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Given these pressures—and the related risks—audit committees need to be particularly focused on the adequacy of their organization’s ethics and compliance program. Indeed, two thirds of the senior executives who took part in KPMG’s Fraud Survey 2009 identified inadequate internal controls or compliance programs at their organizations as “most enabling fraud and misconduct to occur.”

As a baseline, every organization should establish an ethics and compliance program that ensures comprehensive reporting, clear accountability, and full and effective oversight by the top decision makers. By focusing on six key elements, audit committees can help ensure that ethics and compliance programs hold up to the pressures of a turbulent business environment.

Establish the right tone at the top…and at the middle. An ethical culture, it is often said, starts with “tone at the top.” But equally important is “tone in the middle,” the influence of mid-level managers and supervisors who serve as the day-to-day role models for a majority of the organization. In addition to monitoring reports and employee survey results to get a sense of the “tone in the middle,” audit committees also should use executive sessions as an opportunity to obtain the views of internal and external auditors about the organization’s culture and tone.

Organize the business to support the program. The right organizational structure and tools must be in place to create an ethical culture that will drive an effective ethics and compliance program. This starts with a governance structure that gives the ethics and compliance program both independence and stature.

Independence is critical to guard against potential conflicts and to ensure that issues are treated objectively. And although a culture of ethics and compliance must be embedded across the organization, ensuring the independence of an ethics and compliance program may require a governance structure that separates ethics and compliance components from the operational components. Finally, a periodic ethics and compliance risk assessment is an essential part of any well-functioning governance structure of an organization.

Make the code of conduct clear and relevant. A key element of any ethics and compliance program is the code of conduct, which sets forth the organization’s core values, ethical standards, and expectations. The document should be practical, clearly demonstrating how the organization’s values apply in the everyday work environment for every person.

Maximize training opportunities. Instilling an ethical culture requires more than periodic training efforts. There are innumerable “touch points” that every organization has where it connects with its employees. Touch points can range from orientation to company-wide meetings, and from technical training to employee letters and publications.

Be prepared to respond effectively. The strength of an ethics and compliance program is measured, in large part, by how an organization responds to the reports of possible misconduct that inevitably arise. There are three fundamental elements for ensuring a successful response to ethics and compliance matters:

• Identification: Provide multiple channels of communication—including “whistle-blower’’ mechanisms that accept anonymous complaints or allegations—that enable individuals to raise ethics, fraud, and misconduct issues without fear of retaliation.

• Investigation: Ensure the consistent, fair, and thorough investigation of complaints. The audit committee should have a clear action plan in place for conducting an independent investigation.

• Remediation: For substantiated reports, ensure that appropriate disciplinary action is taken, and implement both specific and general remedial measures to mitigate the possibility of recurrence.

Re-evaluate and refine. Although it can be challenging to measure the effectiveness of an ethics and compliance program, surveys of personnel can be a good indicator of how well the program is doing. No program can be successful, however, without a process for continual re-evaluation and refinement.

Sven Erik Holmes is executive vice chair of Legal and Compliance at KPMG LLP.

“Despite some very high profile prosecutions and the pledges of rigorous enforcement by various government watchdogs, one of the country’s most troubled economic periods has created a perfect storm of increased pressures, new opportunities and dangerous rationalizations to allow business fraud and misconduct to occur,” said Richard H. Girgenti, national leader of Forensic for KPMG.

Executives’ expectations regarding changes in the incidence by type of fraud:

• Eight percent of respondents said fraudulent financial reporting would increase, while 66 percent said it would stay the same;
• One-quarter of respondents expected asset misappropriation to rise, and 60 percent said it would stay the same;
• 20 percent of those surveyed said they expected other illegal or unethical acts to rise, while 60 percent said they would remain the same.

The “volatile” mix of issues dominates the market as the turbulent economy pushes companies to make due with less resources–cutting payrolls, pushing employees to maintain output, and causing workers to do “whatever it takes” to achieve earnings goals. The government’s intense focus on illegal activity also seems to add to the pressure.

“This survey also uncovered a need for improvements in corporate programs designed to prevent, detect and respond to wrongdoing,” said Girgenti:

• The executives surveyed said improvements were needed around communication and training (67 percent), technology-driven techniques, e.g., auditing and monitoring (65 percent), and fraud risk assessments (60 percent).

• About 27 percent of respondents reported that their organizations did not fully understand how to conduct investigations, and at what point the board of directors should be alerted to potential concerns. In addition, 33 percent said they lacked protocols on how to remedy control breakdowns.

As a result of the economic crisis, it is likely that further regulatory changes will take place. “Companies that strengthen their corporate controls and compliance programs to confront fraud and misconduct risks have a better chance of prospering as the market improves,” added Girgenti.