How company culture can lead to fraud

Financial Management | 3 Dec, 2014 |

Unfortunately, fraud is something all businesses must think about and guard themselves from. According to Statistic Brain, seven percent of annual revenues are lost to employee theft or fraud and 33 percent of business’ bankruptcies are caused by employee theft.

Fraud isn’t only a result of employee theft; it can also include misuse of accounts, bribery, incorrect accounting on financial statements or filing of fraudulent expense claims.

When you discover that your company has been a victim of fraud, it’s usually possible to find who actually conducted the fraud. However, it may be a more difficult to find what opened the door to fraud within the company.

Managers can unknowingly create an environment where fraud runs rampant. To prevent this, it is important that management understands their role in fostering an ethical, healthy work environment.

As the old saying goes, “a fish rots from the head.”

Establishing a positive company culture is a key component in keeping fraud at bay. It begins with cultivating a company culture that fits the values most vital to the company’s success. This can be achieved by clearly defining what behaviors will be accepted and encouraged within the company and which will not.

Each company’s culture is unique, reflecting the organization’s goals and the management team’s attitudes. At its core a company’s culture is driven from the top down. In other words, managers must model the expectations they set for employees.

According to the CPA’s Handbook of Fraud and Commercial Crime Prevention, a guide published by the American Institute of Certified Public Accountants, there are certain elements of a company’s culture that can make it more susceptible to fraud. Amongst these are autocratic management styles, centralized distribution of authority and overwhelmingly negative feedback.

Autocratic managers often make decisions without employees’ input and put unnecessary pressure on employees to preform. According to the AICPA, this pressure can lead to internal fraud.

Much like companies with autocratic managers, companies who implement a centralized distribution of authority harbor an environment for fraud by taking power away from employees and allowing all decisions to be made by higher-ups. Stripping employees of their ability to offer any insight or feedback makes it easier for employees to rationalize internal fraud.

While constructive criticism is a crucial part of any business, too much negative feedback can have a serious negative impact on a company. According to the AICPA, companies whose managers provide a lot of critical feedback typically experience more fraud than companies with managers who give positive feedback.

The AICPA also warns against companies that focuses more on short-term performance than long-term, foster competition, maintain inflexible policies and mandate formal correspondence instead of friendly communication. Companies should also work toward strategic objectives instead of managing crisis after crisis.

While having some of the “warning signs” in your company culture doesn’t guarantee fraud, it is something to pay attention to because, at the very least, it can contribute to a company filled with unhappy, unsatisfied employees. Taking an honest look at your company and striving to improve is imperative to an organization’s long-term success, whether the company has been a victim of fraud or not.

Most importantly, remember that managers set the tone. Even the best of intentions can be fruitless if those at the top refuse to be role models for the rest of the company. Managers who encourage employee feedback and foster collaboration will find their company is healthier, more successful and less susceptible to fraud.

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