Before It Happens

tone-at-the-topRegister Today for Investigating on the Internet May 18-19 2016 RVACFES Seminar!

An attendee at our summer seminar on fraud prevention last year, reported that she had become quite discouraged by the amount of in-house fraud her auditors were detecting among the employees of the overseas subsidiary of her non-profit organization.  She asked our speaker, Chris Rosetti, what he would recommend to head off what seemed like a growing number of defalcations that were costing her firm large amounts of time and money to investigate and, in some case to prosecute.   Chris told her it was always motivation that drives employees to commit fraud, and that motivation can take many forms, ranging from family needs or a desire to keep up with a colleague’s lifestyle. Often, employees’ motivation to commit fraud depends on how they perceive they’re being treated by their employers. Nevertheless, there are many ways any management can minimize employees’ motivation to commit fraud. Some common methods include increasing morale, implementing employee support programs, creating a culture of high ethical standards, rewarding loyalty, establishing an open-door policy,  and reducing pressures to make the numbers.

Fraud occurs less frequently when individuals feel positively about their employers than when they feel abused, threatened, or ignored. Negative workplace environments diminish morale and can affect employees’ attitudes about committing fraud. Employees who consider themselves to be unfairly treated are more prone to commit fraud. Accordingly, increasing employee morale can be a powerful tool in decreasing employees’ motivation to commit fraud.  Chris recommended that our questioner’s management might consider steps like the following, relatively low cost ways to boost employee morale in the overseas subsidiary …

–Provide organization-sponsored social events;
–Routinely recognize employees for good work and make the recognition a big deal, taking time to really celebrate accomplishments;
–Offer flexible work arrangements to the greatest extent possible;
–Exhibit a strong ethical tone at the top;
–Engage individual contributors in the decision-making process;
–Listen closely to employee grievances and settle them as soon as possible;
–Tune into employees’ emotional needs;
–Offer competitive compensation and benefits;
–Show employees the results of their work.

Chris went on to emphasize that competitive compensation and benefits are especially important for increasing employee morale. Perceived inequities between a home office and a subsidiary in compensation and benefits policies can contribute to fraud, and less-than competitive compensation is always a negative factor that can increase the risk of fraud. The ACFE reports that employees who feel adequately compensated for their work are less likely to commit fraud against their employers. Management should compare its organization’s compensation structure with those of their competitors to ensure that their employees are not underpaid.

On the flip side management should reduce the following factors, which the ACFE has identified as detracting from a positive work environment:

–Top management who do not seem to care about or reward appropriate behavior;
–Negative feedback and lack of recognition for job performance;
–Perceived inequities in the organization;
–Autocratic rather than participative management;
–Low organizational loyalty or feelings of ownership;
–Unreasonable budget expectations or other financial targets;
–Fear of delivering bad news to supervisors or management;
–Less-than-competitive compensation;
–Poor training and promotion opportunities;
–Lack of clear organizational responsibilities;
–Poor communication practices or methods within the organization.

Chris went on to say that many organizations have begun to realize the benefit of employee support programs. Support programs are designed to help employees cope with personal problems that might motivate them to commit fraud or adversely affect their work performance, health, and well-being. These programs generally include assessment, short-term counseling, and referral services for employees or their family members.

These programs can provide support for a range of issues, including:

–Substance abuse;
–Emotional distress;
–Major life events, including births, accidents, and deaths;
–Health care concerns;
–Financial or legal concerns.

If organizations can offer employees a means to address such issues, they might be able to prevent fraud by those who are suffering. Providing safe outlets for coping can reduce an employee’s motivation to commit fraud.
Creating a culture of high ethical standards is a necessary component to any fraud prevention program. That is, management must be committed to preventing fraud, and it must build an ethical environment. The tone at the top, which is created by the organization’s leadership, refers to the ethical (or unethical) atmosphere in the workplace. According to Chris, whatever tone top management sets will have a trickle-down effect on employees. If the tone set by managers upholds ethics and integrity, employees will be more inclined to follow those same values. But if management appears unconcerned with integrity and focuses solely on the bottom line, employees will be more prone to engage in corrupt activities because they feel that ethical conduct is not a focus or priority within the organization.

Organizations that cultivate ethical cultures frequently encompass strong governance practices, such as:

–Free information flow;
–Employee access to multiple layers of management and effective control of a whistleblower hotline;
–Effective senior management team (including chief executive officer, chief financial officer, and chief operating officer) evaluations, performance management, compensation, and succession planning;
–An employee code of conduct that is clear, concise, and communicated;
–A code of conduct specific for senior management.

An ethical organization culture also includes management assurance of ethical considerations in hiring, evaluating, promoting, and earning policies for employees, as well as ethical considerations in all aspects of the entity’s relationships with customers, vendors, and other stakeholders. Ethical organizations will also address issues of ethics and the impact of ethical behavior on their strategies, operations, and long term survival. The level of management’s commitment to these areas varies widely and directly affects the fraud risk profile of an organization.

Rewarding employees for their loyalty might reduce the likelihood of fraud, but this type of morale boosting activity, according to Chris, can be successful only if the organization has an ethical culture. From a fraud prevention point of view, it’s probably more important that management establish an open-door policy to minimize employee pressures. Having an open door policy gives employees an opportunity to voice their concerns and feel heard. Employees who feel empowered and valued as a member of a team might feel a sense of loyalty to their organization and will be less inclined to commit fraud against their employer. Likewise, if employees can speak freely, managers will understand the pressures facing their employees and might be able to eliminate or reduce them.

Finally, Chris recommended reducing the pressures on employees to “make the numbers at any cost”. This alone can reduce the likelihood of fraud. One way to reduce pressures is to provide performance-based compensation rather than profit based or revenue-based compensation. When compared to profit or revenue-based compensation, performance-based compensation-such as bonuses calculated as a function of clearly set performance indicators-can reduce the motivation to cut corners, cheat, or fraudulently make the numbers. In some industries, it’s possible to tie compensation only to sales or profits. When this is done, it’s important to monitor staff performance closely, and management must encourage ethical behavior on a regular basis.

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