Every successful organization follows the actions of its leadership. After all, that is why successful executives are called “leaders.” This is true in sports, business and certainly anti-fraud prevention.

Imagine a small-business owner expensing such charges as taking their spouse out to dinner, personal vacations or personal credit card expenditures as legitimate business expenses. And what about paying children who do not work in the business, expensing their personal vehicles or those of their spouse or children, or writing off your child’s tuition? The list of blatant executive fraud goes on and on. We have seen it all. What happens when others in the business, such as an internal accountant, see this unethical behavior—what are they to think?

Unfortunately, a common rationalization by white collar criminals is: “If the executive or owner can steal from the company, why can’t I?” The next thing you know, they do. Then we are called to assess the theft of the bookkeeper, who has no qualms in sharing with us that the owner does the same thing.

It’s a simple case of “monkey see, monkey do.” It is not uncommon for an employee to emulate what they see, and that extends to corporate behavior.

Management must lead by example. If you are the executive, you should be prepared to not only talk the talk, but be prepared to walk the walk. The organization’s ethical atmosphere begins at the top and trickles down to the rank and file.

It can be easy for management to set the proper tone. For example, effective leaders wanting to set the proper ethical tone within an organization would:

  • Talk to their employees about the importance of ethics and “doing the right thing”
  • Keep promises
  • Model ethical behavior
  • Treat employees equally
  • Establish recognition and rewards
  • Be team-oriented
  • Show that they care about your employees
  • Ensure that compensation is fairly administered
  • Attempt to segregate one’s personal life from their business life
  • Keep personal expenses out of the business
  • Not steal

It is management’s responsibility to communicate to employees what is expected of them and to reward integrity. An open door policy allowing employees to freely come in and communicate to you their concerns (for example, as embezzlement issue) should be second nature. You want their buy-in and confidence in your leadership.

Most employees want to meet expectations. But they are less inclined to be honest when pressured to meet a sales or profitability goal, or when they have some sort of a personal financial incentive that is tied to a sales or income number, or to a percentage that they can potentially fraudulently manipulate.

Management should want their employees to be an integral part of the business. Some of the best suggestions for sales ideas and cost reduction originate from the very employees the executive leads. Making them feel a part of the team goes a long way in building a solid relationship.

If that employee thinks the world of you and your company, there is a high probability they will want to advise you if they see anyone attempting to steal from the business. Because they hold the company in such high regard, these loyal individuals will take those actions personally and be more likely report them to you.

Today’s employees are woven from a different fabric than the baby-boom generation. Some estimates reveal that one-half of employees would report fraud if they were aware of it. Fewer employees today will report financial misconduct than employees 15 years ago. Employees under age 30 are the least likely to report at all!

The three most important ways to lead people are: 1) by example; 2) by example; and 3) by example. Management setting the proper ethical tone cannot be over emphasized. It’s absolutely critical when it comes to establishing an effective fraud prevention program.

For more information on fraud prevention in the workplace, download our e-book, Fraud Prevention Measures. Questions? Contact Frank Suponcic in our Valuation and Litigation Advisory Services Group at 440-449-6800.

New Call-to-action