corporate-scandals

Do Scandals & Fraud Come From Poor Culture?

No one would give a burglar a key to their home. The same can be said of a hacker – no one would give them an online bank password, and no one would give an impersonator a piece of I.D.

But major businesses grant access to criminals all the time, in a figurative sense of course. They allow thieves and fraudsters to infiltrate their systems due to a corporate culture that encourages crime. Is your company’s corporate culture opening gaps for fraud and other crimes to occur?

You may not know outright, but there are lessons to learn from companies who have succumbed to scandals due to being too lenient with their employees. Even more important are what managers and leaders can learn to prevent such crimes from happening within their own walls.

How Corporate Culture Motivates Fraudsters

First and foremost, it’s important to remember that corporate culture applies from the top to the bottom and vice-versa. Everyone from the intern to the CEO falls into it. And even if some illicit activity happens out of sight, the effects of a corporate scandal will affect everyone in a company. Even those who have no idea what’s taking place can have their hands tainted simply because they are part of the company.

This can manifest in many ways:

  • Authoritarian leadership that’s corrupt can intimidate workers to adopt practices to cover up illicit behaviours among executives and managers
  • The fear of losing one’s job (and livelihood) can lead someone to stay in a company involved in corporate fraud
  • Manipulation and instilling a competitive spirit that motivates employees to lie and cheat to meet performance goals (common among younger and ambitious professionals)
  • A “closed-off” environment where departments rarely communicate with each other, and interactions are discouraged
  • A corporation where fraud isn’t willingly practiced, but lacks a clear code of ethics (extreme circumstances may motivate some to commit fraud)
  • A company that lacks effective and rigorous controls to prevent fraudsters who may act on their own

The list of cultural “deficits” within a business that can lead to corporate fraud goes on. The key takeaway here is that a business environment which allows for criminal activities to thrive is a greater risk for corporate scandals.

Examples Of Corporate Cultures That Enabled Fraud

Some of the biggest corporate scandals and fraud schemes in history took place because the culture they harboured was toxic and enabled crime in the first place. In fact, many of them practiced or showed signs of the cultural flaws listed above.

Toshiba

In July 2015, consumer electronics giant, Toshiba, announced that its CEO would step down after an investigation into a profit inflation scheme had started. According to reports, Toshiba overstated its operating profits by $1.9 billion (225 billion yen) dating back to 2008. Other reports indicated different figures – Kana Inagaki of Financial Times reported a $2 billion inflation while Jonathan Soble of The New York Times reported a $1.2 billion inflation.

An 82-page summary detailing the investigation revealed what it described as “a corporate culture where it was impossible to go against the boss’ will.” It also mentioned, “systematic involvement including top management, with the goal of intentionally inflating the appearance of net profits.”

Volkswagen

You most likely remember the infamous Dieselgate scandal that dominated the headlines in 2015. Desperate for growth and limited by North American emissions regulations, Volkswagen engineers created software that masked the high level of pollutants in their engines. When tested, their engines would pass off as safe.

The scandal began as early as 2007 and finally came to light in September 2016. A description of the Volkswagen’s management at the time includes adjectives such as “cutthroat and insular”, and “closed-off” since management frequently ignored employee concerns.

Critics also labelled the engineers there as “yes men”, willingly following management’s direction to install the software that would help the faulty engines pass emissions tests.

Takeaways

With both examples, it’s clear to see that executives and managers were too concerned with profits to care about the quality of their products or the reputation of their brand. This unfortunately extended throughout all levels of both companies, and employees were pigeonholed into complying with unethical tactics to generate more revenue. Again, the corporate culture of such a company affects everyone and is difficult to break if it has already been instilled.

How To Create a Culture That Discourages Fraud

With the examples seen above and causes of corporate fraud, it’s no doubt important to treat corporate culture with high esteem. In other words, it’s vital to treat your company’s culture as the lifeblood of employee morale and ethics.

If there’s a leniency towards the code of conduct, then a poisonous attitude will spread throughout the company. If there’s a high level or regard for the culture, however, an organization’s employees will more than likely avoid scandalous behaviour, or at least report such activities if they witness it.

Promoting Corporate Culture That Works Against Fraud

  • Encourage open collaboration and communication between all levels within an organization
  • Create a readable and visible list of ethics and values that serve as reminders for all employees, managers, supervisors and executives
  • Hold everyone accountable to the same rules, regulations and consequences (if engaging in illicit behaviour)
  • Establish clear controls such as processes and tools to discourage fraud and detect it faster
  • Reprimand employers who engage in illicit behaviour to set an example

Make Fraud Your Company’s Enemy All Across the Board

It’s impossible to know exactly what goes on in the mind of a fraudster. Yet still, a company’s corporate culture can deter them from proceeding with their acts. The more defined that culture is from the beginning, the easier it is to cast a wide net of positive influence throughout an organization. Not only will this discourage acts of fraud, it will encourage action against it.

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