Corporate governance does not shield against fraud

Good corporate governance practices, internal and external control organs, as well as organizational leaders should not be automatically judged and condemned as if they were, as the case may be, flawed, negligent, complicit, or even participants in the face of fraud and other illegal irregularities.

First and foremost, there needs to be a serious investigation into the facts to begin forming an initial idea of what happened. Investigations conducted by competent authorities are important for initial clarification.

Even so, depending on the case, a judicial process may lead to different conclusions from preliminary investigations. Only due process of law will delve into all arguments, through evidence, in accordance with the Criminal Procedure Code of the country in question.

Moving beyond the legal sphere and into organizational processes and technologies, it is risky to assert that management and compliance systems are perfect. This is because systems can always have imperfections that were not noticed during their conception. Furthermore, there is an important aspect in these systems to consider: the human element operating them.

In short, good corporate governance systems and practices based on the best recommendations do not ensure a "zero-fraud" level. At least, not for the time being.

Implementing and improving good governance practices in companies and other organizations in the economy is obviously very important. The adoption of robust corporate governance systems helps create value for organizations that adopt them, reducing risks and adding more favorable returns and benefits to shareholders and other stakeholders of all sizes. These practices, in fact, advocate more than just compliance with the law; they call for going beyond the law. However, there are limitations in governance systems, and sometimes they are mistakenly attributed a role that exceeds their reality, giving them a capacity that does not exist to prevent all frauds and morally reprehensible or illegal conduct.

Another consideration is that if an internal agent manages to circumvent existing control and supervision mechanisms, it does not necessarily mean that there were failures in the principles adopted in codes of ethics, compliance policies, or the diligence of management efforts. Governance systems can be very good, following the best guidelines and techniques available at a given moment, but they are not foolproof. They do not have the ability to absolutely prevent all frauds that can occur, especially those planned by individuals who are well-versed in existing control mechanisms and can create ways to bypass protective barriers.

Moving forward in the reasoning, here's a question: if, in addition to the possibility of unforeseen errors in the design of control systems, there is also the human element, the humanware operating them, as mentioned, does this imply adopting a strong and generalized distrust of everyone in the organization? In our view, no, there is no logical justification for such a stance regarding the integrity of individuals. In fact, if corporate governance requires good practices and good controls, it also requires a healthy dose of trust in human beings; otherwise, how would organizations of all kinds exist? How would delegation exist? In numerous situations, trust is necessary, plain and simple.

Organizations require a mix of trust in humans and control over some human actions (especially considering critical decisions for the organization). Humans are imperfect. Even the sole entrepreneur of a business (which may, initially, be informal) needs to have its own controls. Even though this entrepreneur deeply trusts himself, he cannot predict all possible events, everything that could happen and all his own reactions. And he may forget important details of his business, or be harmed by third parties, if he does not have minimal controls over what was agreed or contracted.

In conclusion, how should situations involving fraud be treated? With or without governance failures, with the classic treatment that should be given in situations of wrongdoing: the law, or rather, the force of the law, which should have good rules. Effective legislation that protects organizations and the public who rely on the integrity of their actions. The legal framework and its effectiveness are fundamental barriers to containing and punishing illegal behaviors. Some of these behaviors have been substantially harmful to various societies around the world.

Mônica Mansur Brandão

Mônica Brandão lives in Belo Horizonte, in the state of Minas Gerais, Brazil. She has been working as an executive and advisor in various organizations. With a master's degree in Administration, she is an electrical engineer and is currently pursuing a degree in Law. She has been publishing articles in different outlets in her country.


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