How Does Corporate Governance Minimize Fraud And Conflict Risks?

Corporate governance refers to how an organization manages fairness, accountability, responsibility, and transparency in its relationships with stakeholders. Through a solid corporate governance framework, fraud risks and conflicts of interest can be better identified, managed, and resolved in business.  

While the concept may seem like it only applies to large companies, our experience as Colorado business attorneys has shown that good governance is necessary for managing fraud risk and conflicts of interest at organizations of any size. 

The Role of Corporate Governance In Reducing Fraud

Governance systems are critical fraud prevention tools because they encourage oversight and transparency, which help minimize opportunities for fraud. 

For example, a company should have direct procurement and bid invitation processes or policies to ensure that the employees who choose suppliers have fewer opportunities to engage in bribery or corruption. Such procedures generally involve intentionally getting more eyes on the situation, such as additional approval requirements for large orders or outside help to search for and report vulnerabilities in the financial or procurement process.  

As part of an overall fraud-fighting corporate governance program, company leaders should: 

• Create and implement a “whistleblower” protection program
• Develop a code of ethics and educate all employees on the code annually
• Engage in risk management
• Establish an investigation framework, which should allow for outside investigators if fraud is suspected to be significant in scale

While the board usually implements governance systems, the techniques must also prevent fraud at the board level. The governance documents could, for instance, provide a conflict of interest process, policy, or a way to obtain an independent third-party review to help prevent fraud within the board itself. 

Addressing Conflicts Of Interest Through Corporate Governance

Whether you run a commercial business or a non-profit, you’ll eventually confront conflicts of interest. A conflict, in one sense, is a scenario where a person or a company has to deal with competing interests between parties. In short, it is when the obligations or duties to one party could be undermined, or appear to be undermined, by the obligations or duties to another party.  

This could mean prioritizing the company over a client, one client over another, or a board member using their position for their personal gain at the company’s expense.  

Conflict risks must be addressed within the corporate governance framework. This usually means creating a formal conflict of interest policy. The policy should describe how to identify a conflict, the disclosure obligations when a conflict might exist, and explain how such conflicts will be resolved.  

The process for addressing conflicts should be fully integrated into the company’s overall governance and, depending on its size, include appropriate implementation of the following: 

• First, business leaders must watch for and report conflicts appropriately.
• Compliance, ethics, and risk management teams must be adequately resourced and given sufficient authority.
• Finally, internal and external audits must assess the company’s conflict controls independently.
• Executives and board members must be engaged by monitoring business units and leaders and disclosing their outside interests.

Our Colorado Attorneys Help Clients Reduce Fraud and Conflicts

Hackstaff Snow Atkinson & Griess, LLC assists clients with creating corporate governance structures, including provisions designed to fight fraud and properly manage conflicts. To arrange an initial meeting with one of our seasoned Colorado lawyers, please call our Greenwood Village office at 303-534-4317 or send us a message.