Create an Antifraud Culture

by Duane Reyhl, CPA
Senior Manager, AHP

Other fraud articles by Duane Reyhl:
Protecting your Company from Employee Fraud

Every time you read or listen to a news report, it seems like someone has discovered yet another fraud. You would like to think that it won’t happen to you, but you wonder. You hear lots of sound advice about how to prevent fraud. But how do you put this advice into practice—especially in a smaller organization? This article outlines the basic steps of an antifraud program necessary for creating the appropriate culture. The process includes five steps that:

• Create a high ethical tone at the top
• Create a positive workplace
• Promote proper employee management practices
• Establish expectations for accountability
• Communicate the disciplinary process for fraudulent behavior

Tone at the top. Create a high ethical tone at the top. A high ethical culture is the cornerstone of fraud prevention. It starts with the board of directors or its equivalent. In a smaller organization, this might be the owner or executive team. Leading by example, you need to show that fraud or unethical behavior should not be tolerated by anyone. One way to implement this step is through a code of conduct. This document should state the organization’s core values and guide employees in making appropriate everyday decisions.

Positive workplace. Create a positive workplace. A positive workplace fosters good employee morale, which tends to inhibit conditions that can motivate someone to commit fraud. This all comes down to perceived fair treatment. The ingredients of a positive workplace include strong communication practices, effective training, participatory decision making, clear communication of responsibilities, and fair recognition and reward systems. Although these elements make sense, they are still often overlooked. In addition, a positive workplace should include the reporting procedures for employees to follow if they suspect wrongdoing. Implicit in this is an understanding that communicating suspicions will not lead to retribution. A trusted individual who is assigned the role of fraud or ethics officer should have the authority to investigate any reported matter. Some organizations use a human resource department to maintain a positive workplace. Smaller organizations typically rely on the executive team to assume this role.

Proper employee management. Promote proper employee management practices. Organizations with proactive hiring and promotion policies can reduce their risk of hiring individuals who lack integrity and honesty. Background checks are part of this process. Using behaviorally based interview questions related to the specific position is another tool. Such questions might start with, “What would you do if …” An applicant’s responses to these questions can alert an interviewer to possible conflicts between a prospective employee’s ethical values and those of the organization. When making promotion decisions, look for these same types of conflicts.

Accountability. Establish expectations for accountability. Each employee should understand that the organization expects honesty and a commitment to high ethical behavior. All employees, especially new ones, should be trained about the organization’s values and code of conduct. These should be written and readily available. Organizations should also train employees to report any fraud they suspect. Examples of fraudulent actions include:

• Any dishonest or fraudulent act
• Misappropriation of funds, securities, supplies or other assets
• Impropriety in the handling or reporting of money or financial transactions
• Profiteering as a result of insider knowledge of company activities
• Disclosing confidential and proprietary information to outside parties
• Disclosing to other persons securities activities engaged in or contemplated by the company
• Accepting or seeking anything of material value from contractors, vendors or persons providing services/materials to the company. (Exception: gifts less than $50 in value)
• Destruction, removal or inappropriate use of records, furniture, fixtures and equipment
• Any similar or related irregularity

Disciplinary process. Communicate the disciplinary process for fraudulent behavior. Fraud deterrence can be strengthened if everyone in the organization understands the consequences of committing fraud. Credibility in the disciplinary process starts when the organization acts decisively to indications of alleged or suspected fraud. Investigations must be thorough. Actions taken against violators must be consistent. Finally, applicable controls must be assessed and improved as a result of lessons learned.

More information. Implementation of an antifraud program starts with your organization’s leadership. See our fraud services page for ways we can help your organization. The selected resources below can also provide more information to help you implement or refine your antifraud program and culture.

American Institute of Certified Public Accountants (www.aicpa.org):

Audit Committee Effectiveness Center (www.aicpa.org/audcommctr/homepage.htm)

Audit Committee Toolkit (www.aicpa.org/Audcommctr/toolkits/homepage.htm)

Antifraud Resource Center (www.aicpa.org/antifraud/homepage.htm)

Management Antifraud Programs and Controls (www.aicpa.org/download/antifraud/SAS-99-Exhibit.pdf)

Management Override of Internal Controls: The Achilles' Heel of Fraud Prevention

Sample fraud policy (www.aicpa.org/download/antifraud/81_sample_policy.pdf)

Sarbanes-Oxley Implementation Central (www.aicpa.org/sarbanes/index.asp)

Business Roundtable (www.brtable.org)

Corporate Governance Task Force (www.businessroundtable.org/taskForces/index.aspx)

Ethics Resources Center (www.ethics.org)

Reports from the Association of Certified Fraud Examiners:

2004 Report to the Nation  |  2003 Report to the Nation  |  1996 Report to the Nation