Tone at the Top

Executives can help prevent fraud in their organizations by promoting a positive work environment and conveying the message of corporate responsibility and accountability. But it takes more than a spiffy code of ethics.A negative work environment will always spawn low or nonexistent levels of employee morale or loyalty. Employees will be more prone to committing fraud because they feel no obligation to protect it.

Following are some of the components that make up a negative work environment, according to the AICPA report, “Management Antifraud Programs and Controls: Guidance to Help Prevent, Detect Fraud.”

• No reward or recognition for appropriate behavior and job performance
• Negative feedback
• Perceived organizational inequities
• Autocratic rather than participative management
• Unreasonable budget expectations or other financial targets
• Low organizational loyalty
• Fear of delivering “bad news” to supervisors and/or management
• Less-than-competitive compensation
• Poor training and promotional opportunities
• Unfair, unequal or unclear organizational responsibilities
• Poor communication practices or methods within the organization

POSITIVE WORK ENVIRONMENT
A positive work environment will help deter fraud while improving the morale and loyalty of employees. According to the AICPA’s report “Management Antifraud Programs and Controls: Guidance to Help Prevent, Detect Fraud,” when employees are in a positive work environment, they’ll be more reluctant to commit fraud that will hurt the organization. Misconduct is reduced when employees have positive feelings about their organization. To create and maintain a positive work environment, management should ensure that:

• Recognition and reward systems are in tandem with goals and results
• Equal employment opportunities exist
• Team-oriented, collaborative decision-making policies are encouraged
• Compensation and training programs are professionally administered

TYPES OF WORKPLACE LOYALTY
Obviously, employees who demonstrate and feel greater levels of loyalty to their organization will be less likely to commit fraud. Following are three levels of workplace loyalty according to the “Fraud and the Tone at the Top” video presentation.

• Personal loyalty, the lowest level, consists of employees’ basic acceptance and compliance with the orders of their superiors.
• Institutional loyalty is employees’ acceptance and compliance with an organization’s mission.
• Integrated loyalty, the highest and most virtuous level of organizational loyalty, transcends the previous loyalties by honoring the ideas of accountability, fairness, honesty, and good will.
• Organizations should strive for this level of workplace loyalty to protect against fraud and ethical misconduct.

INVESTORS’ CONSIDERATIONS
When critically examining an organization’s successes and failures, it’s necessary to keep the shareholders’ goals in mind. Investors, analysts, and advisors are taking a close look at the reputation and perceived ethical culture of an organization as part of their evaluation. According to the Corporate Reputation Watch 2004 survey, from Hill & Knowlton, investors consider the following factors, listed in the order of importance.

• Caliber of CEO and management team
• Quality of products and services
• Corporate reputation – The majority of senior executives surveyed believed that investors and lenders view corporate reputation as important to extremely important, and it’s one of the top three factors considered before making investments.
• Governance – More than two-thirds of the surveyed senior executives believe that effective governance, transparent disclosures, and reliable financials are essential elements of their organization’s reputation to the investment community.

CONVEYING RESPONSIBILITY, ACCOUNTABILITY
Organizational leaders can take several steps to convey the message of individual and corporate responsibility and accountability to its employees, contractors, and investors.

Set an ethical tone at the top – Upper management has to lead by example and actions. These actions should include rewarding ethical behavior while punishing unethical actions. An organization should have sanctions for engaging in, tolerating, or condoning improper conduct.

Establish a code of ethics – An organization should produce a clear statement of management philosophy. It should include concise compliance standards that are consistent with management’s ethics policy relevant to organizational operations. This code of ethics should be given to all employees (and contractors) who’ll be required to read and sign it.

Carefully screen job applicants – According to the ACFE’s Fraud Examiners Manual, one of the easiest (and most obvious) ways to establish a strong moral tone for an organization is to hire morally sound employees. Too often, the hiring process is hastily conducted. Organizations should conduct thorough background checks on all new employees especially managers and those who will be handling cash. These background checks should include a thorough examination of the candidate’s educational credentials, criminal record, history of employment, and references. Speaking with former employers or supervisors can provide valuable information about a person’s reputation for trustworthiness, moral conduct, and loyalty.

Assign proper authority and responsibility – Place ethical employees where they’re able to thrive without resorting to unethical conduct. Organizations should provide employees with well-defined job descriptions and performance goals. The employees’ managers should routinely review these goals to ensure that they don’t set unrealistic standards. They should also provide training so that employees maintain the skills to perform effectively. Regular ethics training will also help employees identify potential trouble spots and avoid getting caught in compromising situations. Finally, management should quickly determine deficiencies in an employee’s conduct and work with him or her to fix the problem.

Mandate anti-fraud and ethics training for staff – Use training sessions for all staff (including upper-level personnel) as tools to communicate and reinforce the organization’s values, expectations, and stance on corporate compliance including its code of ethical conduct, continuing procedures and standards, and employees’ roles and responsibilities to report misconduct. The training sessions should also inform employees about acts and omissions prohibited by law and by the organization to help them avoid situations that could lead to criminal conduct. Common training techniques include lectures, training films, and interactive workshops. Regularly emphasize compliance standards.

Implement effective disciplinary measures – No control environment will be effective unless there’s consistent discipline for ethical violations. Consistent discipline requires a well-defined set of sanctions for violations and strict adherence to them. If one employee is punished for an act and another employee isn’t punished for a similar act, the moral force of the organization’s ethics policy will be diminished. The levels of discipline must be sufficient to deter violations. The organization could also reward ethical conduct to reinforce the importance of organizational ethics.

Implement a confidential hotline – According to the ACFE’s 2006 “Report to the Nation on Occupational Fraud and Abuse,” occupational frauds were more likely to be detected by a tip than any other means such as internal audits, external audits, or internal controls. Additionally, organizations with hotlines had a median loss of $100,000 per scheme and detected their frauds within 15 months of inception. By contrast, organizations without hotlines suffered twice the median loss and took 24 months to detect their frauds. The mere mention of an anti-fraud, confidential hotline can deter fraud. When employees are aware of workplace ethics, their likelihood of engaging in misconduct decreases, according to the 2005 National Business Ethics Study. An organization can place an advertisement in the staff break room with a hotline number that employees can call to confidentially report suspicious fraudulent activity in the workplace.

Establish a whistle-blower policy – A whistle-blower policy should allow employees to report or seek guidance about actual or potential criminal conduct by others within the organization while retaining anonymity or confidentiality and without fear of retaliation. Additionally, in many organizations, whistle-blowers could be protected by state and federal law. Consult with your legal counsel to train and educate employees about whistle-blower protections.

To create a robust and successful whistle-blower program:

• Implement a 24/7 hotline staffed with trained interviewers
• Nurture ongoing dialogue by assigning a unique identification number to an anonymous caller so he or she can call back to respond to questions
• Protect confidentiality by not using caller ID, e-mail tracking, or other means of tracking communication

Remember that the anti-fraud hotline should protect an employee’s identity. Any posters or organization communications that promote the anti-fraud hotline should emphasize clearly that reports and employee identities will remain confidential. Employees should be well aware that they’ll remain anonymous if they call the hotline. Those who take these anti-fraud reports on the other end of the line should fully understand the significance of keeping the whistle-blower’s identity and the details of the investigation completely confidential.

Follow-through with reports of misconduct and promote effective internal controls – Organizations must have a standard procedure for dealing with fraud allegations. The management team must conduct a full-fledged investigation when misconduct is reported. After an offense has been detected, the organization must take all reasonable steps to respond appropriately to prevent further similar offenses including any necessary modifications to its program to prevent and detect violations of the law. Those at the top of the organization are responsible for clearly stating and upholding the message that all employees are required to act within the organization’s ethical code of conduct. This message must be enforced to prevent and deter fraud in the organization.

Prevent reprisals – The organization should make every effort to protect the identity of, and prevent reprisals, against whistle-blowers.

Create a culture of doing the right thing – When an organization implements all of the above steps and assures that everyone in the organization (especially those at the top) are actively maintaining corporate standards it will create a culture of “doing the right thing.” Organizations should always strive for this ultimate goal. (Obtain a copy of the AICPA’s report, “Management Antifraud Programs and Controls: Guidance to Help Prevent and Deter Fraud,” commissioned by the Fraud Task Force of the AICPA’s Auditing Standards Board.)

DON’T RELY ON JUST FORMALIZED CODES
Employees won’t necessarily morally analyze questionable situations if executives simply distribute a written code of ethics without setting examples for living and interpreting the code. Ethical situations are complex; many deserve specific attention that go beyond the scope of a code of ethics. If an organization becomes too dependent on a checklist of prohibited actions, employees will begin to lose the ability to analyze each complex ethical situation as it comes up in the workplace. It’s impossible to list every ethical situation an employee might face; any attempt to do so might lead the employee to conclude, “If it’s not specifically prohibited by the code of ethics, it must be okay.”

SUGGESTIONS FOR CORPORATE LEADERS
According to Dr. Steve Salbu, dean and Stephen P. Zelnak Jr. Chair, College of Management, Georgia Institute of Technology, an organization’s leadership can take at least four steps to create and maintain a good ethical climate within an organization.

Communicate Expectations of Employees
State clearly and convincingly the organization’s values and ethics and the behavior expected through the implementation of a written code of ethics and a formal training program. Continually reinforce the policy through communications from the organization’s leaders.

Lead by Example
Employees take their work ethic cues from those at the top of the organization. Executives cannot just talk about acting ethically, executives also have to “walk the walk” and show employees how to act by setting an example with integrity.

Provide a Safe Mechanism for Reporting Violations
Those who know about, or are suspicious of, fraudulent behavior or other ethical violations should be able to come forward and report misdeeds without the fear of retaliation from upper-level management or their colleagues. Executives need to strongly convey that the organization highly values reporting of misdeeds and those who report will be protected to the highest degree.

Reward Integrity
Companies shouldn’t reward employees only for meeting financial goals but ethical behavior; they should be rewarded for it. Employees should know that meeting the bottom line isn’t the only measure of success. Acting with integrity and ethics should be included in existing employee incentive programs.

Employees look to management for direction. Management must be conscious of the signals it is sends to its employees. Creating an ethical tone at the top will cut losses due to fraud and improve loyalty and morale. Preventing fraud is good business, and it starts at the top.

Suzanne Mahadeo is a copy editor for Powered, Inc. and contributing editor of Fraud Magazine.

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