Fraud is intentional deceit for some gain at the expense of another party(ies).  When it involves the environment, it’s environmental fraud.

The Enron and Worldcom scandals led to the passage of Sarbanes-Oxley in 2002.  “Sarbox” required financial auditors to test for fraud.  The Institute of Internal Auditors strengthened standards to test for fraud.   We think of the “gain” as being financial.  It can also be prestige or other non-financial factors.

The Volkswagen diesel emissions scandal cost the company an estimated $30 billion, in addition to requirements to change their compliance and environmental programs, and possible reputational damage.  This is the highest-profile instance of environmental fraud – but hardly the only example.  There have been other frauds in the ESG space as well.

ESG risk, compliance and audit programs have not adopted practices to prevent or detect environmental fraud.  One high-profile $30 billion example should cause any organization to revise ESG management to prevent and detect environmental fraud.

NOTE:  Mr. Hileman was on the Volkswagen Monitor Team, which oversaw the company’s efforts pursuant to agreements signed with the U.S. Department of Justice.  Mr. Hileman was not the court-appointed monitor.  Nothing in this section or elsewhere on this website should be construed as being about Volkswagen or any other DHC client.

DHC helps Risk, Compliance and Audit professions prevent and detect environmental fraud.

• Update risk, compliance procedures to prevent environmental fraud
• Update audit programs to detect environmental fraud
• Specialist support to audit functions in audit planning, analysis
• Training
• Investigations and monitorships

DHC has augmented audit groups and audit teams to incorporate provisions to detect environmental fraud, and fraud in other ESG areas.

DHC has consistently incorporated procedures to prevent and detect environmental fraud in engagements since Sarbanes-Oxley went into effect in 2002.  While ESG compliance, risk and audit are still trying to understand fraud concepts and how environmental fraud could occur, DHC has over 15 years of experience on this topic.

DHC’s experience in operations, compliance, [financial and non-financial] reporting, and audit is unique with regard to fraud in the ESG space.

DHC has developed and/or implemented procedures to test for fraud pursuant to many standards and frameworks.  These include US GAAP (reserves for contingent liabilities in financial statements), the IIA’s International Professional Practices Framework (for Internal Audit), and performance standards of the “Yellow Book” (Generally Accepted Government Auditing Standards).  DHC has added confidence and value to other audit teams working in these areas.  DHC has added value to ESG audits by incorporating our techniques to provide greater confidence to our clients.

The three sides of Cressey’s fraud triangle all apply to environmental fraud.  The incentives for environmental/ ESG fraud may not be as obvious as for financial fraud – e.g., money.  But prestige, awards, and inclusion in ESG investment funds can be powerful incentives.  There are opportunities; controls are not as robust as for financial reporting.  Rationalization, too:  “Everybody does it” or “it’s not really ‘fraud’” or “it’s just a couple of drums”.  Financial auditors, investigators – and prosecutors – have known for decades that when these three elements are present, someone will find a way to commit fraud.

Have you ever been audited where the auditor said “OK, we’re going to ask the fraud questions now?”  Of course not.  (If you have, DHC would like to know about it!)  Fraud detection is invisible in audits.  The key is to identify evidence and techniques to test for deceit.  IT expertise is essential for data analytics.  Experience in compliance, operations, the subject area (ESG!) are also essential.

Fraud detection techniques exist, but it helps to know what to look for.  What could be incentives for falsification of information relevant to ESG compliance or risk management?  What are typical controls, and how can they be circumvented?  DHC’s efforts embed environmental/ ESG fraud prevention and detection in our effort for audits, compliance support, and ESG risk management.