V. Sue Butts
Admitting that fraud can or has occurred can be difficult for most organizations: Only 50 percent of all organizations in the U.S. have anti-fraud programs, policies and controls in place.
It is common to deny the potential of fraud by a trusted employee. When fraud occurs, anger is also common, and it comes in two forms: anger that someone could have violated a previous level of trust, and anger that the organization could have had such naïve standards in place.
Once these initial reactions have passed, however, a certain degree of acceptance begins to take hold. At this point, company leaders can begin to examine why fraud has occurred, and they can take steps to prevent it from happening again.
Good organizational governance requires company leadership to impose and enforce ethical behavior, and the tone set at the top will guide the attitudes of employees.
An important question to consider: What actions of owners and managers can erode the ethical climate of the organization and feed the rationalization to commit fraud?
Suppose, for example, that a company has a bad financial year and, as a precaution, one morning management asks everyone to cut back on spending. Later in the day, an accounts payable clerk finds in an expense report that an executive has spent $100 on a bottle of wine during a business dinner. What message does this send to the accounts payable clerk? A $100 expense may be an insignificant amount to the organization as a whole, but it makes it difficult to explain why the organization removed the water cooler to cut back on expenses.
If top management does not set the appropriate tone for ethical behavior, the likelihood of fraud at other levels of the organization will increase.
According to Patricia Harned, president of the Ethics Resource Center, executives can face considerable difficulties in setting the appropriate tone for an organization - even when they are taking concrete steps to set this tone.
Owners and managers need to constantly ensure that they are sending the correct message: playing by the same employee rules by avoiding insider dealing, by abiding by internal controls and by treating all employees equally to avoid favoritism. This helps relieve the perception that management is simply looking out for itself, as opposed to acting in the best interests of the company.
The Ethics Resource Center has found that employees are 15 percent less likely to observe misconduct when top managers set the appropriate tone; they are also less likely to find fellow employees acting unethically if their managers simply talk about ethics. The same applies to middle-management and at the supervisor level. Many employees need to know that their executives are conducting business ethically, but they also need to know that their immediate supervisors are doing the same.
There are many ways managers can close the gap between perception and reality of ethical business practices. Management needs to play by the same rules it holds its employees to, not just appear to be doing so. Supervisors need to maintain honest and informative communication with lower-level employees regarding the future and what to expect in the short- and long-term.
Finally, employees need to be shown the appreciation that they deserve for their willingness to play by strict rules during tough times. These initial steps can go a long way toward ensuring a lower incidence of in-house fraud.[[In-content Ad]]
V. Sue Butts is a certified public accountant and certified fraud examiner at Elliott, Robinson & Co. in Springfield. She may be reached at sbutts@ercpa.com.
