A US survey concluded that 6 % of business revenue or $400 billion is lost within the UK economy as a result of fraud, and a most of this loss comes from internal staff. Furthermore, KPMG estimated that only 4 % of these fraud incidents were spotted during external audit. The reasons for this huge damage comes from a lack of internal corporate controls and poor stock-control/accounting.
Many shareholder interest groups exist to protect the rights of the smaller investor. Grouped together, they command a huge pension fund and influential voice. Calpers, Teachers, NAPF and PIRC are among many. PIRC (Pensions and Investment Research Consultants) was vocal in its criticism of arrogant boards that do not press forward to embrace corporate governance recommendations0 PIRC has called for more transparent and accountable directorships to
make UK boards more geared towards increasing shareholder value and socially responsible investment.
PIRC is an agency committed to SRI (socially responsible investment). It encourages investors to monitor how companies are managing their stakeholder relationships. One byproduct is FTSE4Good as an index of SRI stocks that such investors can choose from. PIRC gives investors relevant information and SRI advice, particularly on corporate governance, including:
shareholder rights  best practice compliance  suitable board structures  remuneration schemes  investor relations.
PIRC has called for a series of changes to make UK board of directors more effective.
Encouraging more boards to have more non-executive directors than executives.  Making sure non-executives are genuinely independent rather than chums of the chief executive. PIRC says only 20 % of FTSE 100 boards have a majority of independent non-executives.  Independent appraisal of board members.  A widening of the pool of non-executives. Companies could advertise for new recruits.
Better resources for non-execs, including secretaries and researchers as well as access to  independent research and advice.
More contact between non-execs and shareholders.
NAPF (National Association of Pension Funds) operates with a similar mission. Its priority is to ensure an efficiently regulated market for the provision of employer-sponsored pensions. It advocates sound governance of pension fund assets as NAPF represents pension funds that cover about 10 million UK employees. These funds control 20 % of the shares of the London Stock Market. NAPF also opines that independent directors articulate the wishes of their investors, while the non-executive directors fully understand the shareholders’ expectations of them. One role could be for them to exercise effective restraint over the sympathetic remuneration committees that are inclined to pay the top executives too much (“fat cats”).
Fat cats are blamed for skimming off the cream from the corporate milk, so impoverishing their investors. Executives have to be charged with the duties of wealth creation and safeguarding it through risk management, not for sleeping on the job. The risk management directors’ duty is listed in the Basel II banking document that prescribes a healthy environment for business. It states that the function of risk management should go all the way to the top:
The board of directors should be aware of the major aspects of the bank’s operational risks as a risk category that should be managed, and it should approve and periodically review the bank’s operational risk management framework. The framework should provide a firm-wide definition of operational risk and lay down the principles of how operational risk is to be identified, assessed, monitored and controlled/mitigated.
Invest within companies where there is a culture of openness and risk management. The new Basel II banking regulations encourages corporate transparency. One’s conscience is better put at rest than by a superficial report that white-washes the remaining dangers.
We have looked at sensing for top management errors and lack of ethics deep down the company – see AEW: advanced early warning.
Your sixth sense can save you a lot of money!

Effective counter-measures have to be put in place and tested. We have outlined some of the Basel II guidelines for effective risk management. The trouble is: “Do you have the corporate influence and the budget to get the proper risk management in place?”
Where advice and plans fall on deaf management ears, nothing concrete is likely to be done. Budgetary constraint, as an opponent, is no stranger to the champion of risk management.
The financial world is set on cutting costs and automating business processes; risk management systems are just one facet of this drive. Yet, the quest for lower costs and automation can blind us to the fundamental areas for error. Human intervention and room for exercise of staff initiative can become stifled.
This is partly why human error is cited as the source of most operational failures. However, this is often just an excuse for poor management and badly designed systems and processes that remove checks and controls in an effort to improve efficiency by lowering costs.
Much of this corporate culture against disclosing the truth stems from the top of the financial institutions. Switzerland, for example, makes whistle-blowing a crime. Therefore, unfavourable financial assessments can remain hidden from the investors. Whistle-blowing really saves investors money in the long run. It pinpoints the perpetrators of economic crimes and reduces the period during which they could be removing or destroying economic capital of the company and its shareholders. Whistle-blowing reduces the time-lag after which auditors and investigators can look for relevant evidence.
Whistle-blowing works on a raising series of red flags. When there is no visible recourse, or for major crimes, resort to an escalation of whistle-blowing. Alert the press and media, then report to regulators, police and other supervisory authorities. A proper whistle-blowing methodology can be set within the staff contract to lift the lid on fraud and crime. For minor transgressions: keep the dissent internal initially and keep an account of all errors, crimes and relevant data. Consult the ombudsman or newspaper if the company refuses to act.
Whistle-blowers must be protected and encouraged. Right now, the downside risk is being fired or shunned in the professional for “squealing” on the company or colleagues, while the upside potential is not much. Immediate risk is being questioned for technical competence, political competence, sanity, naivete ́; onus is on the whistle-blower to understand the
whole of the story; first managerial reaction is often “you do not have a view on the whole picture”.
Many corporations do not encourage whistle-blowing. Certainly, discouraging the leaks of information is an overt attempt to block all events that present a corporate reputation risk. Enron did not support whistle-blowing, but preferred to hide or shred the facts. Fraud and concealment of the truth were deep-rooted in the structure of the company. Worse, the fraud was perpetrated at the top. A company has to have a structure that is rooted in business and risk management.
Risk ignorance does not work, especially if the top management is ignorant or crooked. What an open risk-managed structure does is to open the corporation to the control function of the risk managers. They actively let the company be open to the idea that “squealers” can inform on the company if something wrong or fraudulent is suspected.
An internal company “fraud hotline” should be set up, where anonymous whistle-blowing can be channelled and processed for action. Nowadays, whistle-blowing is possibly anonymously through setting up temporary email accounts that access the regulatory website.