Intimidation In The Office

Though there’s no definitive research yet linking workplace bullying and fraud, here’s some food for thought about a possible correlation.

John, a sales manager for a large manufacturing firm, rarely missed the sales meetings on the first Wednesdays of each month. With the economic downturn, he seemed to be struggling more than others to meet his sales projections, and he valued the meetings as opportunities to discuss issues with his colleagues.

In March and April, John’s boss, Ted, the regional sales manager, had rescheduled the sales meetings for the first Thursdays but didn’t bother to tell John. John complained to Ted about being out of the loop. Ted said it was a simple oversight but told John he might have a better chance of getting back into the loop if he could make his sales projections.

Shortly afterward, John heard Ted and two other sales managers talking about their dinner the previous evening. John wondered why he hadn’t been included, but he was too embarrassed to ask. With the decrease in his sales, John saw a decline in his income and perceived an erosion of his position in the company and his relationships with Ted and his colleagues.

Two weeks later, after many sleepless nights, John received some good news – a longtime customer called him to place a large order. Unfortunately, the next day the customer canceled the order because of his company’s economic problems. However, John didn’t remove the order from the sales system. He produced false shipping documents and told the business office that he would hand deliver the invoice to the customer. John used sales adjustments for months to hide the outstanding accounts receivable.

John felt he was forced to commit fraud because of his exclusion from sales meetings and Ted’s inference he would be “back in the loop” if he started making sales projections – a form of subtle bullying.

John’s manipulation of the records went undetected for several months until a routine physical inventory count prompted an investigation into discrepancies between records and available stock. John hadn’t actually misappropriated assets yet, so he was given the opportunity to resign. (Ironically, at the time of his resignation, the market had improved and John was actually meeting his sales targets.)

No matter how well organizations articulate their ethics and values in codes of conduct statements, if income, status, and self-esteem are inextricably linked to performance alone, some employees will be motivated to commit fraud. John received no direct monetary benefit from his manipulation of the company’s records. On the contrary, the benefits derived from being a successful member of the sales team far outweighed his concerns about a reduced income.

Though this case is fictitious, I conjecture that many fraud cases might have occurred, in part, because of workplace bullying. Much research still needs to be done, but in this article, I’ll discuss ways to prevent and detect fraud due to subtle and overt workplace bullying.

(Following this story are additional scenarios derived from fraud cases in which subtle and overt bullying could have been motivating factors in the employees’ behavior.)

BULLYING – UNPLEASANT AND COMPLEX 

Have you ever been a victim of bullying, either at school or at work? No one wants to feel like a victim from subtle or overt bullying. Self-esteem is undermined, and in more extreme cases, careers and health could be adversely affected. For many workers, it’s difficult to separate personal identities from job identities.

Schools are taking steps to reduce or eliminate bullying, but in many workplaces, bullying remains a dirty little secret that management might ignore or even inadvertently encourage.

There’s a considerable amount of literature about the emotional, psychological, and physical toll that bullies exact in the workplace. Psychologist Evelyn M. Field, among others, has written extensively about the causes and impact of workplace bullying. Several newspaper and magazine articles have covered the topic, too, which usually are fueled by anti-workplace bullying associations.

While there has been little written linking bullying and workplace fraud, there have been a number of seemingly inexplicable fraud cases, in which bullying might have played a role. I use the word “inexplicable” because the fraud was so large or occurred over such a long period of time that it seems almost impossible that others, although not directly involved in the fraud, weren’t knowledgeable or suspicious.

Statistical data varies, but available literature estimates that one out of every six employees is bullied at work in some form. Even when employees believe they’re being bullied, only 3 percent formally complain. Most bullied employees manage to cope, potentially at considerable cost to themselves. However, it’s becoming more evident that there are also significant costs, including fraud related costs, to the organizations at which these employees work.

LOSS OF PRODUCTIVITY  

Bullied employees are less productive employees who harbor feelings of resentment and powerlessness. To improve self-esteem, they might waste time seeking approval or gathering support from their non-bullying colleagues. Their commitment to their organizations might be eroded, or they might quit. In extreme cases, victims of workplace bullying resort to violent acts against their bosses, co-workers, and organizations.

Schoolyard bullies might or might not become workplace bullies. We’ve all seen schoolyard anti-bullying campaigns in the media, but anti-bullying campaigns in the workplace, though accelerating, still have a long way to go.

In some corporate cultures, bullies are favored – perhaps even encouraged – in some kind of perverse survival-of-the-fittest leadership style. Some organizations are aware of bullying but ignore it and perhaps think bullying isn’t a serious issue or that a certain amount of it promotes a healthy, competitive environment.

The impact of bullying goes beyond the direct victim to affect witnesses and co-workers. No employees want to be bullied, and it might be equally uncomfortable to see someone else bullied.

SUBTLE AND OVERT BULLYING 

Bad manners or a lack of respect might be interpreted as subtle bullying. Actually, bullying might be so subtle that employees find it difficult to articulate exactly what’s happening and how it makes them feel. On the surface, affected employees’ concerns might sound petty, even paranoid.

Subtle bullying might lead:

• Employees to feel isolated when excluded from meetings, lunches, coffee, or other social gatherings in which information is traded
• To an environment in which employees don’t feel empowered or valued
• Employees to think management doesn’t listen to their ideas or ridicules or rejects them

Overt bullying might include:

• Rude or dismissive behavior, particularly in front of other employees or customers
• Persistent criticism and derogatory comments, which undermines employees’ credibility
• Lack of trust for no apparent reason
• Failure to delegate
• Refusal to give or share credit
• Unreasonable demands or withholding of critical information, which might make it difficult for employees to succeed

Have you ever asked yourself why some employees or managers get away with consistently bad behavior? You can see the impact on co-workers and organizational morale, so why doesn’t executive management see it? It might be a simple matter of cost versus benefit. Is the organization better off with or without the volatile employee?

PROFILES OF WORKPLACE BULLIES 

Most bullies are supervisors or managers and are split evenly between men and women. However, according to the 2003 Report on Abusive Workplaces, issued by the Workplace Bullying Institute, about 70 percent of victims are women, and women are more apt to bully other women.

Bullies behave the way they do because it might make them feel powerful and boost their self-esteem. Bullying might be ingrained in their management styles because they don’t know any other equally effective way to motivate employees’ performance or enhance their positions.

Bullies might decisively pick their targets because they might perceive them as threats. A bully might want a target to resign, undermine the target’s work, or simply make the target change his or her behavior.

BULLYING AND THE PREVENTION AND DETECTION OF FRAUD 

Organizations generally expect employees will:

• Refrain from fraudulent activity
• Perform their responsibilities competently and as directed, which will reduce the likelihood of fraud
• Report suspicions of fraud

Refrain from Fraudulent Activity 

Organizations undertake specific activities that prevent and detect fraud. Specifically:

• Establishing a corporate culture that communicates and promotes ethical behavior
• Setting the appropriate tone at the top (leading by example)
• Providing fraud awareness education to employees
• Developing and managing sustainable systems of internal control

Management can thwart any of these positive activities by bullying its employees, condoning bullying behavior, or not taking measures to stop it.

Perform Responsibilities as Intended 

Management is often surprised to discover that internal controls aren’t functioning as they thought they would. During fraud examinations, I’ve seen accounts receivable reports that in practice weren’t subject to meaningful reviews. I’ve seen bank deposits that weren’t compiled or deposited according to management’s intent.

The reasons for employees’ poor performances are varied and might include insufficient time and understanding of the rationales behind their responsibilities. However, bullying in the workplace could be another factor that might affect competent and reliable performance of internal control activities.

Report Suspicions of Fraud in the Workplace 

Bullying in the workplace can also affect employees’ willingness to report suspicions of fraud. Bullies might specifically target employees who they deem to be threats – real or imagined. For instance, a bully might be vying with a target employee for a promotion, credit, or other recognition.

A bully also might want a targeted employee to change or refrain from specific behavior that affects the bully. During the investigation of a fraud, it’s not uncommon to learn that other employees knew about the fraud or at least had suspicions. They might have a wide variety of complex reasons for not reporting the suspected crime. Many organizations require that employees always report their suspicions of fraud. However, employees might be torn between requirements, their ethical values, and the practicalities of earning a living.

ACTUAL EXAMPLES 

I conjecture that bullying behavior might have been one of the many factors in allowing many recent larger-than-life cases to be undetected and unreported for so long. Though we don’t have definitive evidence yet in these examples, I believe it’s important to include the effects of possible bullies.

• The recent Bernard Madoff Ponzi scheme incurred losses to investors of between $15 billion and $60 billion.
• Investigators in 2007 found that a fraudulent futures trader in France’s Société Générale caused trading losses of $7.1 billion.
• A derivatives banker at Barings Bank in the United Kingdom in the early 1990s incurred trading losses of more than US$1 billion.

From the outset, federal investigators in the Madoff case didn’t believe that one man could have engineered a fraud of such magnitude and complexity. Newspaper and magazine articles are slowly providing a glimpse of the corporate culture that existed in Madoff’s make-believe investment advisory business. There are indications that his employees were neophytes who didn’t understand the intricacies of hedge funds and certainly didn’t understand Madoff’s split-strike-conversion strategy, in which equity investments were supposedly hedged with buy-and-sell options.

Robert Cialdini, a professor emeritus of psychology at Arizona State University and author of several books on the subject of influence, has speculated that inexperienced Madoff employees were bullied into submission by Madoff when they summoned the courage to ask questions about business practices.

The accused Société Générale fraudster, Jerome Kerviel, has been called both a genius and a mediocre employer. He was credited with exercising complex derivatives trades but also described by others as a simple “vanilla” trader. Kerviel was accused of creating fictitious trades involving European stock index futures, far beyond his limited trading authority. He used the fictitious trades to offset real trades. Conflicting stories report that he acted alone and that he couldn’t possibly have acted alone.

“I don’t think we’ve had the full story,” said Howard Davies in The New York Times Jan. 24, 2008, article “Société Générale loses $7 billion in trading fraud,” by Nicola Clark and David Jolly. Davies, the former chairman of the Financial Services Authority of Britain, argues that one person, however well informed on the bank’s control procedures, couldn’t hide a trade of this scale. “It’s a lot of money. Normally you have a compliance mechanism” that involves a trade like this to be run by more than one person to avoid a situation where it’s “only one pair of eyes,” Davies said.

I agree with Davies. While Kerviel might have acted alone in the commission of the fraud, it’s unlikely he was the only one who knew about the fraud. We can only speculate on the back office staff members’ failure to blow the whistle. When these staffers asked about specific trades, Kerviel said the trades were mistakes. We don’t know if Kerviel bullied them, but bullying can override the best control system.

One year before the discovery of the Barings Bank fraud, the bank’s internal audit department had reported, although unheeded, that Nicholas Leeson had excessive power, although no action was taken. Not only was Leeson a derivatives trader, he also supervised the back office in which his wife worked. Fraud examiners are only too familiar with those red flags.

Back offices, though tasked with monitoring trades and traders’ positions, are largely comprised of clerks who are often no match for arrogant, fast-talking, or bullying traders.

In the Société Générale and Barings Bank cases the rogue traders claimed their supervisors were well aware of their trading activities, particularly when they were making money.

(Junior employees are most frequently bullied by their bosses, but co-workers can bully their co-workers. And sometimes lower-level employees bully their bosses, particularly when those employees have superior knowledge or specialized skills such as derivatives trading.)

We might never know definitively what occurred in these cases, but we shouldn’t discount the possibility of bullying.

RECOGNIZING BULLYING BEHAVIOR 

Seemingly inexplicable frauds might not be quite so perplexing when we consider the effects of workplace bullies. Organizations need to recognize bullying behavior that might contribute to fraud:

1. Pay attention to employees who are so volatile and disagreeable that co-workers avoid them.

2. Be aware of issues that might arise when junior employees are tasked with monitoring the activities of more senior or specialized employees.

3. Don’t be diverted by the “techno-speak” of specialized employees. These employees should be able to respond reasonably and plainly to an inquiry from someone they know to be less knowledgeable.

4. Ask employees if they suspect fraud. Annually, some organizations ask employees to acknowledge in writing that they know of no instances of suspected fraud.

5. React immediately and visibly to complaints of bullying or other inappropriate behavior. Conduct an immediate and objective investigation of specific complaints. Reinforce the company’s lack of tolerance for bullying in the workplace.

6. Be aware when bosses place unreasonable demands on their employees and if employee compensation plans don’t align with the organization’s ethical values. Bonus structures often recognize short-term employee performance to the detriment of long-term organizational strategies. Pressures to meet budgets and sales targets might blur the lines of acceptable revenue recognition policies.

7. Watch for changes in employees’ behavior. Don’t allow individual employees or small groups of employees to become alienated or segregated from the mainstream. Well-conceived coaching and mentoring programs that foster discussion and trust can play an important role in the early identification of issues, including bullying, faced by employees.

8. Listen to the informal communication network. It’s not always just gossip.

9. Watch for management hiring people who don’t match appropriate experience and skill sets for the positions. Don’t facilitate bullying that might lead to fraud by putting unqualified employees in positions that require they monitor the work of experienced and specialized employees.

10. Watch for underlying motives for management’s ongoing criticism of an employee.

11. Above all, communicate the organization’s position on bullying in the workplace to all employees. Many organizations include anti-bullying references in their codes of conduct, which encourage safe and respectful workplaces.

Though research is still developing, companies should work to deter bullying behavior in the workplace and consider it as one factor among many when searching for fraud.

Joyce McGeehan, CMA, CIA, CFI, is senior manager in Grant Thornton’s forensic accounting unit in Halifax, Nova Scotia, Canada.

Boss Bullies Assistant And Travels On Company’s Dime 

Janine, a single mother of two small boys, had been the executive assistant of Howard Bond, the director of sales, for more than 10 years. During that time, Janine had seen many changes in the company’s policies about entertaining clients. Gone were the days of long lunches and expensive golfing trips with clients. However, Howard didn’t agree with the new expense policies; he believed that his established social relationships with clients boosted sales in difficult economic times. Howard often combined business with fishing trips – with the company picking up the tab.

Janine compiled Howard’s expense claims and often thought that they were on the borderline of acceptable expenses. She knew nobody else reviewed Howard’s expense claims in detail. When she asked him about specific items that didn’t look right to her, Howard told her that questioning him “wasn’t in her job description,” and she should send the expense reimbursement requests to the accounting department. Then he’d allude to pending layoffs in the company. Janine believed that Howard was threatening her job.

She thought that Howard had really crossed the line when he expensed $8,000 for a one-week fishing trip to Alaska because he said he had taken a major client with him. Janine knew for certain that Howard’s two teenage sons had accompanied him, not the client. After much thought, Janine decided to ask Howard if the client had joined him in Alaska to see if he would admit to the transgression. He told her it was none of her business and she should just “process the darn claim.” He then reminded her that her performance evaluation was due in a couple of weeks. Janine thought about anonymously calling the company’s whistle-blower hotline, but she knew Howard would trace the call back to her.

Janine kept her “outrageous file,” containing Howard’s highly questionable expenses of more than $225,000, hidden in her bottom drawer through the next four years. Expenses included four fishing trips with Howard’s personal friends, dozens of airfares for his sons flying back and forth between home and their universities, numerous family dinners at high-end restaurants, pool cleaning at Howard’s personal residence, and a $4,000 Chanel gown for Howard’s wife that he had bought on a business trip to France.

Janine, in a sense, became an accomplice to Howard’s fraud because she felt bullied into hiding it.

Volatile Trader 

Stan, 22, a recent business graduate, thought he was extremely lucky to get a job in the back office of a foreign currency trading department of a large bank. He found the fast-paced environment exciting and liked to be in the center of things. He eventually wanted to become a trader and felt that his new job was the first step. One of Stan’s responsibilities was matching foreign currency trades and monitoring the traders’ positions to ensure they were within their authorized trading limits.

Michael was the chief U.S./Canada trader and had been on the trading floor for about five years. He consistently received large bonuses and had a good reputation for accurately forecasting the foreign currency markets. As the months passed, Stan found that he was having difficulty matching some of Michael’s trades with one of the other banks. Whenever he asked Michael for a specific explanation about the trades, Michael became agitated and verbally abusive; he questioned Stan’s ability to understand basic trading transactions and accused him of wasting time.

After several of Michael’s outbursts, which always occurred in front of other traders and support staff, Stan was beginning to feel a bit stupid because he couldn’t make sense of the transactions. He told his direct supervisor that he didn’t understand why specific trade tickets didn’t match. His supervisor referred him back to Michael. Stan eventually stopped asking Michael about the unmatched trades because he didn’t want to suffer through the uncomfortable and embarrassing confrontations and he thought he might actually be missing something. Soon after, Stan stopped trying to match Michael’s trade tickets and rationalized the situation by telling himself that Michael must know what he was doing. And Stan didn’t want to jeopardize his chances of being promoted to the trading floor by continuously annoying Michael for no good reason. Eventually, the bank discovered that Michael and his friend, a trader at another bank, were manipulating their true positions through fictitious trades with each other.

The bank dismissed Michael and intends to pursue a civil suit. It’s still not clear if Michael personally benefitted from his activities. Regardless, it appears the bullying of Stan prevented the early discovery of irregularities.

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