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Employee fraud — an organizational perspective - EY - India

Finesse: November 2010 - February 2011

Employee fraud — an organizational perspective

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Employee fraud is back in the news.

While a few recent cases have gained media attention due to the huge sums and the parties involved, almost all financial services organizations grapple with multiple incidents of relatively smaller magnitude or of cases detected and managed just in time. This is despite their continuous focus and investment in putting in place robust fraud prevention, detection and management frameworks.

Clearly, there is a need to understand and manage this issue better through an organizational and human resources management approach.

From an individual’s point of view, there are three conditions required for employee fraud to occur:

Need
There could be many reasons for an employee’s overpowering need to commit a fraud, e.g., medical/family emergency, debt, living beyond one’s means, gambling, etc. However, beyond taking care of basic hygiene factors such as paying reasonable or market-competitive compensation, providing employee-friendly benefits, etc., there is little influence an organization can exert in this matter.

Opportunity
The relative ease of committing fraud and remaining undetected is inversely proportional to the strength of the safeguards/frameworks put in place around fraud prevention and detection. While increasing sophistication and rigor could somewhat lessen the opportunities available, a determined insider, who is sufficiently motivated, can figure out a way to override these controls for at least long enough to cause damage.

Rationalization of the act
An employee with a strong enough need and a reasonable window of opportunity to commit fraud can find ways to rationalize his or her act:

“The organization owes me as I am underpaid/overworked or both.”
“I am only taking a temporary loan, and will repay the organization/customer.”
“This is the only way I can achieve the stiff targets expected of me.”
“I will not be caught, as this can be detected only after years.”
“Why should I not fleece the customer if the organization does not know/care to know?”
“Others have done it and got away with it.”

In order to manage employee fraud, organizations should work on the reasons which fraudulent employees could use to justify the acts in their minds.

This, in turn, can be addressed through a three -pronged approach:

  • Organizational policy

    Having a set of unambiguously drafted and unequivocally articulated organizational policies relating to employee fraud is a pre-requisite.

    These include policies pertaining to fraud:

    • Prevention, e.g., employee background checks, compulsory job rotation, avoidance of potential conflicts of interest, access to sensitive data, restrictions on employee personal investments, etc.
    • Detection, e.g., maker-checker-auditor approach, vigilance squads, compulsory leave, multi-level customer interaction, whistle-blower protection, etc.
    • Management, e.g., internal investigation process, disciplinary actions including criminal proceedings etc.

    Detailed and continuous communication of these policies is necessary to drive a clear understanding of the behaviors expected and the consequences of not complying with these.

  • Organizational incentive processes

    Rewarding short-term achievement over long-term impact could end up incentivizing behavior, which, while meeting organizations’ short-term targets, may not be in line with its long-term goals. In HR terms, disproportionate focus on the year’s KRAs against long-term contribution and value creation could result in employees taking a short-term approach to their work.

    Similarly, while “stretch” targets are necessary, setting them at unreasonable levels may tempt employees to take shortcuts. All in all, the over aggressive attitude of management toward profitability and performance can lead to an environment that is ripe for fraud. Similarly, a lax attitude toward internal controls and valuing ends over means can also result in pitfalls.

    To a large extent, effective deployment of a detailed and integrated approach to organizational and individual goal setting, e.g., Balanced Score Card, can help in ensuring the correct alignment of organizations and individual goals and actions.

    How an organization responds or reacts to detected fraud cases also plays an important role in influencing employees’ actions. A “zero tolerance” policy is necessary but incomplete if not implemented swiftly, uniformly and consistently.

    Timely communication to all employees, covering the requisite details of the committed act, without compromising on the confidentiality of any whistle-blowers involved, e.g., what damage was incurred /avoided, and what new safeguards have been put in place, etc., is a good practice.

    This helps in reducing speculation around the people involved, building more transparency and making employees partners rather than just recipients of management actions.


  • Organization culture

    Perhaps the most important and least appreciated aspect is the impact of the prevailing organizational culture on employee fraud. Again, while a clearly articulated organizational value statement and a code of ethics/ conduct are hygiene factors, their actual daily observance within an organization is the real differentiator.

    Leaders and managers need to realize that the behavior exhibited by them is under continuous scrutiny by their employees, and influences their own behavior.

    Their actions and responses to “litmus test” situations — such as those requiring a long-term vs. short-term perspective, demonstrating commitment to customers, quality and fair play, and dealings with regulators — influence the conscious choices made by employees to a large extent.

    Furthermore, how leaders and managers are rewarded and how their careers are affected go a long way in shaping the personal career strategy of an employee.

    Sustained investments on all round leadership capability building of key executives help in communicating the right organizational intent to all employees.

    An organization’s overall philosophy on integrity in the external environment is also important. It cannot be focused only on narrow internal interests, while being oblivious to lack of probity in the public domain and it own possible connection to it, whether directly or indirectly. An organization that aims to be a model corporate citizen with a “clean” image is more likely to inspire a high standard of behavior among its employees.

In summary, a complex issue such as employee fraud requires a multi-pronged approach, consisting of employee-friendly HR policies, intelligent organization design and control systems, clear organizational policies, smart incentives and leadership by example, both within and outside it.

Amit Johari
Senior Manager, People & Organisation Advisory

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