Treat the Illness, Not the Symptom: Fixing Fraud at the Root With an Ethical Corporate Culture

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Examples of organizations employing fraudulent practices due to ethical lapses are in the media almost every week. Sometimes they let the bottom line become more important than adhering to their stated ethical values. Other times, they never cared about having an ethical framework in the first place. Regardless of why ethics were ignored, the outcome is almost always the same: fraud.

“I see fraud as a symptom of an unethical culture,” said Dr. Attracta Lagan, co-principal of Managing Values, in her keynote session at the virtual 2020 ACFE Global Fraud Conference Asia-Pacific. Dr. Lagan stressed to attendees how important it is for anti-fraud professionals to look at behavioral science when it comes to instilling and maintaining an ethical culture in their organization.

She explained how important it is for ethical attitudes to come from executives and company leaders. “Organizational culture at the end of the day is about how leaders set the table for their people to be the best that they can,” she said. “Culture is the length and shadow of people at the top.”

However, it is not enough for executives to just write a one-size-fits-all code of conduct and expect everyone to follow it. “Codes only signal management intent. It’s the organizational context that actually drives behavior … [you need to] get a more complex understanding of how context shapes behavior,” she said.

In addition to taking the larger organizational context into account, she stressed the importance of developing unique codes of conduct for different groups in the organization. The ethical dilemmas faced by executives are likely very different than those faced by the lowest level of employees, or those faced by middle management. Each code of conduct you develop must resonate with that type of employee’s experience with the organization in order to be effective.

In considering an ethical framework for an organization, you must also acknowledge assumptions that you, and others, have. “Most people see themselves as ethical,” she said, which can lead them to dismiss ethical training. However, their assumptions may not be accurate. “Most people can predict accurately the ethical standards of their peers, but they’re not very good at predicting their own ethical standard,” she said. “You can leverage the idea of people being ethical to build a better fraud and risk management culture in your organization.”

Dr. Lagan explained that behavioral science says that most humans are pro-social, and when they’re engaged with their work, they will try and make decisions that benefit the organization or society. “Most people want to do a good job. That’s how they get their sense of self-worth and self-esteem,” she said. “So, we have to build on that pro-social disposition instead of ignoring it.” Encouraging engagement with work also can help discourage fraud. “When people disengage, they’re prone to risky decisions,” she said.

There is a downside to this engagement, though, if people are with an organization that has a weak ethical framework, or one that rewards an “ends justify the means” mindset. She said the biggest sociological pressure in any organization is “going along to get along.”

“Most people do unethical things, not for personal gains, but to help their companies make the numbers.” Employees may find it easier to rationalize unethical behavior when they don’t see it as helping themselves, but helping the company.

There are a number of things organizations can do to strengthen their ethical cultures. Here are two Dr. Lagan suggested:

1.        Regularly measure culture. You need to adjust frameworks as situations change. “Culture needs to be measured at least biannually,” she said. She also encouraged having open employee feedback. In environments where employees feel comfortable coming to their bosses with questions or issues, the company as a whole is more likely to have a complete picture of what their fraud and ethical risks are.

2.       Design culture to fit your organization. Dr. Lagan said that ethically successful companies design a culture of their choice. She used the online shoe company Zappos as an example, explaining that once a new employee goes through training — which includes a heavy emphasis on their company culture — the employee is told that if they truly feel they do not fit in with that culture, they can take $5,000 to walk away. “Most of your risks walk in on two feet,” she said. “Everyone who comes into your organization is actually either consolidating that culture, they’re changing that culture or they’re challenging that culture … it’s a dynamic situation and your implementation plan has to likewise be dynamic.”

When thinking about your organization’s ethical framework, take behavioral science into account. Employees likely want to do the right thing, but they need guidance tailored to their challenges. There is no correct blanket ethical framework for all organizations; as anti-fraud professionals, you need to use cultural context and design systems and rules that are best for individual groups within your organization. It may just save you from being the next company in the headlines for the wrong reasons.