Establishing Controls to Combat Workplace Fraud
An article by Mike Savage, who is with the Fraud Investigation and Dispute Services group at Ernst & Young in Canada, provides helpful advice for business owners seeking to stem the tide of increased fraud in the workplace. Savage points out that “while the threat of risk is more apparent than ever before, by staying aware of the risks and following the following guidelines, you can mitigate or even prevent them from occurring.” Here are the ten ways businesses can mitigate risks and my take on their importance for workplace ethics.
1. Set clear ethical standards
Clear ethical guidelines set the tone for what the company is all about: its values; policies; and strategies used to accomplish goals. Often, this is done through a code of conduct or credo, which is an aspirational statement of the goals required to meet stakeholder interests.
2. Live the standards and lead by example
Ethical standards are meaningless and may be counterproductive unless top management adopts those standards as guides for their own behavior. In other words, it is important to “walk the talk” of ethics. Actions speak louder than words and this is especially true in the workplace.
3. Reinforce the importance of your businesses standards at career milestones
Ethical standards should be reinforced when new employees are hired and existing employees are reviewed for performance evaluation. If you want to encourage certain behavior in the workplace, reward it.
4. Use close supervision to compensate for fewer checks and balances
Not all companies have the sophisticated systems and internal controls to monitor supervision and identify red flags that fraud may exist. In smaller companies, close supervision and frequent meetings are necessary to keep the lines of communication open. This might help to encourage employees to report wrongdoing.
5. Require employees to take vacations regularly
Regular vacations can help to provide an opportunity for someone in the organization to review an employee’s work and identify fraud. The required vacation policy sends the message that you can’t work all the time to help cover up fraud because others will step in to do your work when you are on vacation
6. Keep records of your cash and monitor those who approve payments and records transactions
Fraudsters target cash when there is a lack of segregation of duties. One employee may be given the task of opening the mail, segregating out checks for payment of services, make a bank deposit slip, go to the bank and deposit the checks, and record and reconcile cash transactions in the ledger to the bank statement. Ensure that checks and balances exist over employees with authority for initiating and recording payment transactions.
7. Bring in outside specialists, like auditors, to take an objective look at your books and records
External professionals such as auditors can provide insights on what could go wrong and recommend improvements to internal controls to mitigate those risks. Their unbiased view allows them to ask difficult questions and test to confirm that employees are doing things correctly.
8. Introduce and promote a whistleblower hotline
Employees who are faced with an ethical dilemma may not report it out of fear that they will be retaliated against. They may feel uncomfortable speaking to their manager about a colleague or may have reservations about how it may affect the way they are viewed by co-workers. There needs to be a reporting system to anonymously disclose questionable transactions by establishing a hot line.
9. Reward positive behavior
It’s important to recognize your employee’s positive behavior. Employees must believe that the organization values what they do. Ethics is not an exercise for the sake of it. It is a way of conducting business operations that are valued and consistent with ethics policies and code provisions. Recognizing ethical behavior is the best way to demonstrate to employees who do the right thing that they will be rewarded and those who do not will be properly dealt with.
10. Use analytics to identify potential unethical behavior
The electronic footprint of fraudulent transactions is not the same as that of normal business transactions. For example, they may be processed when nobody is watching, late at night or over weekends, or they may be unusual amounts, such as just below approval thresholds. Accountants have tools that can mine data for these anomalies.
It has been stated that good ethics makes for good business. I agree but can’t say good ethics is always rewarded. I am not a fan of that statement. The reason is an organization and its employees should not do the right thing for some perceived payoff. Instead, right action should be done for its own sake: to build an ethical culture that will positively influence all behaviors and actions including relationships with suppliers, customers, employees, shareholders, and creditors.
Blog posted by Steven Mintz, aka Ethics Sage, on September 5, 2013