Lack of integrity burdens society and opens portals to fraud

According to Webster's online dictionary, integrity has three different meanings. The first is "a firm adherence to a code of especially moral or artistic values or incorruptibility." The second is "an unimpaired condition or soundness." The third definition is "the quality or state of being complete or undivided." Managers who focus on building and maintaining integrity, of course, will support a healthy tone at the top and help block portals to fraud. I'll concentrate on the three meanings of integrity in this column.

Integrity is the quality of always doing what you know you should do. Think about it. How many of the things that you know you should do, do you always do and never skip? How you would feel about yourself if you consistently did what you know you should do?

How do you know if you can trust another person? Generally, you base your trust on your experience with the consistency of that person's conduct in the past. It's hard to believe, but there was a time when no one felt the need for written contracts. A person's word was all that was required. Enemies would settle conflicts by accepting mere verbal representations from people who — hours before — were fighting to their deaths. Business executives would agree on commercial transactions based on the spoken word and handshakes.

Even today, some people and businesses have so much integrity their colleagues and customers can trust them with anything. Bill Child, former owner of the RC Willey furniture stores in Utah, Idaho and Nevada, is an example. RC Willey is the largest home furnishings retailer west of the Mississippi. In today's tough competitive world, RC Willey and Bill Child stand tall as leaders of a firm with strong ethical values. (I have no financial or personal relationship with the RC Willey company in any way.)

Handshake transactions

Rufus Call Willey started the business in 1932 by selling appliances out of his pickup truck door-to-door. In 1949, R.C. opened his first store in Syracuse, Utah (at the time, a small town of less than 300). R.C. established a strategy of offering better quality at the absolute lowest prices. (See "Integrity: The Key to Capacity," by George Brunt and W. Steve Albrecht, Lunar Publishing, 2015.)

In June 1954, shortly after graduating from college, William (Bill) Child took over the reins of the business from his father-in-law, R.C., after R.C. was diagnosed with pancreatic cancer. R.C. died in September of that same year. In 1995, Warren Buffett acquired RC Willey for $175 million. The company is now under the umbrella of Buffett's holding company, Berkshire Hathaway. Although Buffett is one of the primary owners of RC Willey, he still left Child to manage the company as he saw fit. Buffett has publicly stated that every transaction with Child was made on a handshake.

Ever since the company was founded, RC Willey has established a strong reputation for being an ethical company. When a warranty company declared bankruptcy shortly after RC Willey had paid it $192,000 for warranty service, RC Willey could have easily told customers that the bankrupt insurance company was responsible for the warranty. RC Willey didn't do that. Instead, Child decided to financially back all of the warranties, even though RC Willey had no legal responsibility to do so.

Child said later, "It cost us more than $1.5 million over the next five years, but we just felt it was the morally right thing to do."

Great rewards and dividends result from following ethical principles. This tone at the top affects all levels of management and employees' attitudes and helps reduce fraud.

Contracts made and broken

Society demands that we not only have to rely on written contracts but we must address every aspect of proposed transactions with painstaking detail. Even so, many don't abide by those contracts. Think of the waste caused in our society by this lack of integrity (and the portals that it opens up to fraud).

We spend billions of dollars each year trying to get people to do what they promised to do in the first place. We spend millions of dollars on internal controls, audits, inspections, independent checks, detailed laws and law enforcement to try to motivate honest behavior. When someone doesn't do what they know they should do, all of society suffers.

Take the simple example of being on time. When a meeting is supposed to start at 2 p.m., we depend on other meeting participants to be there right at 2 (or a bit earlier). But if anybody is late, they waste the time and resources of the organization. This small act of tardiness might appear inconsequential (beyond the annoyance of those who are on time!), but business people repeat it hundreds of thousands of times each day throughout the world. When meetings are inefficient, objectives aren't met: We have low productivity, inaction and a lack of return on time invested. Another portal to fraud? Not necessarily, but it can be another dent in the tone at the top.

Surely everyone knows they should do what they've promised to do even if they're not compensated for their promises. This is the most basic form of integrity. To go a step further — to incorporate integrity into our lives we also need to do the things that we know we should do even if we've made no overt promises.

Integrity isn't merely "being true to what you believe." Rather, it's "believing and doing what is true." In order to realize the benefits of integrity in families or organizations, we must develop integrity from the "inside out." There is no "outside in" method that will instill integrity.

SOX is an ‘outside in' bandage

In 2002, as a result of several highly publicized frauds (such as Enron and WorldCom), the U.S. Congress imposed stiff new regulations affecting the top levels of public corporations. The requirements of these regulations, known as the Sarbanes-Oxley Act (often referred to as SOX), cost companies millions of dollars per year. Unfortunately, even with these costs, SOX is merely a bandage for the wounds. The wounds — the lack of integrity of some corporate leaders — must heal from the inside out. They must realize that following the rules and doing what they've promised and know they should do gives them increased power and capacity. Shortcuts and dishonesty are always recipes for failure.

Organizations should consider devoting significant resources to educating their employees about integrity. Teaching true principles is the fastest and most efficient way to influence behavior. However, businesses can't force integrity; employees must absorb it. The only two ways to make that happen are via modeling (being an example) and labeling (teaching and training). Too many corporations and families today do a poor job with one or both of these key elements.

We're bombarded with explicit bad modeling everyday on the Internet, television and social media. Families rarely spend time together in their homes anymore and seldom eat and converse together. When they're at home, they consume countless hours in front of the television and on social media instead of spending time together conveying values from one generation to another. It's no wonder that every longitudinal study on integrity shows decaying values and levels of honesty.

When we talk about physical materials we equate integrity with strength. Consider, for example, the airplane manufacturing business. The industry can't tolerate weakness anywhere in the structure of an airliner: the framework, outer skin, bolts, electrical and hydraulic systems, and the engine. No margin of error.

Are we (and organizations) not like the aircraft? Can we really fulfill the job for which we were designed if we lack integrity in any part of our structure? Can we have the full capacity for leadership, the strength to endure, or the power to motivate and manage without complete integrity? A lack of integrity in emotional areas limits our financial ability. A lack of integrity in spiritual areas limits our social power. Any lack of integrity will limit our career and personal success.

Closing the fraud portals

Unfortunately, many people are blind to these correct principles. (And that's why we're still fraud examiners.) If we want to work toward complete integrity, we must shrink the difference between our intentions and our actions and between what we know we should do and what we do. The result? We exhibit sound tone at the top (or middle or bottom) and begin to close some of those fraud portals.

W. Steve Albrecht, Ph.D., CFE, CPA, CIA, is the Gunnell Endowed Professor of Accountancy in the Marriott School of Management and a Wheatley Fellow at Brigham Young University. Albrecht was the ACFE's first president. His email address is: wstevealbrecht@gmail.com.