10/10/2014

Business Ethics From the Top Down Can Prevent Fraud

EZ Shield October 10th, 2014
Categories
Fraud Prevention

By John Burcham, Chief Privacy Officer, EZ Shield Fraud Protection

By now we’re all too familiar with sordid tales of greed and fraud committed by executives at the highest levels of corporate America, from Bernie Ebbers (ex-CEO of WorldCom, the nation’s second largest long distance company) to Bernie Madoff (former investment broker). The economic ruin left in the wake of such fraud — companies destroyed, employees left jobless, investors rendered penniless — has prompted attention about the importance of “tone at the top” in the business workplace.

Simply put, “tone at the top” refers to how the leaders within an organization create — or fail to create — an ethical atmosphere. According to studies conducted by the Association of Certified Fraud Examiners (ACFE), when those in charge engage in fraudulent behavior, employees take notice and follow in their footsteps, potentially creating a culture of workplace fraud.

Sometimes the negative tone set by leadership is less overt. However, the fallout is still damaging. For instance, if upper management focuses solely on the bottom line, putting pressure on employees to meet unrealistic goals, employees will be more prone to commit fraud—particularly if they believe that ethical behavior is not a priority for their company.

What steps can companies take to ensure their “tone at the top” is exemplary?

  • Create a clear code of ethics and conduct. This is a crucial starting point. Develop a well-articulated written policy that covers the protection of company data, avoidance of conflict of interest and compliance with the law. Use employee orientation to discuss the code and explain any points that might be unclear. Be sure to regularly review and update the code through employee training, including employees at the highest levels. Include a well-defined disciplinary policy and maintain fair and consistent enforcement. If companies often “look the other way” with regard to certain violations, then employees will quickly come to understand those violations aren’t considered serious ones.
  • Make certain top executives lead by example. When employees see managers honoring and following the company’s code of ethics, they will be much more likely to follow it themselves. They will also be more likely to report any misconduct that they witness. Conversely, when leaders routinely engage in unethical behavior—say by frequently “padding” their hourly billings or expense accounts — then this becomes standard practice at all levels. A recent report by the ACFE found that “executives/upper management” was responsible for 27 percent of expense reimbursement fraud cases, as reported in Business Travel News.
  • Recognize the signs. Studies show that employees who commit fraud at work often do so because they are under pressure, feel underappreciated, or perceive that management behavior is unfair (allowing them to rationalize that they are owed something). Moreover, a 2013 business ethics survey from the Ethics Resource Center found that companies under stress during mergers, acquisitions and organizational restructurings on average experienced a 21.5 percent increase in observed misconduct. During periods of intense change or stress, top executives and managers should be on the lookout for employee behavior that could be a tip-off to unethical practices: Not taking vacations (since many violations are discovered when an employee is away from the office); financial records sometimes disappearing; being overly protective or exclusive about workspace; unexplained debt; and/or any unexpected change in behavior.
  • Establish hotlines and other safe mechanisms for reporting fraud. When it comes to occupational fraud, employee tips are far and away the most common detection method, according to the ACFE. In their 2014 Global Fraud Study, ACFE found that more than 40 percent of all cases of fraud were detected by tips — more than twice the rate of other detection methods. Moreover, organizations with hotlines were much more likely to detect fraud via a tip and discover it more quickly, making the breaches less costly. Ethical employees must be able to report misdeeds without fear of retaliation; therefore, it’s crucial for reporting mechanisms to be anonymous and confidential. Employers should let staffers know that these reporting methods are available, encourage employees to use them and assure tipsters they will be protected. It’s also good practice for companies to identify the kinds of activities that should be reported.

The good news in all of this is that ethical behavior within the American workplace appears to be enjoying a resurgence. The latest National Business Ethics Survey conducted by the Ethics Resource Center found that workplace misconduct is at an historic low, having declined significantly since 2007. Of the 6,400 workers surveyed, about 41 percent said they have observed misconduct on the job, down from 55 percent in 2007. Moreover, fewer employees felt pressure to compromise their standards — 9 percent, down from 13 percent in 2011.


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