When it comes to employee fraud, prevention is definitely better than cure. So why do executives who routinely minimize other risks to their organisation fail to address one of the most commonly occurring threats – employee fraud? Perhaps they believe that they would notice any fraud before it became serious, or that their employees are all trustworthy, or it is the auditor’s job to spot fraud, or that this is an area that is too organizationally difficult to for them to address.

 If so, they would be wrong on all counts. Fraudsters are skilled at concealing their tracks. Indeed, 40% of employee frauds run for more than 2 years. Fraud is often perpetrated by long term employees in a position of trust. It is not part of the role of auditors to detect fraud, though they may do so incidentally. And you can do a lot to reduce fraud without disrupting the organisation’s operations.
 
There are two major components to combating employee fraud. The first of these is to improve controls and systems. This is best done with the help of external experts rather than internally, as it is in the relevant functional areas (finance, accounting, logistics) where fraudsters are most commonly found.
 
The second component is to strengthen the anti-fraud nature of the workplace culture. The aim is to decrease and hopefully eliminate any employee disaffection which can lead to the rationalization by many employees that stealing from the organisation is only getting what they are owed anyway. At the same time, those few employees who are actively seeking to defraud will be less tolerated by the bulk of employees, who will be more likely to report their activities.
 
Executives can increase employees’ feeling of identification with the organisation and its best interests through putting in place well defined and practiced behavioral guidelines, ensuring open communication, promoting management modeling of ethical behaviour, instituting fair and equitable reward and grievance procedures and eliminating “them and us” hierarchical barriers. These characteristics also correspond neatly to those of highly effective organisations respected by investors and the marketplace.
 
There are multiple influences on how honestly an employee (or manager) acts at their workplace (see diagram). The central factor is their innate sense of values. Studies have shownthat:
 
·       10% of employees will always do the right thing, no matter what
·       40% will generally try to do the right thing
·       40% go along with their work group in most matters.
·       10% will take advantage of situations to further their own personal interests.
 
Cultural improvements will not change the behaviour of the “bottom 10%”. It is the “middle 80%” that cultural improvements address with regard to reducing fraud risk, by strengthening the various influences in a positive way. There are some basic steps that executives can follow :
 
Step 1 – Improve management’s knowledge of employee perceptions
Senior management’s beliefs about the organisation invariably differ from those held by employees and middle managers. Yet senior managers often initiate change without ensuring that they understand these attitudes and perceptions. Usually such change initiatives fail. The first and essential step is to gauge employee perceptions about key factors, such as commitment to the organisation, trust and respect of leadership and prevailing level of honesty.
 
An appropriate confidential employee survey will provide the needed data. To obtain accurate data such a survey must be administered and processed by an independent external agency, as it is most unlikely employees will believe that an internal survey will remain confidential.
 
Step 2 – Develop a Code of Ethics and Business Conduct, and live it.
A Code should cover behavioral expectations in all aspects of the organisation’s activities and interactions – customers, suppliers, management, employees, the community, the environment and so on. Standards of openness, honesty and fair dealing should be explicitly spelt out.
 
The Code needs to be promulgated throughout the organisation, and made known to external business partners.
 
Step 3 – Set the “Tone at the top”
It is well established that the behaviour of the CEO and senior managers in an organisation is closely monitored by employees. If employees believe that senior management does not tell them the truth, or that managers are taking advantage of the organisation for their own gain, or if management style is harsh and overly controlling, then many employees will become disgruntled and can retaliate by stealing from the company, or at least tolerate others who do so.
 
Step 4 – Make sure the change sticks
All executives know that implementing change is harder than planning change, and that making the change permanent is harder still. The change to a more fraud resistant organisation can be embedded through focusing on making the Code of Ethics and Business Conduct a “living” document, which is followed by all from the CEO down. Wrongdoing and unethical behaviour need to be punished in accordance with the code, without fear or favor. Open, inclusive and communicative management will encourage employees to identify with company values and goals and report any suspicions of wrongdoing.
 
By making clear what standards of behaviour are expected, setting a good example, encouraging communication and teamwork, developing individuals and punishing inappropriate and dishonest behaviour, management will create an environment where correct procedures are followed willingly, and the less ethically strong will be supported and oppose the actions of fraudsters.