Why Corporate Culture Matters in Fraud Control
U.S. organizations of all types lose about 5% of top line revenue to organizational fraud every year. We know that gets your attention, but what can you really do about it?
Simply put, proactive fraud prevention measures are necessary to limit organizational fraud. Many of the steps we can take are straightforward, including having published and promoted anti-fraud messages, encouraging and rewarding employee communications about fraud, and doing rigorous internal audits.
These steps are controls. Controls are familiar to every manager, especially in financial, auditing, or accounting occupations. They are procedural, orderly, systematic, and predictable.
Corporate culture is something different. It has an ethical dimension that goes beyond the imposition of objective controls. In a sense, it provides the environment of control.
This is why you need to care about the corporate culture: the environment of control is the context in which your procedural controls operate. If the environment of control is rotten, the procedural controls are irrelevant.
An Environment of Fraud Control
Creating a culture is a bit of an oxymoron because cultures evolve—they aren’t manufactured. But in an organization, leadership can make a dramatic difference in the corporate culture by doing things to shape the environment of control. The actions of top management can induce everyone in the organization to internalize the positive attitudes and behaviors that prevent fraud or make its detection more likely.
Here are some of the things management can do to improve the environment of control:
Set the right “tone at the top.”
Senior managers cannot say that expense reports must include receipts and then ignore it when they don’t. The point is that even seemingly small rules exist for everyone in the organization—including top management—and they provide a consistent framework people can depend on when they are fairly and consistently applied.
“Do as I say, not as I do” just doesn’t cut it.
The people in your organization will learn the same way your children do: they will watch your actions and do the same as you. If upper management does not follow procedures for things like expenses, contracting for services, hiring and firing, interpersonal relationships, travel and holidays, and so forth, other employees will feel authorized to ignore them as well.
Maintain transparency with training and communication.
Transparency is one of the core requirements of trust, and it permeates every step you take to detect and prevent fraud. You have to be explicit about your expectations for behavior, and then hold everyone, including yourself, to those standards. Research has shown that employees who commit fraud often convince themselves that they are entitled to do so because they are not confronted with explicit rules or ethical standards of the organization.
Don’t let little things get big.
A sociologist named James Q. Wilson published a famous paper titled “Broken Windows” in which he argued that neighborhoods where broken windows went unrepaired invited more serious breakdowns in social control, often leading to serious crime. A positive environment of control implies a “zero tolerance” attitude toward fraud, even little frauds. Don’t tolerate it, and make your intolerance known in the organization.
Reap the Rewards of a “No Tolerance for Fraud” Corporate Culture
Organizations with positive, strong environments of fraud control tend to create loyalty among employees at all levels. People like to work in trustworthy environments, and these organizations reap the rewards.