As originally published at ACFE Insights:
Growing evidence makes it clear that doing the wrong thing will cost companies dearly both in the marketplace and with law enforcement. Recent news shows that fraudulent business practices are bad for business. To wit,
- The 2010 COSO Report—Fraudulent Financial Reporting: 1998–2007, An Analysis of U.S. Public Companies reported that companies experienced a 16.7 percent drop in stock price within two days of reporting fraud.
- The SEC’s 2010 Performance and Accountability Report announced that the SEC brought 681 enforcement cases covering a broad spectrum of financial wrongdoing in FY 2010. Those enforcement cases resulted in $2.8 billion in penalties and disgorgement.
At the same time, evidence is mounting that companies that do the right thing enjoy considerably higher returns. As reported by the Ethisphere Insitute, companies that qualified for the ‘ethics index’ outperformed the S&P 500 before, during and after the economic crisis of 2008.
Such data provides the necessary ammunition in the fight against fraud, starting with cultivating an ethical work environment. Techniques and strategies may vary among ethical companies; there are a handful of tenets, however, common to all ethical companies. Those tenets include:
- Free information flow to board: organizations should strive to have their top compliance officer designated as a C-suite position. Board directors should ensure that direct lines of communication exist for the top compliance officer.
- Anonymous reporting mechanisms: Anonymous tips are the leading detection tool for fraud, with the 2010 Report to the Nations on Occupational Fraud and Abuse reporting that 40 percent of frauds are initially detected through tips.
- Leadership by example: Employees watch top management very closely. When top management does not exemplify the highest ethical standards such conduct plants the seeds of rationalization for committing fraud.
- Enforce superb ethics policies: Non-enforcement of known violations or inconsistent, seemingly surreptitious enforcement of company policies breeds confusion and possibly discontent strong enough to fuel rationalization for committing fraud.
- Inspired training programs: Orientation and ongoing training programs educate, empower and motivate the workforce to report fraud.
- Alignment of incentives with organizations values and goals: ‘buy-in’ mechanisms such as stock options and bonus pools can benefit organizations by reducing conflicts between personal gains and corporate success. However, incentives can illicit dysfunctional business processes and financial statement fraud. Organizations should look for ways to use incentives to reward acts of integrity as well as revenue-generating business activity.
As shown by the Ethisphere’s report that shows higher returns for ethical companies, creating a culture of shared success can help organizations reach both their economic and ethical goals. Add to that the penalties for fraudulent behavior dispensed by both law enforcement and the marketplace, it is clear that good guys do indeed finish first.