Given that staff tend to take their cue from what management does, rather than what it says, companies that encourage questionable workplace practices from the top down can end up being their own worst enemies. By encouraging employees to take shortcuts or by demonstrating a lack of oversight, businesses can become victims and, sometimes, unwitting perpetrators of internal fraud, bribery, and corruption.
The larger the company, the more likely there’ll be measures in place to detect these threats. However, for SMEs, it can be difficult to prevent the corporate culture from going south. Even in larger enterprises, there’s no shortage of examples of scandalous behaviour.
These examples include Volkswagen’s global scandal of cheating on emissions tests, a culture of greed inside Australia’s banking and financial services sector, the AWB oil-for-wheat kickback scandal, or, more recently, the $21 million accounting deception undertaken inside retailer Target. This proves convincingly that corporate culture, which usually takes time to evolve, matters.
Scandalous incidents, dishonest practices can cripple SMEs
While massive global organisations like Volkswagen and ASX-listed companies like Wesfarmers (which owns Target) can survive these kinds of incidents, most of the smaller Australian businesses can’t.
This means SMEs can be dangerously exposed to bad behaviour by management, dishonest business practices by staff, suppliers, and, potentially, other key stakeholders. These incidents may not make the news but they can cripple the business.
While it varies significantly between industries, Australian organisations can, according to the Association of Certified Fraud Examiners (ACFE) Global Fraud Study 2016, lose up to five per cent of their annual revenue due to fraud alone. For many SMEs, that could represent an entire year’s profit.
SMEs need to encapsulate their values and standards of behaviour within enforceable policies, and implement their own interventionist solutions where necessary. But remember, no amount of legislation can regulate an organisation’s culture, so the onus is squarely on business owners and managers to lead by example.
Review culture, plot changes, empower staff, more…
It’s hard to change an organisation’s culture but it is possible. The first step is to work out what the culture within your business is like now, and identify what you want it to be like. Then determine what changes you and other managers need to make to improve how you live up to the behaviours you want staff to emulate.
As well as empowering employees to question and speak out about improper conduct, you should also have clear incident reporting lines in place to ensure employees who witness improper behaviour, whether it’s from managerial staff or otherwise, have the means to report it. You also need to make it clear that employees will not be punished for speaking out against improper behaviour, regardless of who the perpetrator is.
Of course, culture alone won’t defend your business from individuals going rogue, so you also need to develop a more prescriptive set of processes to both prevent and detect breaches. These processes need to be documented and shared with employees regularly. They should also include a mechanism for oversight, so employees know they can’t get away with doing the wrong thing.
Detecting and responding to fraud and corruption
Examples of forensic or fraud detection procedures at the highest level include, interviewing executives, conducting forensic due diligence background checks, understanding the systems-access profile of executives, and performing forensic IT analysis as required.
An effective fraud and corruption control framework should encompass everyone in the organisation from workers on the factory floor to the management team and business owner.
As perpetrator seniority increases, so to do fraud losses
Sadly, fraud by senior managers is much more prevalent than most companies, regardless of size, would care to admit. Interestingly, the Association of Certified Fraud Examiners (ACFE) Global Fraud Study 2016 revealed that the higher the perpetrator’s level of authority, the greater fraud losses tend to be.
In fact, the same study revealed that the median loss caused by owners or executives was more than $700,000, which was more than four times higher than the median loss caused by managers ($173,000) and nearly 11 times higher than the loss caused by employees ($65,000).
There are myriad reasons for fraud within the owner/executive ranks, but the ACFE Study suggests the single biggest motivation (45.8 per cent) is owners or executives living beyond their means.
No one is above the scrutiny needed to mitigate risks
So it’s important for your business to implement necessary checks and balances to mitigate these risks, while reassuring your stakeholders, including shareholders, that your trusted executives continue to act ethically and with integrity at all times.
The key is to develop tailored forensic or fraud detection procedures, or a forensic review, focused on your leadership team. Remember, no one, regardless of level or seniority in your business, is above the scrutiny needed to mitigate fraud and corruption risks.
About the author
Roger Darvall-Stevens, National Head of Fraud & Forensic Services, RSM Australia