Tuesday, October 14, 2014

Doping in Sports and Financial Statement Fraud

I just read an interesting article titled: "Instead of punishing dirty cyclists, should we reward the clean?" The idea is to certify pro cyclists who are willing to be thoroughly tested for doping. The tests would go beyond what is currently used to look for drugs and involve many mechanisms to detect doping.

An analogy in business is that companies could voluntarily pay for additional rigorous testing to ensure they are not committing fraud. Similar to doping in pro sports, the normal, traditional, tests for fraud are pretty weak and a smart fraudster can fool the testers (i.e. WADA in pro cycling or CPA firms in financial statement audits) all day long. This certification in cycling would give additional assurance that the athlete is clean; in business, the certification would go beyond the traditional audit to give assurance that the financial statements are not materially misstated due to fraud.

I've wondered before whether there would be a market for services that go beyond the traditional audit to test for fraud and to give assurance to investors that management is not committing fraud. They could go beyond traditional audit tests and bring in fraud experts to thoroughly interview employees for fraud, computer experts to sift through transactions and email looking for fraud, and establish additional channels that encourage whistleblowers to reveal fraud. Several procedures that go beyond a traditional audit could be performed with the goal that the company would get certified as being a low fraud risk.

A key question is whether investors would value such a certification. I think they would but that's an empirical question. Similarly, with doping, the question is whether fans, advertisers and sponsors would value a clean athlete certification. I think they would in that case too but it's also an empirical question.

I'd love to see both pro cycling and big businesses take this approach. It has the potential of creating economic mechanisms that reward and encourage both athletes who compete clean and companies that issue clean financial statements.

I think both these groups need all the support and encouragement that they can get!

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