Occupational fraud is still a problem in the workplace. It encompasses a wide range of undercover crimes committed by employees at all levels of a company’s hierarchy. Corporate scandals fuelled by a dysfunctional board of directors and/or management team result in external and widespread harm.
Even if it entails misleading reporting, such broad, deliberate misbehaviour may not be properly regarded as misappropriation or financial reporting fraud. The rise of digital data and worldwide markets with complex legal requirements has only complicated the effort of preventing fraud.
Nearly half of worldwide firms have suffered fraud, according to PwC’s Global Economic Crime and Fraud Survey (PwC 2018), but many of the remaining organisations are likely to become victims of undetected fraud.
Consumer fraud, cybercrime, identity theft, and money laundering are just a few of the ways fraud can express itself. In light of recent corporate scandals, many companies have implemented strong internal control systems, procedures, and programs, as well as corporate governance, to protect themselves from occupational fraudsters.
Institutional internal controls, according to Price Waterhouse Coopers, were insufficient to uncover frauds. Furthermore, insiders who are familiar with the existing internal control systems and their flaws are more likely to commit occupational fraud.
“The most expensive frauds are conducted by management teams with the ability to override control systems and cooperate to disguise their tracks,” according to the report. These efforts, however, have been ineffective since they do not reach the ‘soul of the problem.’ As a result, we believe that organisational culture is crucial in reducing the danger of fraudulent conduct.
An organisation is more likely to minimize internal scams when ethics is firmly embedded in corporate culture and exhibited by top leadership. More so, the board of directors and management should establish and maintain an ethical corporate culture that incorporates the organisation’s basic principles and drives people to do the right thing. Employees should be able to speak up about their suspicions and be aware of their critical role in preventing fraud. Employees take their cues from the top when it comes to corporate culture. The character of the CEO and other senior executives, in our experience, is
generally mirrored in the character of the entire firm. Integrity becomes the corporate norm when a CEO is known for his honesty. If a company’s top executives, on the other hand, are more concerned with personal gain at the expense of shareholders, our… investigations show that other employees will follow suit.
Developing a strong ethical company culture is critical for preventing, detecting, deterring, and responding to occupational fraud. Creating an environment that supports adherence to high ethical norms, particularly in the attitude and behaviour of leaders, can go a long way toward reducing fraud in firms.
To put it another way, organisations that value integrity and do not compromise on ethical norms set an ethical tone at the top that filters down to the ranks and files. Top management is responsible for creating that environment and providing direction by utilizing a variety of official and informal cultural systems.
Employees are more likely to commit fraud if top management does not uphold and emphasise high ethical standards, according to the Association of Certified Fraud Examiners. Employees pay great attention to their boss’ actions, which influence their own.
The Association of Certified Fraud Examiners also recommends that top management take four critical steps in fostering strong corporate culture: (1) convey expectations to employees (2) lead by example (3) offer safe reporting systems and (4) reward honesty.
That is, a high ethical culture built within a business through management practices and beliefs might dissuade personnel from engaging in unethical activities. The most effective mechanisms for embedding and reinforcing culture in the corporate environment are (1) what leaders pay attention to, measure, and control; (2) leader reactions to critical incidents and organisational crises; deliberate role modeling, teaching, and coaching by leaders; (3) criteria for allocating rewards and status; and (4) criteria for recruitment, selection, promotion, retirement, and ex-communication” are the most powerful mechanisms for embedding and reinforcing culture.
However, for these techniques to be authentic and reach the soul of employees, they must go beyond lip service — words and actions must be in sync. Employees continuously assess management’s decisions and conduct as signs of what is practically acceptable and unacceptable in the workplace.
As an anti-fraud approach, corporations must attempt to develop internal reporting procedures through their boards. Employees are more likely to observe the crime from the start because almost all occupational frauds are premeditated, disguised, and veiled. As a result, the current corporate culture should offer employees at all functional and hierarchical levels a voice to express their concerns, ask questions, and expose developing frauds so that corrective action may be implemented.
Encouragement of employees to speak up is only possible if they believe it is safe and effective. Employees must be informed, reminded, and comforted that it is safe to express their concerns and that an anonymous reporting method, such as fraud hotlines, is available. Employees must understand how they will be protected if they disclose misconduct involving even top leaders, which the board and management team must explicitly explain to them.
Top management will gain credibility if they listen to their people and demonstrate that they care about their well-being. Most significantly, the corporate board has a fiduciary responsibility to ensure that organisational members understand and comprehend why occupational fraud and other unethical acts must be avoided.
Managers and staff should be aware of their roles and responsibilities in the fraud risk management process. As a result, rather than simply obeying authority, employees’ behaviour should be directed by a common commitment to creating an ethical culture. It is easier to create and execute effective organisational controls when an adequate ethical culture is in place.
You may be aware of the fraud triangle, but do your company’s leaders have a firm grasp on how and why fraud occurs? While external variables such as pressure and rationalization are beyond most organisations’ control, an opportunity arises from a company’s lack of corporate ethical culture.
Understanding and analysing the options accessible to your staff is essential for developing effective internal controls that can help detect and prevent fraud. According to the ACFE study, the corporation lacked proper internal controls and culture to prevent fraud in approximately one-third of fraud incidents. The anti-fraud controls listed below may assist prevent fraud and limit any losses your firm may suffer.
Separation of responsibilities – Require the completion of a task by more than one employee.
Management review — consistently review procedures carried out by employees.
Provide all employees with an anonymous anti-fraud telephone hotline to report suspicious conduct.
Implement a code of conduct outlining expectations at the top of the organisation to act as a reminder of what is expected of all employees.
If your firm is the victim of fraud, the next step is to pursue the necessary steps to recover monies from the employee(s) or your insurance carrier (the most likely outcome). Your company, like many others, may not have the resources to continue operating as usual while investigating the fraudulent activities. So, where do you begin? Hire a forensic accounting firm with experience and certifications (Certified in Financial Forensics “CFF” or Certified Fraud Examiner “CFE”). Forensic accountants use data analysis tools (IDEA or ACL) to evaluate vast volumes of electronic data while using their skills in the field.
In conclusion, while every company wants to avoid fraud, there is no certainty that it can be avoided. Implement robust internal controls and take a proactive approach to update them regularly, as technology and procedures evolve. Create a culture in which employees are expected to act ethically, and build an environment in which employees are comfortable being uncomfortable. Make sure your staff is aware that someone from the management team is constantly examining and holding them accountable for their job. These actions will go a long way toward preventing fraud and lowering your company’s liability.
The writer is a Ph.D. candidate, Certified Forensic Investigation Professional, Associate Member of ACFE, Researcher, and Accountant for Serviceships Ghana Ltd & Cape Logistics Ltd). Contact: 0246390969 – Email: [email protected]
- Association of Certified Fraud Examiners. (2020). Report to the nations on occupational fraud and abuse. Global Fraud Study. Retrieved from https://www.acfe.com/rttn2020/docs/2020-report-to-the-nations.pdf
- Epstein, Seymour. 1979. “The Stability of Behavior: On Predicting Most of the People Much of the Time.” Journal of Personality and Social Psychology 37:7, 1097–1126.
- Free, Clinton. 2015. “Looking Through the Fraud Triangle: A Review and Call for New Directions.” Meditari Accountancy Research 23:2, 175–196.
- KPMG International. (2017). Driving corporate culture from the top: Global boardroom insight. Retrieved from www.kpmg.com
- Price Waterhouse Coopers. (2016). Adjusting the lens on economic crimes: Preparation brings opportunity back into focus. Global Economic Crime Survey. Retrieved from https://www.pwc.com/gx/en/economic-crimesurvey/pdf/GlobalEconomicCrimeSurvey2016.pdf
- 2018. “Pulling Fraud out of the Shadows.” Global Economic and Crime Survey. Available at https://www.pwc.com/gx/en/services/advisory/forensics/economic-crimesurvey.html
- Shultz, Majken. 2012. On Studying Organisational Cultures: Diagnosis and Understanding (Vol 58). Boston, MA; Berlin: de Gruyter Studies in Organisation.