The Fraud Examiner

Corporate Conduct: Guidance From Afar
 

By Peter Goldmann, CFE 

 

Long before Sen. Paul Sarbanes and Rep. Michael Oxley took it upon themselves to craft a federal law designed to thwart mega-accounting frauds like those at Enron, Tyco and WorldCom, a respected, retired judge in South Africa named Mervyn King was hard at work fashioning a set of standards aimed at enhancing corporate board, audit committee and internal audit influence over governance and risk mitigation... including fraud risk.

 

The first draft of the "King Report on Governance for South Africa" was published in 1994. It was considered by some to be groundbreaking work in the area of corporate governance. But it lacked much of the "muscle" that many felt was needed to keep businesses on an ethical path. Hence, "King II" was published in 2002. It introduced the key elements of board responsibility and risk management.

 

It was upon the foundation of King II that the current version, predictably dubbed "King III," was written, adding substantive standards for board conduct, risk mitigation and internal audit responsibility. The provisions in these key areas are all well worth reading by Americans for whom the gold standard of corporate governance continues to be Sarbanes-Oxley -- whose essential confinement to management’s responsibility for ensuring the effectiveness of internal controls (Section 404) seems rather inadequate in light of the massive frauds that were perpetrated during the boom years leading up to the recession of 2008.

 

Key Provisions 

Unlike most corporate governance codes (including Sarbanes-Oxley), King III is non-legislative, and is based on principles and practices. It also espouses an "apply or explain" approach, unique to the Netherlands until King, and now also found in the 2010 Combined Code from the United Kingdom.

 

The philosophy of King III consists of the three key elements of leadership, sustainability and good corporate citizenship. It views good governance in refreshingly simple terms, namely effective, ethical leadership. King III insists that leaders direct the company in order to achieve sustainable economic, social and environmental performance.

 

In a rather more philosophical vein than would likely be found in U.S. corporate governance laws and professional standards, King III defines "sustainability" as the primary moral and economic imperative of this century. Its view on corporate citizenship flows from a company's standing as a juristic person under the South African constitution and should operate in a sustainable manner.

 

This, of course, is nothing uniquely South African. It just so happens that the common sense view of how businesses should behave was born in that country (whose history, notably enough, is densely blemished by government and corporate conduct, which might well be defined as the egregious opposite of what King III espouses).



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