[Fraud Risk Management] For Its compliance program to be effective, an organization must perform procedures to ensure management hires only ethical Individuals who exercise a substantial measure of discretion In acting on the organization's behalf

This statement is true. A critical component of an effective compliance and ethics program, as defined by authoritative sources in fraud prevention and deterrence, is the exercise of due diligence in hiring and promoting personnel. Specifically, organizations must take reasonable steps to ensure that individuals who are given substantial discretionary authority are not known to have a propensity for engaging in illegal or unethical activities. This is a proactive measure designed to prevent fraud by ensuring that trustworthy individuals are placed in positions of power, thereby strengthening the organization's ethical culture and control environment.

The alternative, "False," is incorrect because it would imply that an organization could have an effective compliance program without vetting the integrity of its key decision-makers. This contradicts foundational principles of corporate governance and fraud risk management. Neglecting to screen individuals for positions of substantial authority would represent a significant internal control weakness and a failure to establish the "tone at the top" necessary for an effective anti-fraud environment.

1. ACFE Fraud Examiners Manual (2023). Section 4: Fraud Prevention and Deterrence

Subsection: "Elements of an Effective Compliance and Ethics Program." The manual details the components of a robust anti-fraud program

which includes policies for hiring and promoting ethical employees. It emphasizes background checks and due diligence

particularly for management and those in positions of trust

as a key preventive control. This aligns with the standards set by the U.S. Federal Sentencing Guidelines.

2. U.S. Sentencing Commission

Guidelines Manual

§8B2.1. "Effective Compliance and Ethics Program" (Nov. 2023). This is a primary source defining the standards for corporate compliance. Section §8B2.1(b)(3) explicitly states: "The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew

or should have known through the exercise of due diligence

has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program." This directly supports the question's premise.

3. Kaplan

J. M.

& Murphy

J. E. (2021). Compliance Programs and the Corporate Sentencing Guidelines: Preventing Criminal and Civil Liability. Thomson Reuters. Chapter 5

"Due Care in Delegating Substantial Discretionary Authority

" provides an in-depth analysis of the guideline requirement. It explains that "due care" involves background checks

reviewing past conduct

and ensuring that individuals promoted to positions of authority have demonstrated a commitment to the organization's ethical standards.

4. COSO. (2013). Internal Control—Integrated Framework: Executive Summary. Committee of Sponsoring Organizations of the Treadway Commission. Principle 4 of the framework states: "The organization demonstrates a commitment to attract

develop

and retain competent individuals in alignment with objectives." The explanatory text for this principle discusses the need for evaluating competence and addressing shortcomings

which includes establishing policies and practices for hiring and promoting individuals who possess the requisite integrity and ethical values.