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Guilty of Fraud or Incompetence?

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Headlines about a company being investigated for ‘Accounting Irregularities’ send shivers down the necks of accountants nationwide.

Broadly, there are two scenarios: either the Finance Director knew about the irregularities, or he didn’t.   Neither option is great.

Deliberate accounting irregularities are fraudulent, and an FD involved in a fraud will not only lose their current job, face prosecution and possibly jail, but their future career path is also in tatters.  They will be banned from holding a directorship and their accountancy qualification could be struck off by their regulatory body.

Not knowing about an irregularity is less terrible – the moral compass of the Finance Director remains intact – but it still raises serious questions over the FD’s competence and fitness to hold office.  What were the deficiencies in the control environment that led to this irregularity?  Was it a deliberate fraud by someone else in the business, and why was it not picked up?  Was it an oversight – and how did it slip past both senior management and the auditors?

The duties of a director are defined by the Companies Act and include exercising reasonable care, skill and diligence, and ensuring compliance.  All directors of a company under investigation will be held accountable when something goes awry and if it is in the financial arena the FD will be first on the line.

An issue in the production team- whether faulty goods or stock theft – will fall to the Operations Director, but the nature of the Finance Team’s responsibilities, that of reporting accurate results and valuations, and of ensuring controls are met, means that the Finance Director will also be questioned as to how an oversight slipped through the net. Financial reporting spans all areas of every business, and so the Finance Director has to be satisfied that all teams are in order, not just the ones directly under the FD’s management.

We always presume innocent until proven guilty: unfortunately, in the situation of ‘significant Accounting Irregularities’, being innocent of deliberate fraud still carries a conviction of being guilty of incompetence.

It’s a lose-lose situation for the directors involved and one that all directors, accountants and auditors fervently wish to avoid.
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