The-Accountant-Jul-Aug-2016

MANAGEMENT
shareholders vs. managers, shareholders
vs. auditors, shareholders vs. government
e.t.c.
The concept of the tone at the top
was emphasized in the Sarbanes –Oxley
Act of 2002 as an important tool in
prevention and detection of fraud. Tone
at the top is often considered to permeate
an entire organization and a good tone
at the top is considered a prerequisite
for solid corporate governance and the
boards of directors have a sole role in
creating code of conduct and living by
them.
A good organizational tone is set
through hiring policies, codes of ethics
a commitment of hiring competent
employees and development of reward
structures that promote good internal
controls and effective governance. In
the current Kenya we wholesomely
need ethical leaders in management
of government and private entities
and according to KPMG analysis on
ethical leaders, ethical leaders are those
who are receptive to employees’ ethical
concerns, value ethics and integrity over
short -term business goals and respond
appropriately if they become aware of
misconduct. This is true because the
role of prevention and detection of
fraud lies with management. The tone
at the top should always ensure that the
governance structure is well formulated
and codes of ethics are complied with by
all employees.
It is also the role of the tone at the
top to set the pace for the rest to follow.
According to experts, poor tone at the
top may include a disdain for internal
controls, an overemphasis on profits
at the expense of ethics, a belief that
compliance with the law is sufficient for
defensible ethical conduct, the canvassing
and accommodating of some stakeholders
but not others, blaming higher –ups or
colleagues for unethical practices due to
conflict of interest and misunderstanding
of and lack of adherence to public
expectations of what constitutes ethical
behavior for executives.
The National Commission on
Fraudulent Reporting (called the Tread
way Commission) released a ground
breaking study in 1987 that reported
the causal factors that lead to fraudulent
behavior and financial statement fraud.
According to the commission, the tone
at the top plays a crucial and influential
role in creating an environment in which
fraudulent financial reporting is ripe to
take place.
If the tone at the top set by managers
upholds ethics and integrity, employees
will be more inclined to uphold those same
values. However, if upper management
appears unconcerned with ethics and
focuses solely on the bottom line,
employees will be more prone to commit
fraud because they feel ethical conduct is
not a focus or a priority to organization.
In setting the right tones at the top the
following four key elements must be
adhered to;
• Those in top positions of management
have to communicate to employees
what is expected of them
• Lead by example
• Provide a safe mechanism for reporting
violations
• Reward integrity
A good tone at the top normally has the
following benefits to both government and
private entities:
1. Sets an organization’s guiding values
and ethical climate as per Nicole
Sandford.
2. Helps in binding an organization
together.
3. Acts as an important driver of
audit quality.
4. Helps in risk management e.t.c
The following officers should play a key
role in setting tone at the top;
The Board- The board sets the tone
at the top right by hiring the right
CEO, approving strategy, monitoring
execution of the plan, setting risk
appetite and exercising appropriate
oversight regarding risk mitigation,
with the underling goal of preserving
and creating shareholders value.
The CEO- As a key individual
in an organization, his behavior
tells employees what counts, what’s
rewarded and punished.
The CCO-The Chief Compliance
Officer plays a major role in setting
and reinforcing the tone at the top.
The character of the CCO positions
sends a powerful statement about
the organization’s commitment to
ethics and compliance as does the
organizational positioning of the
person within the executive leadership
team.
To sum up, management should be
blamed entirely in case of business failure
and incase auditors are involved; there is
need to conduct a thorough investigation
on their professional misconduct as they
are supposed to exercise;
• Due Care
• Professionalism
• At most Good Faith
• Professional skeptics and it’s the role
of auditors to question the integrity of the
tone at the top and conduct a thorough
interview in terms of goal setting, target
achievement and remuneration of the
people at the top.
Action should be taken over them in
case they are a party to it and remember
news papers may be appealing in terms of
yearly financial statement presentations
but no reliance should be placed on them
unless one gets the advice of an expert to
interpret the postings. This was evident in
the case when National Bank posted mega
profit only to turn into losses again for a
short period.
JULY - AUGUST 2016 5