To fight fraud, manage culture

Organisational culture plays a key role in enabling detection, mitigation, and prevention of financial fraud and misconduct, but leaders need to be active in assessing and shaping internal culture, according to a new study by the Anti-Fraud Collaboration.

The study, released Tuesday, found that “[a] proactive approach to culture can deter various types of misconduct and promote behaviours that enhance morale and productivity”. The study found that a strong, ethical culture can act as a bulwark against the pressure of the “fraud triangle” of opportunity, pressure, and rationalisation that often leads to fraud and corruption.

The study also concluded that organisational leaders should take ownership of the process and engage a wide variety of tools to assess and manage culture. Doing so “allows for early detection of warning signs” and empowers leadership to “take active steps to prevent and address problems”, according to the report. The Anti-Fraud Collaboration is a joint project between the Center for Audit Quality, which is affiliated with the American Institute of CPAs; Financial Executives International; the National Association of Corporate Directors (NACD); and The Institute of Internal Auditors.

A weak organisational culture “allows or encourages … illegal, unethical, or risky behaviour”, and is often the underpinning of scandal and misconduct, according to the report. That’s why “tracking the leading indicators of culture should be a fundamental component of managing risk”.

But what to look for? The study cited an NACD report that identified the following as leading indicators of culture:

• Explicit and implicit rules.
• Norms of behaviour and interaction.
• Compliance and ethics policies.
• Incentives.
• Recruiting and training activities.
• Processes for decision-making and prioritisation (including budget setting).
• Communication and information flows.
• Leadership styles.

The study found that there were multiple tiers of ownership for culture within an organisation. On the highest levels, boards should be overseeing “how culture is defined and aligned to strategy” along with monitoring changes, assigning responsibility, creating accountability, and challenging their own board culture, with audit committees taking the lead.

On a more operational level, management should be regularly communicating cultural directives and visibly demonstrating cultural standards to the wider organisation, according to the report. Another key area for management is the regular assessment of an organisation’s culture.

According to the Anti-Fraud Collaboration, when assessing culture to help bolster anti-fraud efforts, leaders should be looking at the pressures that employees face, which resources employees have to report wrongdoing, whether the internal imagining of the culture matches the reality, what the obvious strengths and weakness of the culture are, whether there is enough information to gather an accurate picture of the culture, and where problems are most likely to occur.

The study offered the following steps and tools for assessing an organisation’s culture.

Culture dashboard. A culture dashboard is a digital tool that can be an effective way of tracking trends and changes over time. The dashboard can include “metrics from a variety of areas and reports in numerous forms”, according to the study. There is no standard format for culture dashboards because every organisation has different needs and structures.

Cultural orientation. While not a direct element of assessment, steering employees towards an ethical culture starting with hiring and onboarding is an important step in the process, according to the study. This allows leaders to grow a strong culture instead of the much more difficult work of repairing a broken culture.

Talk to employees. The study found that information gathering directly from “[e]mployees can offer critical insights into the realities of an organisation’s culture”. That means conducting employee engagement surveys, focus groups, self-assessments, and exit interviews. The study also found that paying attention to employee trends like retention and turnover can help leaders find hidden areas of cultural weakness and strength.

Performance metrics. Designing an employee’s performance goals to align with cultural strategy and then measuring how they do can offer significant insight into a culture, according to the study. Pay and promotional incentives based on cultural goals can also demonstrate whether employees are maintaining the necessary standards.

Problem identification. How often are employees calling an internal whistle-blower hotline? How many internal incident reports have been filed in the past year? Are customers or vendors complaining about employees on a tip line or website? Are there visible social media complaints about your organisation? Are there metrics that flag problems that can be useful in assessing an organisation’s culture?

— Drew Adamek (Andrew.Adamek@aicpa-cima.com) is an FM magazine senior editor.