Final answer:
The prevention and detection of fraud are collective responsibilities of management, the internal auditor, and those charged with governance, including the board of directors and outside investors. Management creates and maintains internal controls, the internal auditor assesses these controls, and governance entities oversee the process. Failures in this system, such as the case with Lehman Brothers, can lead to the spread of false financial information.
Step-by-step explanation:
The responsibility for the prevention and detection of fraud primarily lies with three groups: management, the internal auditor, and those charged with governance. Management is responsible for establishing and maintaining an adequate system of internal controls to prevent and detect fraud. The internal auditor evaluates the effectiveness of these controls and ensures that the organization is following its established processes. Those charged with governance, including the board of directors and outside investors, oversee the fulfillment of these responsibilities and ensure the integrity of financial reporting.
In the context of corporate governance, the board of directors, elected by the shareholders, is the first line of defense. They oversee the company's top executives and ensure that the company's financial dealings are in order. The auditing firm hired by the company acts as a second line of defense by checking the company's financial records and verifying their credibility. Lastly, outside investors, particularly large shareholders, serve as a third institution by exercising their influence and demanding transparency and accountability in the company's operations.
Corporate governance structures, however, can sometimes fail, as evidenced by the case of Lehman Brothers, where these oversight mechanisms did not prevent the dissemination of inaccurate financial information.