Five lines of defense in corporate governance

Today I want to discuss a topic that is extremely important, but often overlooked. I’m talking about corporate governance and the five lines of defense that protect our global ecosystem from fraud and ensure regulatory compliance.

As we move forward in the digital age, we must ensure that our systems, processes and frameworks are designed with integrity and transparency in mind. The stakes are high and the consequences of failure are serious. However, with the right approach, we can create a future where ethics, communication, technology and toolkits come together to create a seamless and fraud-free experience.

So what are these five lines of defense? These are:

1. Management and internal audit: The first line of defense is the management team and the internal audit function. This is where the money ends, this is where decisions are made and the company’s values ​​and principles are upheld.

2. Audit committee and independent directors: The second line of defense is the audit committee and independent directors. They are the ones who guard the company’s integrity, ensuring that the company operates in accordance with its values ​​and principles.

3. Statutory auditors: The third line of defense are auditors. These are external experts who provide independent opinions on the company’s financial statements, ensuring that they are reliable and compliant with the regulations.

4. Stakeholders and regulators: The fourth line of defense is stakeholders and regulators. This includes investors, customers, employees and the wider community who have a vested interest in the company’s success and integrity.

5. Regulatory authorities: The last line of defense is the regulators themselves. These are government agencies and organizations that oversee a company’s operations and ensure its compliance with laws and regulations.

Ethics, communication, technology and toolkits

But these five lines of defense must be surrounded by something more. They need to be surrounded by ethics, communication, technology and toolkits. This is where the rubber meets the road, where the company’s values ​​and principles are put into practice.

Ethics are the foundation of every successful company. This is what drives our decisions, what inspires our employees and what sets us apart from the competition. Communication is key because it is how we share our values ​​and principles with the world. Technology and toolkits provide the means to execute our strategy, track our progress, and identify and mitigate risks.

As we move forward, we also need to adopt new approaches to accounting and reporting. We need to move away from entity-based accounting, which focuses solely on a company’s financial performance, to ecosystem accounting, which takes into account the broader impact of our activities on the environment and society.

This is where the concept of integrated thinking and reporting comes into play. We must respect all six capitals, including physical, human, social, innovation, environmental and financial. This means considering the impact of our actions on the environment, on our people, on our customers and on society as a whole.

To achieve this, we also need to adopt new technologies such as blockchain. It is a decentralized, digital ledger that allows us to capture data sets in real time, just as it happens in a physical environment. No data entry required, no manual intervention required. Data is captured, verified and logged automatically, providing a tamper-proof record of our activities.

A future free from fraud

So what does this mean for the future? It represents a future where ethics, communication, technology and toolkits come together to create a seamless and fraud-free experience. It means a future where our values ​​and principles are upheld, where our stakeholders are informed and engaged, and where regulators have confidence that we follow the rules.

It means a future where environmentalism and misreporting are a thing of the past, where we can trust the numbers and where we can make informed decisions about the companies we invest in and the products we buy.

In summary, designing a fraud-free future requires a multi-faceted approach, combining five lines of defense with ethics, communication, technology and toolkits. It requires us to adopt a new approach to accounting and reporting, one that respects all six capitals and takes into account the broader impact of our activities on our economy and our lives. Let’s work together to make this future possible.

Shailesh Haribhakti is an independent director on corporate boards. Twitter: @ShaileshHaribh2