Corporate teamwork’s impact on collective fraud participation

Teamwork, an important attribute in any organization’s culture, may facilitate innovation and encourage employee loyalty and workplace cooperation. But it may also facilitate collusive financial statement fraud and promote collective rationalization (a by-product of groupthink).

For example, consider the justification offered by a fraud offender who engaged in teamwork to participate in corporate fraud: “We all believed in the company. We were part of an overall scheme of making the company successful … . There was an us versus the world mentality. We wanted to prove that we could be the biggest company in the field.” (See “The ties that bind: The decision to co-offend in fraud,” by Clinton Free and Pamela Murphy, Contemporary Accounting Research, Sept. 24, 2013.)

A study published in 2023 in the Journal of Behavioral and Experimental Finance examined the relationship of corporate teamwork as a potential risk factor for participation in financial statement misconduct. According to the authors, financial reporting requires teamwork, asserting that top executives, such as CEOs, are realistically unable to perpetrate financial misconduct without broader involvement from other professionals. Lower-level employees may be complicit in fraudulent practices in organizations that encourage teamwork and discourage speaking up against the team. (See “No rose without a thorn: Corporate teamwork culture and financial statement misconduct,” by Chenyong Liu, David Ryan, Guoyu Lin and Chunhao Xu, Journal of Behavioral and Experimental Finance, March 2023.)

Take the case of Japanese electronics company Toshiba. In 2015 Toshiba’s CEO, Hisao Tanaka, stepped down due to an accounting scandal. Toshiba had artificially inflated profits in the billions of dollars by fraudulently misrepresenting the true costs incurred to operate the business. An investigation into Toshiba’s fraud found a corporate culture, supported by upper management, that prevented teams from questioning management’s fraudulent goals and rationalizations. (See “Independent Investigation Committee for Toshiba Corporation,” by Koichi Ueda, Hideki Matsui, Taigi Ito and Kazuyasu Yamada, Toshiba, July 20, 2015.) The Journal of Behavioral and Experimental Finance study suggests that an organization’s corporate teamwork culture is positively associated with the likelihood of financial statement misconduct under certain conditions. The more emphasis and prominence a firm puts on teamwork as a shared value, the more likely the organization is engaging in financial statement misconduct when the tone at the top is ethically compromised. The study further reveals that the association between teamwork culture and financial statement misconduct is more pronounced when the organization reports no internal control weakness. Internal control deficiency disclosure exposes companies to more scrutiny by auditors. Companies engaging in financial statement misconduct may conspire to override internal controls to conceal financial issues. Either the collusive activity of highly collaborative organizations can successfully circumvent internal controls to engage in financial statement misconduct or the organizations know how to constrain and conceal misconduct to avoid additional scrutiny.

The results are more pronounced in companies with stronger teamwork cultures and in organizations that use Big 4 auditors — Deloitte Touche Tohmatsu (Deloitte), PricewaterhouseCoopers (PwC), Ernst & Young (EY) and KPMG. Drawing upon the results of their study, the authors suggest that auditors, other anti-fraud professionals and various stakeholders, such as investors, will be able to assess firms’ potential fraud risks by understanding the potential consequences of client culture related to ethical misconduct. Boards of directors and compliance officers may be able to mitigate the risk of collusive fraud through additional employee training and more direct communication. Here I’ll examine some methods for reducing the risk of collusive fraud within a corporation.

Mitigation of collective rationalizations

One no-nonsense mitigation suggestion comes from Joseph Heath, Ph.D., professor of philosophy at the University of Toronto. He recommends neutralizing individual and collective rationalizations facilitating collusion upfront with employees at all levels before any fraudulent behavior arises. (See “Business ethics and moral motivation: A criminological perspective,” by Joseph Heath, Journal of Business Ethics, Jan. 16, 2008.) Organizational cultures that encourage teamwork must establish a no-tolerance policy related to unethical or illegal behaviors. Organizational leaders need to explicitly communicate to teams what the consequences are of engaging in collusive behavior. Team members should understand expectations, spelled out in the company’s codes of ethics, employee handbooks and included in employee training.

Keep in mind that the best written codes of ethics and employee training reinforcing the idea of ethicality mean nothing unless leadership supports the expectations in the “tone at the top.” Organizations set and reinforce written codes of ethics and employee training by holding those who violate them accountable, and management must model ethical behavior for employees. Convicted WorldCom CEO, Bernard Ebbers, said, “Codes of ethics are a colossal waste of time.” (See “Fraud Examination and White-Collar Crime: An Accounting Behavioral and Criminological Approach,” by Frank Perri, Kindle Publishing, Nov. 9, 2022.) Such a statement doesn’t set the proper tone, and his philosophy had an ethical impact on his accounting team. WorldCom accountant Betty Vinson and her coworker Troy Normand followed the directives of their boss, convicted Chief Financial Officer, Scott Sullivan, to facilitate financial statement fraud by overstating earnings, allowing WorldCom to meet Wall Street expectations. (See “I didn’t intend to deceive anyone: Fraud rationalizations and the Guilty Mind,” by Frank Perri and Edyta Mieczkowska, Fraud Magazine, March/April 2015.)

Initially, Vinson and Normand reacted negatively to the request. Sullivan reassured them that reporting false accounting entries represented a one-time request. He appealed to them with this analogy: “This is a situation where you have an aircraft carrier out in the middle of the ocean and its planes are circling up in the air … and what you want to do, if you would, is stick with the company long enough to get the planes landed to get the situation fixed … . Then if you still want to leave the company, then that’s fine, but let’s stick with it and see if we can’t change this.” (See “A dark cloud descending,” by Cynthia Cooper, Fraud Magazine, March/April 2008.) However, additional requests followed the request to manipulate the financial statements. Employees shouldn’t feel intimidated to disclose fraudulent team practices to enhance organizational goals. Organizations should seriously consider having a hotline for a team player to share concerns without fear of retaliation.

Pay attention to employee relationships

Although we want coworkers to work well together as team players, relationships that appear out of the ordinary should be on a company’s radar. Organizational leaders should pay attention to relationships, especially those that pose an inherent risk for collective fraud, such as weak internal controls relating to segregation of duties. Countries may differ in terms of how to approach employee privacy issues, so organizations must work with legal counsel to ensure that the organization has the right to monitor employee communications, such as email or instant messages shared on a network. Doing so allows you to identify employees communicating in a way that appears to violate the organization’s policies and procedures.

In addition, consider implementing a job rotation program or requiring mandatory vacation to determine if suspicious, potentially fraudulent patterns that would require a team approach start to appear. Expecting ethics to be an integral part of a team member’s identity strengthens the resolve to look beyond doing the bare, legal minimum to satisfy compliance. Research suggests that the more someone’s moral identity is tied to expecting ethical behavior, the more resistant and less prone to temptation a person is to engage in unethical behavior. (See “Does honesty result from moral will or moral grace? Why moral identity matters,” by Zhi Xing Xu and Hing Keung Ma, Journal of Business Ethics, Jan. 17, 2014.) Expecting ethics to be part of a team’s identity can help to mitigate collusive behaviors. Team leadership is pivotal in setting the example that ethical behavior is a nonnegotiable part of “who we are.”

Frank S. Perri, J.D., CFE, CPA, is an attorney in Illinois. Contact him at frankperri@hotmail.com.