Lowliest workers are nearest the ground in fight against fraud

American shareholders are better off relying on secretaries, postroom workers or other employees to spot fraudulent activity at companies in which they invest than analysts, auditors, regulators and lawyers, a report claimed yesterday.

According to a 62-page study from the Chicago Graduate School of Business, auditors and financial regulators are far down the rankings of parties who detect financial wrongdoing.

The report examined who is best at “detecting and deterring corporate fraud” by trawling 230 cases of alleged corporate fraud in the United States between 1996 and 2004. Each of the companies owned at least $750 million-worth of assets.

During the nine-year period, only 6 per cent of the frauds studied were sniffed out by the US Securities and Exchange Commission (SEC), the financial regulator, with 14 per cent spotted by auditors.

“Approaches involving persons officially charged with fraud-detection duties have been costly and ineffective,” the report said.

Stock exchange regulators, commercial banks and underwriters, those with access to companies and whose business is managing risk, are shamed the most in the report. Not one managed to spot a single fraud over the period.

According to the report, an analyst takes, on average, just over nine months to detect a fraud, almost a full financial year, while auditors intervene after 14.7 months, with journalists and the SEC taking about 21 months.

Auditors and the SEC were ineffective at detecting fraud because the former were more likely to lose the contract or the client when they revealed a fraud than when they did not. The the SEC is “paid for the outcome they exert, not for the outcome they achieve”.

The report, which considered whether the Sarbanes Oxley Act, introduced in July 2002 after the Enron and WorldCom collapses, had improved the exposure of fraudulent activities in corporate America, found that because the Act had made auditors legally responsible for assessing a company’s internal controls, they did improve � but it added: “Only time will tell whether this . . . is just a temporary blip.”

The best way to catch fraudsters, the report found, is to offer a financial reward to anyone who spots wrongdoing an incentive system, which is cheap and has been proved to be effective in keeping the American healthcare system in check.

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