Posted by Christie Malry on October 15, 2012 at 11:06 pm
Most businesses would think that they’re unlikely to be hit by fraud. But do some commonplace corporate practices unwittingly make it more likely for fraud to occur?
Talk about corporate fraud and most people will likely think of Enron or Worldcom. As well as being monumentally big frauds, they also have a cast of infamous baddies that - so legend has it - single-handedly caused those frauds to happen: Jeff Skilling and Andrew Fastow in the case of Enron, and Bernie Ebbers at Worldcom.
But here’s a name you might not know: Toby Groves. Toby was a basically honest person who nevertheless found himself at the centre of a multi-million dollar mortgage fraud, for which he was eventually jailed. Toby’s incredible story is told in an excellent NPR podcast, which is well worth a listen.
Toby doesn’t fit the mold of ‘evil wolf’ surrounded by a sea of ‘lambs’. And his story is, in fact, much more representative of the way frauds typically take place. It’s not a bad person who sets out to commit fraud from the offset. Rather, it’s a fundamentally good person who finds themselves in a bad situation and who then ends up doing the wrong thing, even though their intentions are basically honest.
Similarly, they don’t use the sheer force of an evil personality to recruit others to help them. They simply ask nicely. They’re not asking for much. They just need a little favour, which will make everything all alright again. Quite often it might be a short term fix to keep the business afloat. The small transgression is portrayed as minor in comparison with the potentially huge consequences of "doing the right thing", which could include many lost jobs and ruined lives.
Having helped out in this way once, people are often willing to help again, even if the objective is now the much less noble aim of covering up the tracks left by the previous fraud. Large frauds start small.
The influence of management practices on fraud
Even if it's not that well understood by the general public, the origins of frauds are well documented in the academic literature. However, I now want to explore whether there might be aspects of modern corporate behaviour that actually make frauds of this sort more likely. No business wants to be defrauded, but could they inadvertently be sowing the seeds of fraud?
Consider the following:
- Job vacancies commonly specify that they want "a good team player". They want people who get on with others and who conform to the norms of the organisation. People that question the way things are done, that challenge perceived wisdom, that rock the boat, simply aren't welcome. When a longstanding and trusted colleague asks for "just a little favour", the good team player is expected to help, instinctively.
- Employers also want people who are commercial. Who wouldn't want to be "commercial", if the alternative is to be "uncommercial"? But what does this mean? Typically, it means someone who is prepared to look to exploit loopholes in regulations or who will put the pursuit of profit ahead of doing what's "right". Among experienced staff, this kind of commercial behaviour tends to be rewarded, while slavish rule-following is frowned upon.
- Confidentiality is very important within business. Saying what's going on outside the organisation, even discussing with one’s partner, is considered very bad indeed, even if that behaviour is illegal or unethical. Unfortunately, this feeling can extend to departments too, so that employees are sometimes encouraged by their managers to keep other departments out of the loop. Even worse, it can encourage employees to be cagey and hostile to both internal and external audit functions.
- Finally, management structures encourage the notion that employees should defer to authority within their organisation. So more junior employees may be susceptible to falling in line with what their authority figures are telling them to do rather than doing what's right.
Each of these areas would seem to make it more likely that an employee-initiated fraud could flourish, by encouraging employees to be helpful to each other, to cut corners where there’s money to be made, to keep quiet about minor wrongdoing and to follow orders without question.
How might business react?
There are many factors which make fraud possible, so there is no simple course of action that will allow a business to eliminate the risk of fraud completely. However, I tentatively suggest the following possible actions that might help reduce some of the problems.
- Promote diversity. In the 2012 Sir Thomas Gresham Docklands Lecture, Charles Taylor of the US Office of the Comptroller of the Currency suggested that diversity of financial institutions and financial products could help to make the financial system safer. Similarly, it stands to reason that involving people from different backgrounds, different social classes, different religions, different ethnicities and even different sexual preferences in an organisation should make fraud less easy to undertake. This kind of diversity would be expected to help diffuse the groupthink and clique-like behaviour that can allow fraud-reinforcing behaviours to set in.
- Strengthen whistleblowing. While it may still be seen as akin to snitching, it is an essential part of protection against fraud. The Public Interest Disclosure Act, introduced into UK law in 1998, provides some robust protection for whistleblowers, on paper, at least. However, the perception remains that whistleblowing is a course of action that's likely to lose you your job, livelihood and maybe any chance of ever finding paid employment ever again. The charity Public Concern at Work provides free material to improve public knowledge of the whistleblowing regulations and to support potential whistleblowers. Those charged with governance should look to embed meaningful whistleblowing procedures in their business and to demonstrate to employees that whistleblowing will not be punished, but will be rewarded.
- Employ professionals. Professional institutes help to support the ethical decision-making of individuals by training them in ethical concepts during and after the period of qualification. The emphasis on an ethical code, central to most serious professions (eg accountancy), serves to keep ethics at the forefront when making business decisions. Businesses should consider helping their employees to obtain professional qualifications, both as part of better employee relations but also as part of a plan to strengthen the business’s defences against fraud.
To determine whether modern management practices really do make fraud more likely, or whether the mitigating factors serve to reduce it, will require academic research. A brief search didn’t unearth much existing literature in any of these areas, so I hope that academics will undertake some research to shed light on these matters.