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The role of ethics in fraud prevention: A practitioner's perspective

The role of ethics in fraud prevention:

A practitionerâ€™s perspective

Steve Krummeck
Fraud is a worldwide phenomenon that affects all countries and all sectors of the economy. Although greed undeniably counts amongst the major causes of fraud, it is by no means the sole reason for fraud. It is a much more complicated phenomenon. It could also be inspired by the quest for survival. This is especially true in regions where large numbers of people are locked in a struggle for financial and even physical survival such as in Africa. Although personal motivations on a spectrum from greed to survival can play a role in the motivation for fraud, even such a spectrum of motivations is still an insufficient explanation for the phenomenon of fraud. There are also certain conditions within organisations that can facilitate fraud, such as a lack of determination to deal with fraud, insufficient internal control mechanisms or a company culture that is permissive to fraud. External conditions can also facilitate fraud - a general lack of respect for law and property in a society can promote fraudulent behaviour, and equally an inefficient criminal justice system can create a situation where crime and particularly fraud pays. The latter is often the case inÂ developing countries where the scarcity of resources results in under-staffed and under-trained criminal justice structures. Such situations are ruthlessly exploited by crime syndicates that further fuel the spiral of fraud. The sophistication of information technology and the ways in it can be abused to commit fraud further underlines that fraud is indeed a very complex phenomenon that cannot be simply explained by reference to greed alone.
One of the sectors of the economy that is particularly vulnerable to fraud is the banking sector. There was a time when banks thought that it might be in their interest not to expose fraud when it occurs in the bank. The reasoning behind this approach was that if the bank should expose the fraud that occurred within it, it might create the impression that the bank is not at a safe place and incapable of protecting its clientsâ€™ assets. Instead of exposing fraud they were therefore willing to rather lay off those involved in fraud in order to allow the matter to disappear as inconspicuously as possible. In this way they hoped that their image as safe and reliable institutions would be best served.Â
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This conventional wisdom is however nowadays seriously questioned. The extent to which fraud has grown in recent years, has made it evident that this conventional way of dealing with fraud is not only ineffective, but also too costly to afford any longer. An alternative strategy for dealing with fraud become imperative. In this article I will describe one of the ways in which (the then) Nedcor Bank in South Africa responded to the threat that fraud was posing. Although the outline of the comprehensive approach that we developed at Nedcor Bank (from 1996 through to 2005) will be provided, the emphasis will be on the role that ethics should play within this overall strategy to prevent and detect fraud.
The fraud prevention strategy
The strategy that we developed to fight fraud was premised upon the assumption that we could only be effective if we are able to involve the entire company in our efforts. Fraud prevention and detection should not be the sole responsibility of only one department within the organisation. Rather the responsibility to combat fraud should be shared by all employees. This starting point is particularly important given the role that employees can play in acts of fraud. Studies on fraud have indicated that employee involvement in fraud can range anywhere from 30% right up to 80%. The vulnerability of employees to become involved in fraud is nowadays further enhanced by the activities of crime syndicates that tempt staff with substantial rewards to commit fraud. Once members of staff have conceded to this temptation they are often blackmailed by these crime syndicates to continue with their fraudulent activities as the syndicates threaten to expose them to their employers if they do not co-operate with them.
The strategy to prevent and detect fraud within the company consisted of four key components. They were (a) a commitment to a zero tolerance for fraud, (b) regular communication about fraud, (c) control mechanisms to prevent and detect fraud and (d) a culture that will discourage fraud. Each of these four components will now be briefly described.
(a) Commitment
The fight against fraud starts with a commitment not to tolerate fraud in the organisation. This commitment must be a visible one and one that is shared throughout the organisation. It was therefore regarded as imperative that the executive and senior management must be seen to be supporting this initiative to curb fraud. To achieve this, the organisation took an active part in formulating a policy statement on fraud and in communicating it to all levels of the company. From there this policy and commitment has to be filtered down to all levels of the organisation. All members of the organisation must regard the fight against fraud as a priority. Without such a commitment the attempt to eradicate fraud will remain non-focussed and diffuse.
(b) Communication
In order to sustain this commitment to fraud, ongoing communication about fraud related matters within the organisation is important. The organisation has to be open in its communication about fraud and must provide information relating to fraud on an ongoing basis to its employees. They must be informed about what they need to be on the lookout for, what the current trends are, where the fraud is taking place and in certain instances even how the fraud was perpetrated. Without the provision of this vital information staff will be looking for a needle in the proverbial haystack. A wide range of communication channels was used for communication in this regard. These included electronic message systems, faxes, training sessions, presentations, management meetings, and the bankâ€™s intranet as well as the internet.
The communication should however not be one-way communication. For the success of this effort it wasÂ Â considered vitally important that staff should also be provided opportunities to communicate their concerns or suspicions about fraud. For this purpose a fraud and security-reporting line was instituted. Callers to this line had the option of either remaining anonymous or disclosing their names. This provides employees the opportunity to report suspicions of fraud. For this reporting line to be successful it is imperative that each and every call must be taken seriously. This involves investigating every suspicion of fraud thoroughly and also providing feedback to the person who raised the concern. The ongoing communication about fraud that is facilitated in this way has proved to be very powerful in retaining the commitment to fight fraud within the bank.
The communication to all employees within the organisation of staff dismissed and prosecuted for committing fraud was a huge deterrent. Their full names, position, responsibilities, term within the organisation, as well as what fraudulent activity they had engaged in, were communicated to every employee. This communication was recognised as the only one read by every employee within the organisation.
(c) Controls
Fraud flourishes in conditions where many opportunities for perpetrating fraud prevail. An important component of the anti-fraud initiative was therefore to minimise such opportunities for fraud. This entailed the implementation of control mechanisms and procedures not only to detect fraud as early as possible, but most importantly, to prevent it from happening in the first place. On the pro-active side this involves the early monitoring of suspicious transactions, consultancy regarding new product development to ensure that there are no loopholes for fraud in these new products and ongoing research on loss trends within the organisation. On the reactive side the organisations own investigating unit responded promptly to all tip-offs received and investigated all cases of fraud thoroughly. In this way immediate action could be taken and the long waiting period that is usually associated with police investigations into fraud cases was avoided. All these efforts to control the risk of fraud were co-ordinated through a risk management system that not only involves all management in the organisation, but also internal and external audit teams. Without such a comprehensive and systematic risk management system the organisations is destined to flounder around fighting fires in a reactive attempt to stem the tide of fraud from within.
(d) Culture
If culture can be described as â€œthe way we do things around hereâ€ then the contribution that company culture can make towards the fight against fraud is to emphasise that integrity and honesty is regarded as a priority in how we conduct our affairs in the organisation. A culture of integrity and zero tolerance for fraud is therefore a key component of an organisations anti-fraud strategy. Developing and changing company culture is never easy or simple. This is even more so in societies like ours where the external societal culture is not supportive of integrity and honesty in business. In such situations organisations have to work that much harder at creating a culture of pride and integrity within its own confines.
In the effort to change the culture of the organisation to one of integrity and honesty, the policy statement of the organisation on fraud that was alluded to earlier, is of paramount importance. In this policy statement the necessity of integrity becoming a permanent part of â€œthe way we do things around hereâ€ is emphasised. To ensure that this policy statement does not merely remain words on paper, it is vital that it be kept alive by being communicated regularly and in various forms to all staff members. Besides the articulation of the ethical values that should be espoused by all, positive behaviour that resulted in the prevention and detection of fraud should be encouraged, praised and rewarded. This can be achieved in a variety of ways, ranging from personal recognition to formal rewards. One of the initiatives that we embarked upon in this respect was the introduction of a Loss Prevention
Incentive Scheme. We found that rewarding employees for preventing fraud worked extremely well. It is however important that rewards should be paid as advertised and that it should be complemented with personal congratulation and recognition. The opposite is off course equally true. Fraudulent behaviour should not be tolerated at all. To the contrary it should be denigrated.
The ethical dimension of fraud prevention
Ethical values and considerations are not something that should be added to a fraud prevention strategy such as outlined above. To the contrary they should rather be seen as an integral part of such strategy that is intertwined in every dimension thereof. In this final part of this article the ethical dimensions in each of the components of the above strategy will be highlighted.
Ethical considerations play a vital role in the
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There is also another way in which ethical considerations are vital for the communication element of the overall fraud strategy. This relates to the trust within the organisation. Employees will only be willing to play their part in reporting suspicions of fraud to a fraud hotline if they feel that the system can be trusted. They need to be assured that they will remain anonymous if they have opted for anonymity when they reported their suspicions. They also need to be reassured that the company will protect them from retaliation by the accused party. Furthermore the system can only work if the company is faithful to its promises regarding rewards and protection for those who risk reporting suspicious activities. Without such trust, which is obviously based on ethical values such as honesty, reliability, fairness and loyalty, the system of reporting suspicious behaviour to the organisational structures is destined to fail.
When it comes to the
The ethical dimension in the last component of the fraud strategy that deals with company
With thanks to Xavier Corporate Services
commitment to a zero tolerance towards fraud. In order to cultivate a company wide commitment to eradicate fraud some common ground for the rejection of fraud must be found. It is here that ethical considerations play a prominent role. Insight into the immoral nature of fraud and its detrimental consequences for the organisations and societies in which it occurs as well as for the individuals who perpetrate it, is a powerful stimulant for building such a company-wide will to combat fraud. Experience taught us that employees are particularly sensitive for the impact that fraud might have on their family members and loved ones should they be convicted of fraud. Such personal costs as well as the other detrimental organisational and social consequences of fraud should therefore be considered and communicated in building a corporate will not to tolerate fraud.communicating with employees on the issue of fraud, the fundamental unethical nature of fraud should always be a prominent part of the fraud awareness message. Its detrimental consequences to the organisation as well as to the individuals involved should be continuously demonstrated. The fraud awareness training that is provided to staff on recent fraud trends and incidents provide ample and concrete opportunities for doing just that.control dimension of the fraud strategy, the risk management system can be portrayed as consisting merely of a set of prescribed procedures and mechanisms with no obvious moral dimension attached to it. It can thus be seen as a morally neutral component of the overall fraud strategy. Such an assessment would, however, fail to recognise the motivational dimension in such a risk management system. Systems only work to the extent that people are committed to make them work. There is thus a clear need for people who are committed to implement the various elements of the risk management system. Although such motivations can be provided by external factors such as financial rewards or penalties, it would be foolish to overlook the role that a commitment to eradicate fraud on the ethical grounds alluded to earlier could play in this respect.culture is rather obvious. What is at stake here is integrating a core ethical value, namely integrity into the way in which business is being done. What is being called for is that honesty and integrity should be seen as vital for achieving company goals. Rather than being a mere add-on to business, ethics should be seen as an integral part of realising company goals. The integral role of these values for company success should be spelled out explicitly in company documents and should be modelled by leaders for it to find their way into the company culture. Furthermore those who practice these values in their commitment to prevent and detect fraud should be rewarded in material and/or symbolic ways. This shows that ethics cannot be regarded as a luxury that can simply be added onto a fraud prevention strategy if an organisation wishes to do. To the contrary, our experience is that fraud prevention without ethics is an idle dream. Ethics provides a foundation for such a strategy and is simultaneously an integral building block therein. The success or failure of a Fraud Prevention Plan depends primarily on the culture of the organization, and a dynamic and sustainable Total Ethics Management Programme will ensure that ethics is top-of-mind within the company.

Posted by admin on Monday 05 November 2007 - 10:42:53 |

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