask, why did they not do more in their governance and oversight role to detect and prevent rampant misconduct? Why have the gatekeepers and the guardians of governance let us down in so many instances? At times, boards have failed miserably but faced few consequences.

To reinforce the failure of board governance, I will discuss three organizations from the public, private, and nonprofit sectors that made headlines, and not in a good way, for their misconduct. The common denominator in these case examples is the action, or rather the inaction, of the boards of directors involved. I will then discuss the questions that boards need to ask themselves to ensure they are fulfilling their roles effectively.

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