Professional Documents
Culture Documents
Corruption
The Anatomy
of Fraud and
Corruption
Organizational Causes and Remedies
Tomas Brytting
Richard Minogue
Veronica Morino
www.gowerpublishing.com
British Library Cataloguing in Publication Data
Brytting, Tomas.
The anatomy of fraud and corruption : organizational causes and remedies.
1. Problem employees. 2. Organizational behavior. 3. Commercial crimes. 4. Employee
crimes. 5. Commercial crimes Prevention. 6. Employee crimes Prevention. 7. Business
ethics Study and teaching. 8. Employees Training of.
I. Title II. Minogue, Richard. III. Morino, Veronica.
658.3'045dc22
Library of Congress Control Number: 2010940031
ISBN 9780566091537 (hbk)
ISBN 9780566091544 (ebk) II
Contents
List of Figures
List of Sketches
List of Tables
About the Authors
Preface
The Issue
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xiii
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3
4
Chapter 2
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Chapter 3
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Chapter 6
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Chapter 7
Trust in Organizations
Common Values a Double-Edged Sword
Blind Trust
Cynicism
Summary
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Chapter 10
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contents
Chapter 11
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Chapter 12
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Chapter 13
Chapter 14
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Chapter 15
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Chapter 16
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Chapter 17
Workshop Techniques
The Business Case for Workshop Training
Attitude
See the Fraudster in your Heart
Structuring the Workshop
Presentation Tactics
Brainstorming Techniques
Case Studies and Group Work
Dramatic Techniques
Dealing with Workshop Saboteurs
Summary
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Chapter 18
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Chapter 19
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Chapter 20
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Bibliography
Index
contents
ix
Ready to Listen
Recognizing the Symptoms
Dealing with Informants
Incident Management
Communication of Results
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List of Figures
4.1
4.2
4.3
5.1
5.2
5.3
5.4
5.5
9.1
9.2
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List of Sketches
12.1
12.2
13.1
14.1
15.1
16.1
17.1
18.1
19.1
20.1
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List of Tables
5.1
5.2
12.1
14.1
14.2
18.1
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Richard Minogue
Richard Minogue BSc, CPA, CIA graduated from the Business School of
the University of Notre Dame, Notre Dame, Indiana where he specialized
in accounting. He has worked for 35 years in internal auditing, financial
management and fraud risk management; performing investigation, litigation
support and awareness training assignments in dozens of countries and on six
continents. He holds the William S. Smith Certificate of Excellence awarded
by the Institute of Internal Auditors. Richard Minogue currently works as a
consultant for fraud prevention, detection and investigation.
Veronica Morino
Veronica Morino has a BA in Sociology of Work and a Masters Degree in
Organisational Science from the University of Rome. After initially helping
organizations address dysfunctional issues, she broadened her expertise in the
area of inappropriate and illegal behaviour. She worked as investigator into
international fraud and corruption for some years and became increasingly
convinced that prevention is far more cost-effective than investigation. In the
last five years she has specialized in the development of successful anti-fraud
and corruption programmes for global companies.
The most captivating and original textbook I have read about fraud and
corruption. Drawing upon a range of non-traditional disciplines such
as literature, conflict resolution and psychology, the book is not only
enlightening but also entertaining. I look forward to putting the ideas
into practice.
Pall A. Davidsson, Director and founder of Ethikos,
the Icelandic Centre for CSR
Preface
We are all touched by fraud and corruption. The goods we buy are dearer, the
environment is dirtier and our pensions are smaller as a result. The world is
poorer. There are undoubtedly some winners, at least as measured in financial
terms, but their winnings are small compared to the total losses. Fraud and
corruption are the enemies of productivity. Fraud and corruption could be
described as highly wasteful processes whereby benefits are transferred away
from people who deserve them to others who dont. They violate our idea of
justice and thereby also contribute to businesses often undeserved reputation
of being thoroughly cynical. In spite of the importance of the problem, business
schools and management continuing education programmes have until very
recently largely ignored fraud and corruption as risk areas that might be
managed. Certainly most managers working today never received formal
training to help them adequately deal with these problems on a practical
level. Experienced practitioners seldom find the time to think about how their
experience could be used for training others in how to recognize patterns and
signs of fraudulent practices. The ambition of this book is to help fill this void.
Most of the worlds wealth is controlled by organizations, each made up
of people; owners, directors, managers and other employees working in a
coordinated manner towards their respective common goals. Organizations
(or you could say, its stakeholders) are often victimized by fraud. Similarly,
organizations are often involved in serious corruption, for example paying bribes
in order to obtain business or accepting bribes in exchange for favouring particular
contractors or suppliers. Directors, managers and employees are responsible
for protecting the organization against fraud and avoiding corruption, but at
the same time directors, managers and ordinary employees are often (but not
always) involved as perpetrators or accomplices. The fox is guarding the chicken
coop. This is the inherent dichotomy of management fraud.
In this book, we will be mainly concerned with fraud and corruption in the
organizational perspective. We will discuss how to prevent or reduce it. From
the studies that have been done, it appears that despite massive efforts in the
area of internal control, little or no progress has been made in managing these
risks. There is of course a measurement problem; you cant measure what you
xx
havent detected yet. Any real reduction in fraud and corruption would only be
apparent after a delay of some years. But there is no evidence to indicate that
the disease has been cured yet. Fraud and corruption seem to be impervious to
control efforts. Are we lacking something in our approach?
We suspect so. Certainly organizations should continue to improve
their checks and balances, their internal controls, to make it more difficult to
conduct unauthorized transactions. But much more effort is required to educate
employees, including managers, so that they will understand the risks, be able
to competently solve the dilemmas, recognize the danger signs and abstain from
the temptations themselves. That is not to say we can make dishonest people
honest, probably we cannot. But we can ensure that the people guarding our
chickens are enlightened, that they are aware of the risks and conscious of
what is appropriate and what is not. We need to motivate our managers and
employees, and cultivate a culture that is both resistant and resilient to fraud
and corruption. An organization equipped with effective internal controls and
a majority of motivated and risk-aware employees will be much more able to
resist fraud attempts by the intractable minority. The organization that has also
prepared itself for the eventuality of fraud and corruption incidents will be more
resilient, able to absorb the shock and bounce back when incidents do occur.
The concepts of the control environment, tone at the top, soft controls
and so forth are not new. But we believe that the need to develop a control
environment that is both resistant and resilient to fraud and corruption is not
well understood. We wish to contribute with this book to a better understanding,
both theoretical and practical, of this concept. On the theoretical side, much has
been written about why people commit fraud or break the rules in general. We
will build on this work with an examination of the organizational, as opposed
to the individual, psychology. What are the structural and cultural elements in
an organization that are likely to enable fraud? How can we recognize them?
How can we change them?
On the practical side, approaches for raising fraud awareness within
organizations have begun to appear, although the total awareness effort is
dwarfed by efforts spent on developing and maintaining internal controls and
on performing fraud investigations. In many organizations the entire fraud
awareness programme is limited to a warning paragraph in the code of conduct
posted on a rarely visited internal web site.
As authors, we have worked from both ends, the theoretical and the practical,
and attempted to bridge the gap in between. The need is there. Universities and
Preface
xxi
schools have not been able to provide students with the practical knowledge
and tools they will eventually need to fight fraud. Managers, also lacking this
know-how, find themselves reacting to fraud rather than preventing it. We
found that a theoretical study of fraud in the organizational perspective has
provided valuable insight into why some of the practical methods we have
already tried work, while others do not. We believe that applying the methods
we describe to increase resistance and resilience will lead to a significant
reduction in the frequency and severity of incidents and major cost savings
for the organizations that adopt them. The theoretical content is to be found
mainly in Part I, where the main text was written by Tomas Brytting and the
more practical applications in Part II of this book, written mainly by Richard
Minogue and Veronica Morino. The two parts of the book were written in close
consultation between the authors. Then, as we each learned from the others, we
together refined our theories and developed our practical guidelines into what
we hope is a coherent whole.
We have included, by way of example, six fraud narratives based on real
cases of fraud or other kinds of dishonest conduct. The narratives themselves are
fictional and were written specifically for this book (a very special thanks goes
to Nigel Iyer who so generously offered to give them both literary forms and
qualities). The names and other facts have been changed, but the stories reflect
the essence of what actually occurred. We refer to these stories throughout the
book and compare them to our theory.
We refer often to fraud and corruption together, although they are two
distinct activities. Traditionally they are also treated as separate problems.
Perhaps it is because fraud is seen as a business problem, while corruption
is seen as a political one. Stock exchange regulators and internal auditors are
concerned with fraud, while the United Nations, the Organisation for Economic
Co-operation and Development (OECD) and Transparency International are
concerned with corruption. This separation ignores the fact that the private
sector is the major source of corrupt payments to high-level public officials.
We have chosen to treat fraud and corruption together and interchangeably,
because in the organizational perspective that we are examining, they share
many similar characteristics, and they can be addressed with the same methods.
For the sake of simplicity, we do not concern ourselves with legal distinctions
between fraud and theft, embezzlement, misappropriation, corruption,
extortion, money laundering, larceny, wilful neglect, gross negligence and so
forth. Our intention is to examine misbehaviour at a general level.
xxii
We also gratefully thank Nous Design, who prepared all of the diagrams
and pictures for this book, as well as Erik Blennberger, Jorgen Hansn and
Robert Minogue for their valuable advice, comments and corrections. Finally
we would like to thank our editor at Gower, and all those who contributed with
their help and support.
The Issue
it is necessary to know well how to disguise this (hypocritical)
characteristic, and to be a great pretender and dissembler; and men are so
simple, and so subject to present necessities, that he who seeks to deceive
will always find someone who will allow himself to be deceived.
(Machiavelli, 1532/2004)
Niccol Machiavelli (14691527) thought he knew all about power, and gave
the managerial wannabe a piece of good advice: trust no one because no one
trusts you. Cheat if you can because others will cheat on you! Some say he
showed future managers the road to success. But at the same time, and maybe
unintentionally, he also revealed to the rest of us several profound insights
into the logics and dynamics of fraud and corruption. It is a bit disappointing
though that we still havent learnt this lesson of his. Half a millennium later
(Machiavelli wrote his book in 1513) we seem to lack enough awareness and
knowledge to protect ourselves from fraudulent characters. The statistics are
indeed uncomforting.
The Association of Certified Fraud Examiners (ACFE, 2008) in the US
reports that fraud and corruption, one way or the other, is touching practically
every organization:
Participants in our survey estimated that U.S. organizations lose 7% of
their annual revenues to fraud. Applied to the projected 2008 United States
Gross Domestic Product, this 7% figure translates to approximately
$994 billion in fraud losses. [Emphasis in original]
PricewaterhouseCoopers (2007) reported that 43 per cent of all corporations
worldwide have had experience of significant fraud. On average, these
companies lost 1.2 million USD per year plus costs for taking care of the
problems once discovered.
Adding to the problem is the fact that fraud and corruption most often is a
hidden form of crime. According to ACFE, almost 70 per cent of the fraud cases
in private companies were detected by accident, or through some form of tip.
xxiv
Thus, it seems that regular internal control systems are highly inadequate to
combat fraud and corruption.
Treating fraud and corruption as a form of crime has certain implications.
First and foremost, the main focus is on the perpetrators. Who are they? How
is the scam set up? How do we collect evidence? How can we secure and regain
the money that was stolen? Fraud and corruption becomes an issue of criminal
investigation.
Our main focus is not to support fraud investigators. Hopefully they will
find this book useful, but primarily this book has three other target groups.
Firstly Bystanders; you who witness, suspect or feel what is going on, we
think you are the key people when it comes to detecting fraud and corruption.
Unfortunately, you might also be fraudsters in spe if you dont watch out for
warnings signs. Our aim is to increase your awareness of the risks and your
knowledge to deal with them. Secondly, Designers of Organizations; both
organizational culture and structure are crucial ingredients in the complex
process that eventually leads to fraud and corruption. Our ambition is to
make you understand how corruptive organizational processes work so that
you can ensure your organization is resistant to fraud and corruption. Finally,
Trainers; you who need to train employees to be more aware and to recognize
the warning signs in order to put fraud and corruption under control. We
supply ideas and tools for you.
Part I
The Anatomy
Introduction to Part I
The Anatomy
2
I could a tale unfold whose lightest word would harrow up thy soul,
freeze thy young blood make thy two eyes, like stars, start from their
spheres, thy knotted and combined locks to part and each particular hair
to stand on end ...
Hamlet, I, v, 15
We begin with a narrative of six cases of fraud, as described from the point of
view of either the fraudsters themselves or other persons close to the events.
While these cases are based on real events, the narratives themselves are
constructed. Some of the common dynamics of managerial fraud are illustrated
in the cases, including:
Case 1: Rose
Dear Tom,
Since you are also heading up new business ventures I thought I would tell you the
following story from when I was Director of Sales for the Nordic and the Former Soviet
Union markets.
When it all came to a head way back in August 2002, we knew we were losing money, I
had been expecting something like this. Criminals, the lot of them, I thought! We should never
have opened a company or had delusions that we could break into the former Soviet Union
so easily. First we had the problems with organized crime gangs in Odessa threatening our
people and telling us that we dont even own our plant now this. I could not believe it. A
three-page letter packed with ludicrous accusations against Jimmy, our Managing Director,
who we sent out there less than 18 months ago to set up our operations. Then its followed
by 50 pages of documents, so-called evidence most of which are in Russian or some other
language which I could not make head or tail of. Of course I called Vladimir, our lawyer who
represents us in Moscow, and he said he would look into it.
Less than 48 hours later, Jimmy turned up in my office, heavens knows why, swearing at
me, as if I personally had accused him of all those crimes, most of which I didnt understand
anyway. Anyway I managed to calm him down and then thankfully Vladimir calls and tells
us both that he has found out that the allegations are coming from the former local Finance
Director in Kiev who Jimmy had sacked a few months ago because he suspected he had
links to that Odessa mob. It seemed like our young Finance Director was just trying to scare
Jimmy. So thats that; or at least I thought then.
However more letters kept on coming and just around year end I went to see Internal
Audit to ask if they could put this one to bed, you know, cover my back. We had lost so
much money out there this year by shutting everything down, that I did not want to be the
only one taking decisions and carrying the can. They said they would look into it.
When they came back to me, I found what they had to say very hard to accept. They
said that they had intelligence that Vladimir is the one with links to organized crime and
shouldnt be messed with. I thought we had checked him out but apparently no one ever
did (or could!). It turns out Vladimir and Jimmy have plundered our operations, our plants,
our customers and even our brands into a shadow company they set up and there is not that
much we can do about it. This so-called young Finance Director was apparently trying to
warn us and save what he knew was in fact a profitable business we just did not know
that!
Its then I make my next big error of judgement. I simply couldnt, and wouldnt believe
the auditors. They said we had lost a lot but there was a chance we could get out of this
one. Instead I stalled and asked for more evidence. I knew Jimmy well and was convinced
that he was one of us, that he would never betray us!
But I was wrong and in the end it felt good to walk into the Head of Audits office
and admit it. I was quite surprised how pleasant he was. He said if he had been in my shoes
he would have found it hard to believe too, but he was paid to be a cynic!
We both agreed that the people you least expect to be stabbed by are your friends, et tu,
Brute?
I hope you take this for what it is meant to be a note of caution.
Your friend,
Matt
10
Case 2: Build-IT
By Rebecca Thole
14 May 2010
The public prosecutor yesterday filed
criminal charges against David Kyle,
a former regional manager of Build-IT
Limited. In an apparently related matter,
Build-IT last year reported to the European
Community anti-trust commission that one
of its regional divisions had participated
in a cartel arrangement which effectively
controlled contract awards within its
geographical area. The arrangement took
place, according to their report, without
the knowledge or approval of higher
management. In a press release at the time
Build-IT stated that it does not condone
such activities and that those responsible
would be held liable.
Sources that wish to remain anonymous
because they are not authorized to speak
to the media have told us that suspected
illegal behaviour was reported more
than three years ago during an internal
training programme at Build-IT group
headquarters. No actions were taken
at that time, but in planning stages of
a second workshop it was decided to
follow-up the earlier suspicions as a
pedagogical case study, to bring more
of reality into the course. It was soon
discovered that key Build-IT employees,
including regional manager, David Kyle,
had secret financial interests in companies
working for Build-IT on a sub-contractor
basis, and were using their authority to
11
12
13
the amounts each month across several companies. Our shared services
centre never asked any questions as long as the invoices matched
purchase orders.
It started getting difficult when Johnstone asked for more and more and I
told him that I was unable to as people would notice. By then I was beginning
to feel both owned by and afraid of Johnstone. I was visited in my home by
some rough and pushy people who insisted that I buy the artwork they were
selling. I knew that this was a threat from Johnstone. In the end I am glad
that somebody blew the whistle as I felt I had no way out.
From what I can recall I have received the following benefits from
Johnstone during my employment here:
Cash
Jamie Stevenson
14
Case 4: Babylon
Memorandum Strictly Confidential
From: <James Brooke> Chief Financial Officer
To:
Re:
Babylon case
2.
Small Talk has few staff but use a network of sub-contractors which
they mark up heavily, between 200 per cent and 1000 per cent. They
also use illegal labourers paid in cash.
3.
15
4.
Your own staff acts as a sales force for Small Talk and Michael
Ashgarde. They handle the many quality complaints, and defend
the company. Nobody questions Ashgarde. He has taken over much
of the work that your staff should be doing themselves.
5.
Purchase orders to Small Talk are routinely created after the fact,
when the work is finished and invoiced. Approved budgets are also
modified after the fact, eliminating variances. Ashgarde himself
used the term living budgets.
6.
We have no formal contract with Small Talk and the work has never
been put out to competitive tender. Our procurement department
has been totally excluded.
7.
Small Talk can claim ownership over all the designs and intellectual
property, for what they are worth, related to our events and
exhibitions.
Whilst it seems that we have given Ashgarde and his company a licence
to print money we are still not sure how this situation came about. It started
long before you or I joined the company. We have good grounds to believe
former senior management, including the person we have talked about from
many years, are still involved as hidden owners. The exact relationships and
amounts will be difficult to prove. There is however clear evidence that people
in your department have received benefits such as paid vacations or other gifts
in violation of policy.
Proposed next steps
I would like to discuss with you a full re-tender of the contract(s) for events
and exhibition services. The tender process should be run independently by our
central purchasing department. Whether Small Talk would be invited or not is
a matter for discussion.
This may cause protests within your department which you will have to
deal with. I know you think highly of the manager in charge and I believe she
will protest strongly. But frankly, we have to bring the situation under control
and if employees cannot accept that then they are welcome to seek employment
elsewhere. I look forward to discussing this matter with you Thursday.
16
17
A culture where senior managers (including the top man himself) have
claimed for BIG private purchases (clothes, holidays, family dinners at
posh restaurants and so on) on their travelling expenses.
At least three members of the management (including again, our top man)
have secret ownership in at least three suppliers AND two major sales
distributors. No wonder they were getting such a good a deal!
People who speak up get fired (Max was not the only one) and sometimes
offered money to shut up.
18
Our top man and the head of purchasing has bought land from a developer
at a knock-down price, as a reward because they managed to move our
regional Head Office to the expensive premises owned by the same property
developers.
Our local management and some of the former managers seem to own the
travel agency which everyone at the company uses.
They seem to have acquired a pot of black money (from our Head Office!?)
which they are using for sweetening and bribing all sorts of people.
I think Ill stop there. It looks like we could prove all of these in a court of law but the
top management have decided it is time to interview the main offenders first, so I am going
to have to plan for that. Maybe they got a little worried about my last two findings.
5th June
Today was interesting. We interviewed five key managers, including the top guy. They
were interviewed separately and simultaneously. I can tell you, they all were happy
to talk voluntarily, except you-know-who. It was amazing. Four of them confessed to
being involved in fraud and have been dismissed. Only Mr Big denied everything and
became very nasty indeed. He thinks everyone worships the ground he walks on; it
must have been a shock for him. But we had so much evidence against him that our
legal advisors told us we could sack him, so we did. A caretaker regional manager and
team have flown out from Head Office and will start tomorrow. Our job will be to clear
up the rest of the mess.
5th November
Everything has gone full circle now. The company is doing well now and the new
management have had a baptism by fire. I am pleased that this case is over but my
happiness is tinged with a little frustration that we never really got to the bottom of it (or
should I say the top). Since the people we fired are not retaliating then we have decided not
to pursue criminal action against them as that may be too costly and drag on.
And what about Max? Well hes still mad. He feels that the people who wrecked
his life did not get their dues and now hes harassing us, threatening to go to the
newspapers. Maybe he just wants money; I guess thats part of it.
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22
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26
Our closest cousins, the chimpanzees, are capable of real deception, but
we are still talking about fairly simple deception, based on a desire to get
immediate gratification. The scientist observer, who has the advantage of being
able to see the big picture, can see through the chimps deception without effort.
Human deception is at an entirely different level of sophistication. We are all,
relative to lower species, masters of deception. As young children we attempt
to manipulate our parents, and when we are out manipulated we study their
tricks. We learn to bluff and keep a poker face when needed. In competition, we
allow our adversaries to underestimate our capability. All war is deception as
Sun Tzu said in the ancient Chinese book on the art of war.
The perennial presence of corruption begs for an explanation. We all
know about the tools used to combat corruption: good upbringing of children;
rewards for honesty; punishment for theft and lies; teaching of professional
ethics during training; surveillance systems at work; legal enforcement;
stigmatization of thieves and fraudsters. But still greed prevails! We also know
that few things are as efficient in binding people together as sharing a secret or
having a common enemy. That shared secret might be the occasional borrowing
of the company car for private errands, private netsurfing during working
hours, or pinching paper and pencils for the kids, knowing that the others
do the same. What is acceptable at the peer level certainly varies depending
on the organizational and regional culture, but to the extent it is accepted the
common enemy is The Rules, The Law or The Superior. Therefore, on a small
scale, corruption and petty theft in a place of work may actually create positive
feelings and ties of trust and confidence among staff. It may even increase the
emotional affiliation with ones place of work and increase the effort and care
put into it. Perhaps this is an attempt to pay back a debt? For whatever reason,
corruption, to a certain degree, may in practice be seen as fair and may even
increase productivity. Then why fight it with all possible means, risking a good
atmosphere? Is implementation of a zero-tolerance policy towards fraud and
corruption really worth the cost? Isnt some degree of fraud and corruption
part of our nature?
27
28
The local general manager, Mr Big himself, met regularly with group colleagues
and superiors to discuss strategies, sales campaigns, products, financial results
and other aspects of the business. Within this group, he played the part of
the loyal manager and was respected and admired by all for his outstanding
success in his market. No one suspected he was running the business for
his own personal benefit, that the accounts were false and the apparent
success unsustainable. Any visitors, whether VIPs or lowly auditors were
treated royally and left with a favourable impression. Even as the inevitable
collapse approached, Mr. Big was calmly negotiating his own early retirement,
as someone who had achieved every goal and wanted to move on to new
challenges. (Example from Case 5, Mad Max, p. 17).
29
Summary
The ability to deceive is crucial for all living creatures. The law of the survival
of the fittest supports the development of deceptive capabilities, but requires
also abilities to detect and punish swindlers and thieves. Thus, fraud is not a
form of incompetence, rather the opposite. It is natural and sometimes even
admired. This explains both its frequency and hardness.
In the corrupted currents of this world offences gilded hand may shove
by justice.
Hamlet, III, iii, 57
Social Constructivism
Social constructivism comes in many different versions (Barlebo Wenneberg,
2001), a complication which we will not deal with in any detail here. However,
32
33
did the secretary and the manager realize that this was theft of company time
as well as fraud, since it was then found out that the managing director had
paid for only one of the phones while the other was registered as company
phone. (Example from Case 6, Lapis Lazuli, p. 19).
Saying that fraud is wrong because the law prohibits certain acts and calls
them fraud, is a circular reasoning at best. It does not explain why we have
called them illegal in the first place. A specific act will be defined as fraud in a
society when there is a certain degree of consensus about it. If few people dare
to challenge that view, or if they fail when trying, the subsequent common
understanding might be formalized as a law. The law then should be seen as
nothing but a formal expression of a social consensus or as a majority view; and
just as this understanding might differ from society to society, so may the law.
Of course, most people talk about, and experience reality as something
external to them, as something that seems to have an independent existence.
But one could argue that the only things we have, in order to make judgements
and decide on what to do, are internal sense perceptions and mental
interpretations. What people do, their actions, are wholly dependent on these
internal interpretations and not on external facts.
For instance, someone might notice as a fact that the company in which he
is employed has a positive cash flow and interpret that cash flow as a solution
in search of a problem. For him a suitable problem is the financing of a new
private summerhouse in Greece. The rest is a question of implementing a fraud
scheme that will match the solution with the problem. Is his problem real or
false? In fact, that question is irrelevant. The important thing is whether he acts
in accordance with this notion of the world.
Now, our interpretation of facts is seldom strictly individual. Instead there
is a strong tendency in groups to think and react as a collective. For instance,
some interpretations people make may not work as a basis for common action.
Some may raise opposition from powerful sub-groups. Some may even be so
divergent, wild or crazy that their proponents will be put aside, for example,
sent to jail or be hospitalized. Social constructivists therefore use the expression
that reality is negotiated.
The most radical of them would even doubt the existence of anything we
could call objective facts or reality. Instead they would argue that what we
call reality is in fact a negotiated social construction. Fraud then, as well as
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However, the fact is that many people who live close to a fraudster dont
have these reactions. They may agree on the common definition of fraud in their
society, and they would probably also confirm that fraud does exist; somewhere
else. But they may still fail to identify the specific events taking place around
them as fraud. Or more precisely, with the same knowledge, outsiders would call
it fraud. However, insiders often seem to prefer to live in a world where fraud,
as something morally wrong, does not exist. The same goes with corruption. The
people in the vicinity dont seem to realize what is going on.
The tricky and philosophical question becomes: are they then making an
incorrect construct or is it simply eccentric? Is there a right or wrong here, or is
it all matter of taste?
Moral Relativism
This comes close to asking whether also moral classifications in general are
arbitrary, which is the basic idea behind moral relativism. What gives some
of us the right to tell others that they are behaving in an immoral way? Or,
that their interpretations of fraud and corruption are wrong? Isnt that showing
disrespect for other value systems than our own? Arent respect and tolerance
some of the most fundamental values of the modern society?
By raising these questions moral relativism warns, and rightly so, against
letting our moral reflection turn into bigotry or chauvinism. But, on the other
hand, these objections also illustrate quite clearly the inherent paradox with
moral relativism: it cannot do away with the idea of objective values. We all,
relativists and non-relativists alike (apart from hardcore cynics) seem to embrace
respect and tolerance as basic values. Respect for each individuals search for
moral guidance and for meaning in life lies also at the heart of the relativist.
This reference to respect is also one strong point from which we may condemn
fraud. The fraudster does not show respect for others; other individuals, a
company or community, and this ought to also upset the relativist. Fraud always
means that someone has been deceived, and that someone has suffered an unjust
disadvantage. As trivial as this statement may seem, it reflects a fundamental
starting point for any moral reflection. Any social construction of reality will
not do. All constructions or interpretations must be able to withstand a moral
evaluation. Some are better than others. Not every social construction of reality
should be accepted. Some may even be wrong and harmful.
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We said earlier that our interpretation of the world around us is most often
spontaneous, unconscious and in line with those of others around us. This can
explain why we judge, or fail to judge, certain acts as corrupt or fraudulent.
And it explains why these judgements may differ between social groups or
societies. But it is not the same thing as saying that this reference to the social
construction of fraud and corruption is a valid moral argument. It does not
provide morally valid reasons for our judgements. When asked why we as
individuals condemn fraud and corruption, referring to a social consensus is
not adequate. Moral relativism might be a relevant perspective when describing
and explaining fraud and corruption in society but it cannot be used as a
normative frame of reference on the individual level. Doing that would turn us
into full-fledged opportunists.
A further argument against moral relativism, in this specific context, is that
the serious category of fraud which we will be examining here, managerial
fraud, is condemned in all cultures, even among criminals. You may betray
others but not your own people. There is, in fact, honour even among thieves
and thieves will also punish a deceitful gang leader. No relativism here.
If highly trusted persons use their position intentionally to mislead
colleagues, co-workers and superiors in order to make private use of public
resources, that kind of behaviour will not be tolerated anywhere and has not
been accepted at any time in history as a social norm. It is for instance illegal.
Moreover, it is always and everywhere morally condemned. This is a kind of
cultural knowledge which we all have and which we should not forget. A social
construction of actual fraud that does not carry with it this moral condemnation
would simply not work; it wouldnt succeed in defining fraud properly.
To put it even more precisely: if we find a course of events in which
highly trusted persons use their position intentionally to mislead colleagues,
co-workers and superiors in order to make private use of public resources,
and if this behaviour is called fraud in the surrounding society but without
a component of moral condemnation, that label would no longer convey the
essential characteristics of the situation. The word may be correct but its implied
meaning would be incomplete. Fraud without its pejorative undertones is not
fraud anymore at least not in the meaning of the word as it is used in this
book.
This suggests that fraud in general and managerial fraud in particular touch
deep cultural values, values so basic that we might even suspect that they are
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necessary for the survival of human society as we know it. And still, as we have
just seen, fraud is common in every historical period, geographical region and
cultural sphere. It is as if fraud is something deeply engrained in the human
nature, but condemned at the same time, similar to the concept of an original
sin. Therefore, we ought to treat fraud and corruption as something constructed
by, or perhaps better, inherited from both our nature and our culture.
In a culture such as the modern western world, individualism and respect
for others are woven together. We want to be seen as tolerant, even towards
unusual or odd lifestyles. We distance ourselves rather than fight against the
acts and lifestyles of other people that we see as behaving differently. Even if
we disapprove of what they do, we turn our backs and remain silent, minding
our own business or humbly abstaining from the risk of making an ill-founded
judgement. Sometimes we might even refer to moral relativism, meaning
respect. Since early childhood we have been taught that running with slander
and gossip is something bad and to be avoided. It has become a sign of good
behaviour not to judge others. However praiseworthy this might be, it can
also enable an atmosphere in which fraudulent behaviour arises and remains
unchallenged. The distinction between good behaviour and cowardice is not
always clear.
Fraudsters profit from this. They often use rationalizations to explain or
justify their acts: its nothing compared to what others have done; its for a
good cause; Im entitled to it, and so on. What if we, for a moment, accept a
relativistic standpoint, namely that the fraudsters do act in good faith? If this is
how they perceive things, not as committing criminal offences but performing
legitimate acts, then the issue of fraud becomes not a moral issue, whether the
act was good or bad, but rather an issue of power. One interpretation of the act,
as immoral fraud, is here being challenged by the actors interpretations of the
same act as something morally defensible. Whose interpretation will win?
Moral relativists would argue that calling someone a fraudster is an
arbitrarily negotiated classification; a social convention, albeit the majoritys.
In another social setting, the negotiation may turn out differently and the
actor would be called something else, Robin Hood, for instance, and may even
be regarded as a virtuous human being. So, whether private use of public
resources will be defined as acceptable or unacceptable, as fraud or not fraud,
will depend on power relations in the specific social group or community.
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Cultural Differences
In some countries, more than in others, we find a more lenient or even cynical
attitude towards the private use of common resources, in particular with respect
to people in power.
Figure 4.1
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and trust are very stable social phenomena that can survive for long periods of
time, even after a change in the economic or political system.
Very few people would argue that fraud and corruption have a positive
impact on economic development. Nevertheless, cultural differences show
themselves particularly in fraud awareness training. Therefore we will return
to these issues in Part II.
Knowing the facts; the possibility and ability to know about the act,
situation or event. (Fraudulent and corruptive practices are special
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in the sense that they are hidden. Obtaining knowledge of the act,
situation or event probably comes by accident, from a tipster, or
as a result of deliberately looking for it. Occasionally, they may be
spotted through regular monitoring systems.)
Figure 4.2
42
Figure 4.3
43
Summary
What we experience as facts may not always be there. Sometimes we disagree
whether things really happened or not. Sometimes we refuse to see things
as they really are. Perception is tricky and some theorists therefore suggest
that we should treat our experiences of the world, including that of fraud
and corruption, as a social construction. This does not have to imply total
relativism, but it gives us some useful clues on how to detect and prevent fraud
and corruption.
We need to have knowledge about common norms and values, and also
knowledge of actual fraud and corruption taking place. Moreover we need to
be able to judge that as something unacceptable and unethical. This has to be
communicated to a larger group of people and trigger countermeasures. If any
of these steps are missing, fraud and corruption will continue.
while seeing they do not see, and while hearing they do not hear, nor
do they understand.
Matthew, 13:13
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Figure 5.1
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than not. So what? But the quote also says something more and something less
trivial. It portrays the criminals definitions as phenomena on the social rather
than the individual level. It suggests that criminal behaviour is learnt together
with others.
One might argue whether this is correct when it comes to managerial
fraud. Here we are dealing with persons that hold a high social status, that are
very well integrated into society and that in full honesty may both recognize
and condemn criminal acts, including fraud and corruption. The fraudster is
normally an individualistic person, even with a conviction of being above other
people. Even though he often acts in collaboration with someone else, isnt it
a little bit farfetched to view him as belonging to a kind of criminal gang, or
a sub-group in society in which fraud is defined favourably; as challenging,
as something that strengthens internal social ties, or as something that may
render internal social status in the group?
These objections should not bring us back to an individualistic perspective
on fraud and corruption. The Differential Association Theory is supported
by the fact that the same fraudulent behaviour spreads rapidly within an
organization or group.
The management team reporting to Mr Big were aware of many of his illicit
activities; it was impossible not to see and indeed they had to cover for him on
many occasions. They were all somewhat afraid of him, but where well rewarded
for their loyalty with cash, company-paid vacations and other benefits. They
also supplemented their earnings with frauds of their own; who was going to
complain? As long as it was within reason, that is to say not noticed by group
headquarters, it was acceptable. (Example from Case 5, Mad Max, p. 17).
There are also several instances in which actual cases of misconduct cannot
be isolated to a certain individual but is being spread as a sub-culture in the
organization, like a kind of social rot or moral decay.
A relatively new manager in the company had heard some rumours about
sub-contractors in collusion with employees but he was not in the habit of
listening to gossip. His main focus was getting the job done. On some occasions
he had questioned the companys choice of sub-contractors, particularly
when alternatives seemed to be cheaper and faster, but was told there were
logistics reasons that he was not aware of. On the occasion of the company
Christmas party, his superior approached him
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used a model called the Fraud Triangle in which fraud is understood and
explained as an overlap between Need, Opportunity and Rationalization.
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51
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experienced by a drug addict looking for money to support a habit will create its
own rationalizations and drive them to find or create opportunities. If controls
are totally lacking, someone will likely find the rationalizations necessary for
fraud.
KPMGs conclusions should therefore be seen as an assessment of which
factor, if any, was most exceptional.
While it was not included in the KPMG assessment, rationalization could
conceivably be the most important factor in some cases. A career fraudster or
criminal might be said to possess an exceptional ability to rationalize their
behaviour. Whatever actions they take can be justified in their own minds. This
ability to rationalize might be said to lead to fraud even when the opportunity
and need factors are slight. Career fraudsters commit fraud because they want
to.
The Fraud Triangle and its balance of factors should help us to understand
why fraud occurs and how we can prevent it. In addition, certain psychological
and social psychological theories can help us understand what kind of forces
and mechanisms we are up against.
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Seeing, in the latter sense, is obviously a much more complex task. So dont be
surprised if it sometimes does not come about.
Common Ignorance
Half way through the film, the fire alarm goes off and smoke fills the cinema.
What do you do? Run for the door? Dont be too sure. Experiments have
shown that if the rest of the audience have been instructed to stay calm and
to do their best to see the screen through all the smoke you will probably
do the same.
When we face situations that we find difficult to interpret and judge, when
reality is confusing, we have a tendency to postpone our own reaction and
look around for guidance from the others around us. This tendency has been
investigated by the American psychologists Bibb Latan and John Darley
(1970). Even if the situation can be potentially dangerous, we may hesitate.
What do the others do? How do they seem to define the situation? What seems
to be common sense around here? The result may be panic in which no one
can keep their mind together. But the opposite is also possible: common or
Pluralistic Ignorance, in which no one takes any adequate action whatsoever.
Pluralistic Ignorance and/or the psychological phenomenon called diffusion
of responsibility may cause bystanders to lose their ability to discriminate
between normal and deviant behaviour. They become passive bystanders.
Reconstructed Memories
When crossing the street, most people stop if a car comes close. They do not
calculate speed and direction. They do not ponder on the intentions of the
driver, or their own reasons for living another day more. They just stop because
a subconscious impulse takes over. If asked, however, they could probably give
good reasons for stopping but that would be a kind of reconstructed meaning.
They same thing happens in cases of fraud. When asked to explain ones
behaviour, or lack of action, our brain has a tendency to fill in the blanks with
information which seems consistent with our behaviour:
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These things may be said with the best intentions of speaking the truth but
nevertheless, they may be incorrect.
In one study, a teenager is convinced by trusted family members that he
had been lost in a shopping mall when he was five years old, an event that
in fact had never happened. Days after this brainwashing, the teenager
starts recounting facts and feelings about the episode that were not even
mentioned in the indoctrination! He is embellishing a suggestion, resulting in
vivid memory of an event that never occurred.
This experiment, conducted by the American social ecologist Elizabeth
Loftus and her student James Coan (1994) shows that the brain sometimes
reconstructs false memories. These memories will be stereotypical in the sense
that they confirm common sense images.
They may also confirm our normative expectations, that is, they tend to be
self-reassuring.
Wishful Thinking
If available information is ambiguous, incomplete or full of contradictions, the
interpretations we make will also be influenced by what we would like to be
the case. This psychological phenomenon is called wishful thinking. It can be
defined as an identification of ones wishes or desires with reality. In simpler
terms, what we want will affect what we think we know.
The American psychologist Robert Cialdini (1993) lists several psychological
mechanisms behind compliance and persuasion. For instance:
people at the racetrack: Just after placing bets they are much more
confident of their horses chances of winning than they are immediately
before laying down the bets.
One explanation behind this obviously irrational tendency is social
compliance. We want our behaviour to appear consistent. It looks rather foolish
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to bet on a horse whose chances of winning you yourself doubt. Maybe its too
late to withdraw your bets, but you can still adjust what you think you know
about the horse.
It may also be a little late, or at least inconvenient, to change your position
in the company, but you may improve your judgement about your superiors
credibility. Its easy to draw a parallel between wishful thinking and the
difficulties of revealing fraud and corruption.
Contrary to reconstructed memory, wishful thinking has to do with
interpretations of facts present here and now, not with inventing history. Even
more precisely, it has to do with estimating probabilities. What is the probability
that the invoice my superior just signed is a false one? If it is false, then I have
been a stupid fool all this time, relying on him and moreover I probably have
to do something about it! On the other hand, if its genuine, it means business
as usual. Therefore I tend to know for sure that its not false!
No Moral Blame
Being able to discover and put together relevant facts is not enough in order
to construct fraud and corruption correctly. We said before that one specific
quality of fraud and corruption is that they are morally condemned. Therefore
fraud and corruption will remain undetected even if someone notices, for
instance, falsified invoices, unknown suppliers in tax haven countries or large
amounts of cash payments, but does not combine these observations with any
moral blame, or experience it as wrong or bad.
Rationalizations
Donald Cressey (1973/1953) also pointed out that:
Trusted persons become trust violators when they conceive of themselves
as having a financial problem which is non sharable, are aware that
this problem can be secretly resolved by violation of the position of
financial trust, and are able to apply to their own conduct in that
situation, verbalization which enables them to adjust their conceptions
of themselves as trusted persons with their conceptions of themselves as
users of the entrusted funds or property.
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no one is hurt;
The actors involved have cultural knowledge of norms and values. They
know how to act deceivingly, and they feel the tension between their acts and
the social norms, but may find rationalizations to blur out their discriminatory
ability.
Below you will find an attempt to categorize some of the rationalizations
commonly used when breaking the rules. The vertical line has to do with the
individual dimension; is the actor consciously breaking a norm or not? The
horizontal line deals with what the actor thinks about the social environment.
Is the relevant group or society lenient towards violations of the norm in
question, or will they defend it?
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Figure 5.3
In the first quadrant, the subject perceives that they are in an exceptional
individual situation, so that while the applicable norm in itself is valid it
cannot apply. The present situation is so extreme, either due to force majeure,
or implying a right of self-defence, or saving oneself or ones employer from
a financial crisis, that they can detach themselves from the norm altogether.
Similar in experience, but radically different when seen from the outside, is
the situation in which the individual regards themself as above the moral
standards set up by the society. They are detached from the norms by virtue of
their own perceived superiority. This is the logic of the narcissistically disturbed
personality to which we will return in some detail later. The second quadrant,
decadent, describes a situation in which perpetrators see breaches of formal
or institutionalized norms happening around them and use that as an excuse
for doing the same. They know about the correct norm and realize that they are
about to do something forbidden but doubt whether anyone will stop them;
they perceive the environment as corrupt. We describe the third quadrant
as devoid: the fraudulent or corrupt act is not perceived as a violation of a
valid norm by the perpetrators. They are led to that conclusion by looking
around and noticing that the group, or society as a whole, is devoid of any
guilt or shame, and interprets that as giving of a green light to fraudulent acts.
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The norm that may seem obvious to an outsider, for instance not to steal, is
simply not relevant from the perception of the perpetrator. Finally, the fourth
quadrant describes a situation in which the perpetrators are in denial: they
know that others will not approve of their actions if they are detected, but
they have created rationalizations that trivialize the crimes. They are not fully
conscious that their rationalizations are lies, that they will not return the money
for instance.
Rationalization is really about changing names. As long as the act comes
with a label attached calling it fraud or corruption the act will be condemned.
However, rationalization changes the name on that label into something
more acceptable, for instance force majeure, common practice or tricks of
the trade. This is exactly where the moral judgement of the actors involved
is put to the test. When they think about different courses of action, do they
look for moral guidance with an open mind? Do they examine the potentially
fraudulent act to see what the proper label should be, or are they just looking
for excuses for engaging in, or remaining passive in front of ongoing fraud or
corruption? Are they struggling with their own motives or are they looking for
explanations with which they can go public?
Let us go back to the Fraud Triangle described earlier. It is possible to
treat the rationalizing of the deviant act as a kind of dynamic balancing in
which an unstable or tense combination of perceived need and opportunity
for fraud and corruption is brought into some kind of harmony by aptly
changing the label.
Figure 5.4
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Amoral Business. What this well-spread myth claims is simply that business
is concerned with a highly pragmatic search for profits and individual careers,
and that moral concern is and should be left out of the reflection around
practical business problems. If fraud and corruption exist in businesses, that is
no cause for alarm or action.
The myth does not explicitly say that business is immoral, rather that
business leaders sometimes act without concern for moral aspects, thus
creating scandals along the way. Such scandals are swiftly picked up by the
media, possibly spreading the perception of amoral business. But is this really
what we think about the role of business in society?
De George argues that if we deep in our hearts firmly believed that
businesses do not, and should not care about moral claims, that is to say if we
lived in the Myth of Amoral Business, we would not have these stories in the
press and on TV. Who would then be interested, let alone upset? The fact that
many people do get excited and angry when they hear about bribery, insider
manipulations and environmental damages proves that the myth is not as strong
among the general public as some businessmen or students of business might
think. Nevertheless it is there, and it might be one of the explanations behind
the fact that fraud is not always at the top of public concern or anywhere near
the top of the business agenda. An absence of concern about fraud by those
senior managers and officials who are in a position to do something about it
might lead to the myth being self-fulfilling.
On the one hand, silent and cynical bystanders remain passive because they
believe that corrupt behaviour is the norm among managers and, accordingly,
nothing to be too upset about. Adding to this, managers who live in this myth
might very well be able to commit crime for pragmatic reasons without feelings
of guilt or shame; they have found their socially acceptable rationalization.
Several studies confirm this rather cynical view of moral decay in modern
business organizations, such as that by the American sociologist Robert Jackall
(1988):
Bureaucracy transforms all moral issues into immediately practical
concerns. A moral judgment based on a professional ethic makes little
sense in a world where the etiquette of authority relationships and the
necessity for protecting and covering for ones boss, ones network,
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63
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quickly down the slippery slope. Increasingly risky deals were designed in the
vain hope of covering for incurred losses. Someone should have stopped me.
anchor too heavily on their own vantage point (they are unable to
realize that others do not have their privileged knowledge); and
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Understanding how power affects individuals must also take into account
how it affects the individuals who are in the vicinity of power. These individuals
form an essential part of the social construction of power in two ways. First, they
may or may not set limits for power by resisting it, or denying its legitimacy in
certain areas of their lives. In one way or the other, power is always something
that is given to someone from a surrounding social group. At least, the group
must passively allow power to be executed. Without any support or obedience
whatsoever, no power can exist. Secondly, the content of power, the ends and
means by which power is executed, will be influenced by others through their
expectations about power and about the execution of power.
Acting from a power position is in some ways like playing any other
social role. Actors will look around for role models and role expectations in
their environment that may supplement their own expectations. These social
role expectations will affect the way in which individuals with power behave.
Conformity to these expectations is probably the most common response, but
exploitation of these social role expectations may also take place. In those cases
we may very well find incidents of fraud and corruption. But sometimes, where
the Myth of Amoral Business is strong, fraud and corruption is exactly what
one has to expect from those in power.
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The way in which managers rationalize the payment of bribes has been
shown to follow this pattern. One analysis, by the Swedish sociologist David
Wsterfors (2004), of the stories managers tell about bribery and corruption in
Central and Eastern Europe, suggests three different kinds of scenarios: bribes
paid by others are wrong, irritating and they are criticized since they disrupt or
destroy the normal conduct of business. Bribes paid by the storyteller in order
to simplify the normal conduct of business are not bribes, but tactics. They are
never wrong. They are acceptable in a common sense way. Courtships are a
kind of non-bribes and they are used in situations that seem to lie within a grey
zone where the meaning of common sense is unclear.
Students of the process in which formal norm systems, including laws,
rules and regulations, are put into practice (Ekman 1999) have discovered that
small talk is indeed a crucial element. Formal norms tend to be abstract and
must therefore be transformed and translated into concrete actions that also
must reflect practical, real life experiences. This transformation is done through
small talk at work, in which a uniform and often uncritical common sense is
being constructed and reproduced. There are no guarantees that the intentions
behind the formal norm systems will be recognized in this local sense making.
As the saying goes, the problem with common sense is that it is not common.
We will discuss in the second part of the book how to bridge the
communication gap between abstract policies and common sense
interpretations, between intention and actual practice.
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In this way bystanders and witnesses are able to avoid blowing the whistle
and can ignore how their own passivity might have contributed to or permitted
something criminal. Fear, wishful thinking, group pressure and the like may
push bystanders to invent rationalizations for suspicious situations that can
thereby be made to look reasonable when alarm bells ought to be ringing.
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Note that the word probably is added here, indicating that rationalizations
are assumptions, most often untested. It could also be replaced by the word
hopefully. We have a tendency to believe that normality or common sense
like logic, probably or hopefully, governs the behaviour of other individuals,
but we are not willing to put this assumption to a test. If we did, we might have
to start some kind of investigation and learning process, but we seldom do.
It is much more comfortable to not realize that something might be seriously
wrong. A tragic example of this kind of thinking is the Challenger disaster in
1986 (Vaughan, 1996).
In a famous episode of Candid Camera, two miming artists pretend to carry
a large glass plate across a busy street. People steer away; cars stop even
though they can see that some pass right through thin air.
The budget is without doubt one among the most useful and important tools
for controlling costs. It is a basic internal control. Cost levels are estimated and
approved in advance, and actual expenditures are then measured against the
approved budget, and variances identified and explained.
In Babylon, budgets were required, but controllers accepted the concept of
a living budget finalized only after the project was completed. Just like in
Candid Camera where there was no glass, there was no budget! But it seemed
to be there!
Interviewer: Could you please explain to me how are budgets established
and approved?
Employee: We establish an initial budget for the project, and get it
approved. Then when the actual expenditures come through,
we correct the initial budget if the first budget was wrong. The
final budget always agrees with actual expenditures.
Interviewee: Would you say this a normal way of running projects?
Employee: It works! With living budgets we can finalize resources needed
once the project is completed and in this way we completely
eliminate the risk of error. (Example from Case 4, Babylon, p. 14).
These kinds of rationalizations function as ways of legitimizing the actions
of others that otherwise, without the rationalization, would stand out as
unfair, improper, illegal or inappropriate. But they may also function as a way
of diminishing the importance of oneself: They know better than me. My
suspicions have no value.
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Inadequate Communication
If common sense should not be trusted, there ought to be some organizational
mechanism through which it could be challenged. And if suspicions gain
some force, there should be a forum where they can be discussed. One reason
that incidents of fraud and corruption succeed is that despite knowledge of
facts and moral blame, witnesses do not feel that they have anywhere to go
with their suspicions. Of course this is partly a question of installing a proper
organizational design, but it is also a cultural problem. There are also social
psychological mechanisms that inhibit communication around fraud and
corruption.
Moral Muteness
Ask a management team to explain why they have included an antidiscrimination clause in their code of conduct. Ask why they dont discriminate
against minorities or women, for example. Or, ask why fraudulent and corrupt
behaviour is not allowed. You will find this to be a revealing experiment.
Typically, the group will first fall into an embarrassed silence as the managers
try to figure out whether the question is meant to be serious or not and, if
so, what a proper answer might be. After some discussion some in the group
will probably argue that discrimination and fraud is forbidden because it is
illegal. Given some thought, concerns about public image and brand trust
may also be raised. The argument that non-discrimination, in that it brings
diversity, ensures better access to important competences could also appear.
Or that trustworthiness and transparency pay in the long run. The common
theme, however, will be that the company will not engage in discrimination
and corruption because if they did, there would be negative consequences,
ultimately affecting its profits.
The instrumentality in these arguments is quite stunning. One might
expect that someone in the team could argue that discrimination against
minorities or women would be unethical, a violation of basic human rights. But
moral arguments are seldom raised, not even in companies where the level of
discrimination is low or even non-existent. The morally right thing to do could
very well constitute the local social norm, yet the norm is still supported solely
by non-moral arguments. One will seldom find a report of moral concerns
formulated in moral terms in a group of managers.
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This is even more surprising since we might predict that the same managers,
if being asked to state their view on, for instance, the value of human life or
the nature of human beings, would have no problems to formulate a support
of equal human rights and of the importance of living responsibly and with
dignity. But having moral convictions is one thing. Raising moral arguments
in the middle of a management team meeting is another. The Myth of Amoral
Business is too strong for that to happen.
It is as if a humanistic vocabulary and thinking pattern, in which, for
example, all human beings have the same and high value, exists parallel to
another, more instrumental vocabulary and thinking pattern in which it
makes sense to treat human beings as means to commercial ends (Brytting and
Trollestad, 2000). The predominance of the Myth of Amoral Business triggers this
second instrumental thinking pattern but leaves the first, the more humanistic
one, asleep. Therefore, the business climate and the company culture do not
constitute a natural environment for moral deliberations. What is lacking is
some kind of trigger in order for the more morally relevant thinking pattern to
be mobilized.
This phenomenon, moral action in combination with non-moral arguments,
has been discussed in several articles by Frederick Bird, Professor of Religion,
and James Waters, Professor of Management Policy, both Canadian. They call it
the Moral Muteness of Managers (1989). One should discuss this muteness as
a serious weakness connected to what we earlier called reporting possibilities.
That was mentioned as one of the critical steps in the process of spotting and
dealing with fraud and corruption. Normally one would associate reporting
possibilities with whistleblowing or ethical hot lines and so on. But beside these
important but yet extraordinary measures, it is important to underline that in
many organizations, moral muteness in everyday life might be the greatest
obstacle for fraud detection.
The explanations behind moral muteness can be many. Some may argue
that raising moral issues is not in line with the public image of managers as
being strong, decisive, result-oriented and rational individuals. Others would
point to the fact that business leaders neither have the formal training nor the
practical experience to analyze business problems from an ethical perspective.
Of course, fear also plays an important part here (we will return to fear later
when we discuss mobilization). One way or the other, if moral concerns are
never formulated, the business decisions that take place in the resulting moral
vacuum may be less than optimal.
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Prisoners Dilemma
Another reason behind the difficulties in exposing fraud could be that
bystanders find themselves in a situation resembling the Prisoners Dilemma
(Axelrod 1984). The logic behind this concept is the following:
Two thieves, Peter and Mary, have been arrested and put in separate cells.
The police will interrogate them independently. If they cooperate with each
other and both remain silent they will only have to serve one year each as there
will be too little evidence to convict them of the more serious charges. If they
72
give evidence against each other they will each get three years each in prison.
However if only one prisoner talks, that prisoner will go free as a reward, while
their betrayed accomplice will then have to serve five years. Thus, from each
individual perspective, the best outcome would be to betray the other hoping
the other remains silent. There is nothing to lose. But if both reason in this way,
each will betray the other and get three years in prison.
Table 5.1 The Prisoners Dilemma
When interrogated:
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Peter is dependent on Mary and she is dependent on him. The last time
they met she looked really frightened. Will she fulfil her part of the deal?
Peter has a choice; he can play safe and keep his suspicions to himself, go
on with his life and let Mary take the blow, or he can speak out knowing that
two independent witnesses cannot be ignored by the CEO. But if Mary changes
her mind, he will be the only one to speak out. He might be accused of running
with gossip and have to face accusations or disloyalty and CEO denial. Perhaps
the fraudster also will take his revenge. The CEO will not do anything unless
both Peter and Mary come forward with their suspicions.
Although neither Peter nor Mary really know what will happen if they
come forward individually or together, the situation resembles the Prisoners
Dilemma and, in the end, the fear of being alone in accusing the superior could
very well deter each of them from speaking out, thus creating a situation worse
than before they conferred.
No Mobilization
Even if we know what is going on, we know that it is wrong, we have discussed
it with our colleagues and we agree that something must be done about it, still
we may find ourselves paralyzed. Nothing happens. The final evidence that
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fraud and corruption have been identified as a deviant, an unwanted social fact,
is that more than one individual acts in a coordinated way on this knowledge.
Unfortunately in the case of fraud, the obstacles that stop mobilization from
happening are many.
Group Pressure
Our tendency to merge with the group is part of what it means to be a human
being: a group living animal. This reflex may have been necessary for survival
on the African Savannah but it plays tricks upon us in a modern business
organization. This conformity, ingrained in our DNA, is therefore both a curse
and a blessing. If a large majority of a group agrees on a specific solution to a
problem, it is probably rational to go along with it. The probability that all the
others in the group are mistaken and that the single or few deviant got it right,
is low. Anyway, it is safer for each individual to play along, right or wrong,
with the group than to embark on a single and risky journey alone. But what if
the majority is making a mistake? What if the majoritys behaviour is putting
the welfare of the group at risk? Group pressure is not sensitive to issues of
right or wrong, good or bad. It is simply a question of conformity.
Numerous experiments have shown that even if the problem put in front of
the group clearly has one right and one wrong answer, innocent subjects will
conform to the majority even when it goes for the wrong answer (Asch, 1958). It
has even been suggested that the obviousness itself reinforces this conformity.
For example, suppose you find out that your manager obviously and without
any doubt whatsoever is a fraudster. In spite of this, the other bystanders or
your colleagues remain passive. If you then act on the obvious and if you are
the only one to do so that would not only distance yourself from the group.
You would implicitly accuse all the others of being obviously and stupidly
wrong or maybe worse; of being accomplices since the crime is so evident.
That is not an easy thing to do.
Fear
Fear is a strong emotional response to threats of all kinds. Neurologically
speaking, fear implies difficulties to concentrate and to get access to the parts
of the brain where memories are stored. We become cautious and extremely
aware of the immediate present watchfully observing what is going on around
us. Its automatic in the sense that it is nothing we choose. It may be triggered
without any cognitive activity and therefore it is also not rational. It has to
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be, in order to make us run away from a lion or be prepared for a fight fast
enough. Fight or flight, those are the choices. To combat fraud and corruption
fight is of course better than flight. But do we really have a choice? It could
be questioned whether we have access to our rational ability to choose when
we are possessed by fear. On the other hand, if we manage to get hold of our
more rational abilities, we might also find that the reasons for being afraid can
be dealt with through other more sophisticated measures than simple fight or
flight.
It is not the fraudulent or corruptive acts in themselves that trigger fear.
Rather it is the possible anticipated threats coming from the perpetrators, if we
go against them. In the case of management fraud, bystanders and witnesses
are often far less powerful than the persons they suspect. The potential
whistleblower has therefore good reasons to be afraid. No wonder flight is
often the preferred option.
Fear can also trigger fraud. One study suggested that fraud in the financial
sector was not always motivated by greed, rather by fear of losing ones
reputation of being a successful professional (Lindgren and Engdahl, 2008).
Threatened status was said to be a more important fraud motivator than
imagined wealth.
Ruling Techniques
Social psychologists have studied mechanisms through which women are
systematically being marginalized and neutralized in working life and in
society at large. One theory described by the Norwegian Professor in Social
Psychology, Berit s (1983) talks about ruling techniques that are being used
by those (men) who want to maintain their privileges and remain in power.
A clever fraudster might use these and similar techniques in order to make
bystanders remain divided and passive:
denying participation;
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When exposed to these ruling techniques, the victims tend to accept and
internalize the underlying norm of superiority and subordination. They accept
it as a correct description of how things are and how they should be. Eventually
discrimination is even experienced as fair. What might have started in a mood
of suspicion, anger and determination, soon turns into self-criticism, silence
and feelings of weakness.
You dont really know how it feels, to be called all sorts of things, to be told in
front of everyone that Im useless, to be shouted in corridors saying that since
I dont seem to be able to do my job I should consider going back to school.
And I just thought I was doing my job I mean what if I hadnt pointed out that
there were some mistakes in the way we were allocating costs? They would
have blamed me if the Head Office but when I asked the question he first
smiled at me, put a hand on my shoulder and then told me that there were too
many things I couldnt understand, that I was too young to even get anywhere
near the experience he had accumulated during his career. I guess I should have
kept quiet then, but I knew they were some mistakes in the balance sheet and I
felt it was part of my responsibilities to let them know. And now my working life
is a nightmare. Im scared of everything, even to go and get a coffee because if
I meet him he will make fun of me in front of the others and the others would
laugh but maybe it is me, maybe it is true, maybe what you learn at university
is not what you are expected to do when you start working for real (Example
from Case 6, interview with an accounting employee from Lapis Lazuli).
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Summary
In this chapter we have presented a survey of some social-psychology
mechanisms that are relevant when analyzing fraud and corruption. They
are common in the sense that most of us not only fall victim to them from
time to time, but also take part in their reproduction. Fraudsters, victims and
bystanders alike may be trapped by them. In other words, they result in a social
deconstruction of fraud and corruption. They may not be seen, condemned,
talked about or counteracted because of these mechanisms.
The problem that this book addresses, managerial fraud and corruption, is
special in the sense that some of the fraudsters carry a lot of power, internally
in their own organization and also externally in the surrounding society. Some
of them make deliberate usage of these mechanisms and are helped by them in
order to steal from the company.
In the next chapter we will deal in some detail with the personality of some
of the worst fraudsters the narcissistically disturbed and with the rather
nasty effects they have on their colleagues.
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which was then investigated and addressed by Prince Hamlet who simulated
mental disorder to disguise what he was actually doing.
The international group was in the right place, with the right product at the
right time. The business plan was just right, and the profits rolled . into the
pockets of fraudsters. The company never knew they had a great thing going,
and they missed the opportunity of a lifetime.
The villain in the story was a trusted company man, from group headquarters
in Western Europe. He painted a false picture of losses and of the difficulties
of doing business in a former Soviet country. He was universally believed;
indeed no one had expected to make a profit! It was decided to shut down
the project. The fraud would not have been discovered at all if not for Dmitri,
a local employee who, like King Hamlets ghost, reported the truth. But even
when evidence was presented, the fraudster for a long while succeeded
to convince top management of his innocence. When the whole situation
was eventually cleared up from the Head Office based in Western Europe,
Dmitri said: Im really happy to discover that not all Western Europeans are
fraudsters as I thought! (Example from Case 1, Rose, p. 8).
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Teleopathy
A rational focus on achieving business goals can go too far. Some managers
can lose grip of everyday moral rules in favour of what the American business
ethicist Kenneth Goodpaster (1994) described as an unbalanced pursuit of
purpose or teleopathy. It means, literally, a pathological fixation on ends, and
has three symptoms:
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In the end the actor losses control over the goal. The goal has taken
control over the actor and has created a full-fledged teleopath. Unfortunately
companies sometimes prefer to recruit personalities of this type, thereby
installing people in the organization that might engage in fraudulent or corrupt
activities in order to reach their goals.
The cure for teleopathy, according to Goodpaster who coined the word, is
not to move from the frying pan to the fire by being unfocused, irrational and
emotional. Rather, the trick is to find and maintain a balance between these two
versions of dysfunctional single mindedness.
This balance is hard to find if core values and norms are vaguely formulated
or understood. This goes for both the personal and organizational level. On
the personal level, a constant reminder of the authority of ones conscience
is important. Insistence on a reflection on what a balanced enlightened selfinterest would imply is a paramount consideration. A reminder of values other
than economic success and career development is also a healthy suggestion of
the necessity of a balanced lifestyle.
On the organizational level, the first thing that comes to mind is the setting
up of balanced targets and the designing of integrity supporting incentive
systems. Too often unrealistic targets are set forcing employees to the limit, not
only of their capacity, but also to the limits of their integrity and conscience. If
overly generous incentives are tied to these unreal targets, then some will cross
the line. In order to set the balance right corporate values become important.
These should be formulated and supported by the management and
contain statements about the proper balance between work and family life, the
companys attitude regarding part-time and flexi-time employment, parental
leave and so on.
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Like line dancers who fix their eyes on a point straight ahead in order
not to lose their balance, each employee needs a clear point of moral fixation
or benchmark. It helps to keep ones concentration on intrinsic values, such
as health, dignity, freedom and integrity, without being blinded or overly
occupied by the things that are instrumental (for example, money, promotion,
deadlines).
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87
and weaknesses instead of opposing the narcissist. These two groups will
tell different stories about the manager and give different versions of what is
going on. Unable to reach a common understanding, these tensions may create
conflicts, fatigue, stress and discomfort.
People in the vicinity of fraud may blame themselves if results are wanting
or if the working climate deteriorates. Over time they run out of self-confidence,
motivation and energy. The Corporate Psychopaths own frustrations, projected
on others, create a climate of conflict between subordinates. The narcissist
is above the conflicts and not part of them, yet is the root cause of conflict.
Sometimes subordinates may even doubt their own sanity, thus confirming the
twisted worldview of the narcissist.
Again, holding on to an organizational perspective might bring some
new light to the matter of fraud. The feelings of others may reveal where the
fraudster operates.
One lesson we can draw from Hamlet as a psychological drama, is that
people surrounding the crime experience a loss of energy and joy in life. They
have great difficulties in understanding what has happened and what is going
on. Even those who know, or think that they know the truth, remain passive
and feel badly about it. Fraud, especially managerial fraud, is possible thanks
to the resulting silence of colleagues and subordinates.
He had anonymously reported his suspicions to the Head Office but when
they asked for a meeting he felt too scared to reveal his identity. I might be
able to solve this on my own was what he thought. And the more he tried
the more he was relieved of responsibilities. From being the promising and
talented new head of the whole region he had been gradually demoted and
demoted and now he was not even in charge of any specific area. Your new
position is under construction he was told, just be patient and you will see.
See what? The only thing he could see was that he was not able to focus on
anything anymore, he had sleeping problems and he was not even enjoying
the time he spent with his family. Luckily enough his wife had supported him
all the way and she was the one who suggested he see a psychologist. One
year of therapy had helped him to understand that he was not the problem.
But the situation at work hadnt improved at all. He was seriously considering
looking for another job. (Example from Case 6, p. 19, from an interview with
an ex-regional manager of Lapis Lazuli).
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If open, hidden or perceived threats exist, and if there are no safe channels
of communication where co-workers can report evidence or blow the whistle,
the organization will fall into silence and dysfunction creating discomfort and
stress. This allows for the fraud to continue, and with time it becomes more
sophisticated and difficult to address.
Because it is the manager who is the perpetrator, one should expect that
control of subordinate staff also will be sloppy. The manager is not overly
concerned about the well being of the company. This negligence leads to an
even more widely distributed fraudulent culture. In this environment, the
fraudulent manager may even be able to identify and retaliate against an
emerging whistleblower. Those who do not share in this corrupt environment
will be marginalized and excluded, replaced by more lenient or cooperative
individuals. More and more staff are involved. The camouflage is replaced or
elaborated, layer upon layer. Maintaining the fraud and its camouflage will
occupy the energy of a growing circle of people, which will have a negative
effect on their other obligations.
This dramaturgical process separates managerial fraud from other types of
criminality.
We sense that something is wrong but cannot put our finger on it. We
see it in our daily contacts with one another, contacts that in many cases
have become less friendly, polite and generous. We feel it in our places
of work, impregnated with bitterness, fear and stress that really put us
down. However, what is most affected is our intimate relations with
friends, partner and family, who gives life its richness and meaning.
The character of this pathological state isolates us from one another and
from reality and it stands between us and everything we aspire to get
and to be.
This quote from the American clinical social worker and psychotherapist
Sandy Hotchkiss (2003) describes the kind of working climate individuals
with a narcissistic disorder can cause around themselves. Managerial fraud
could also create these conditions since the perpetrator often seems to expose
narcissistic tendencies.
The needs experienced by the narcissistic perpetrators, and the
rationalizations they invent may also be encouraged by social and organizational
circumstances. Some psychoanalysts argue that unrealistic expectations on
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Summary
A special but common type of fraud perpetrator, especially if we talk about
managerial fraud, is the Corporate Psychopath. He is often intelligent, charming,
confident, decisive and a risk taker. All these character traits are beneficial to
the company, if directed towards corporate goals. When turned egocentric and
combined with deceptive skills and sometimes also cruelty, they become a
major threat. The attractive force of the Corporate Psychopath also affects the
bystanders. They tend to lose self-confidence and creativity when they are in
the vicinity of a fraudster with this kind of personality.
Trust in Organizations
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Blind Trust
A sceptical or cynical attitude towards managers tends to increase with distance
and decrease with first-hand experiences. There are of course important
differences between different cultures, but far-off managers in other cultures are
normally believed to be less trustworthy than the ones close at hand. The latter
tend, to a higher degree, to be trustworthy in the eyes of their subordinates.
Why then is it so hard to suspect ones superior of being a fraudster? Why do
we trust some managers blindly?
It is in the nature of things that managers enjoy an extraordinarily high level
of trust. They have been given power and if top managers did not trust them
they would not be given power. Top-level managers, maybe even people at the
Board level, have probably been involved in the appointment of the manager
in question. They would not have recommended individuals they didnt trust.
This trust on the managerial level is almost there by definition, and is expressed
in the form of a loosely defined job description. This situation is inevitable
Trust in Organizations
93
since the manager of any business operation is responsible for dealing with
uncertainty, initiating renewal, implementing complex changes, taking care
of surprises, deviations from plans, and so on. Managerial work, particularly
at higher levels, cannot be specified in advance. It is therefore necessary that
manager not only have discretionary resources at their disposal, but also that
they have considerable freedom to act. You could say that every manager
has got a commission of trust. An immaculate manager is still to be found
but we cannot stand the thought that our own superior, or colleague in the
management team, is an impostor. They simply have to be of the reliable kind
because the alternative is too frightening. It follows from this that a manager
without trust is no longer a manager but a security risk.
Therefore, there is a quite understandable initial resistance to suspecting
managers of fraud. Everyone in the organization wants to trust managers fully
because too much is at stake when people in power are suspected of unacceptable
behaviour. If the trust is withdrawn, even on suspicion, the manager must be
quickly dismissed with considerable consequences for the organization.
This is one reason why trust in the organization, and especially in its
managers, runs the risk of becoming blind. These difficulties might also explain
why PricewaterhouseCoopers (2003) found that a third of the companies they
surveyed did not even investigate the extent of the fraud.
Even when confronted by the evidence, the top management somehow could
not accept that the manager they had appointed had betrayed them. They
recognized the risk of fraud and corruption in the former Soviet country, but
could not imagine that the main risk was the Western European manager!
One of them! And they found it equally hard to believe that Dmitri (the
whistleblower), a local employee, was the honest one.
In the end, the facts became impossible to ignore but top management still
refused to deal with the problem. They found it more expedient to close the
local company rather than admit to the Board how they had been deceived.
(Example from Case 1, Rose, p. 8).
The dangers associated with blind trust should be evident. And if trust is
both blind and dumb, remembering the moral muteness discussed in Chapter 5,
no critical reflection whatsoever will take place. Therefore, it comes as no
surprise that colleagues or subordinates near to the fraud often know or suspect
at least part of what is going on, but without drawing the right conclusion or
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blowing the whistle. And even if they do, more senior management is often
reluctant to deal with the problem.
In summary, if the organizational culture emphasizes decentralized decision
making, deregulation, flexibility and trust-based leadership, individuals with a
commission of trust who are bent towards fraud may see this as an opportunity.
High levels of trust, well founded or not, may paradoxically enough support
breaches of trust and may also at the same time obstruct exposure of the crime.
In the worst of cases, the combination of organizational harmony as a governing
ambition with a narcissistic manager might also in the end create feelings of
guilt and shame among those co-workers who witness the fraud unfold.
Cynicism
Instead of feeling guilt and shame one could develop a cynical view on
managerial fraud. This comes close to the Myth of Amoral Business we
mentioned before and is the opposite of blind trust.
The full-fledged cynic believes that managers are crooks all over. Every
new case of revealed fraud strengthens that conviction and no information
can prove otherwise. Honest managers are only seemingly honest. They just
havent been caught yet.
Cynicism can, psychologically speaking, be understood as a defence against
being deceived. The cynic expects to be deceived, and will not be caught by
surprise the day it happens.
Summary
Trust based on common values is an efficient way of coordinating and motivating
people in an organization. It is also pleasant to work in trustful relationships
with others. Therefore there is a tendency for both managers and employees to
build trust. But too much trust, blind trust, makes it impossible to spot fraud
and corruption. Cynicism, on the other hand, leads to a passive attitude towards
fraud and corruption. How do you reach a balanced or authentic trust?
Authentic trust is a form of trust that implies a risk. To have authentic trust
means to know that that those we trust may deceive us and take advantage of
Trust in Organizations
95
us, but we trust them anyway. Taking that risk is a conscious choice from our
side. Blind trust and cynicism are states of mind that we can fall into. Authentic
trust is a question of conscious risk taking which also means that we will keep
our eyes open and be prepared if red flags appear.
8
9
It is a basic idea in this book to explain the dynamics of managerial fraud and
corruption as a failure by bystanders and/or fraudsters to reach a common
understanding of what is normal and what is abnormal. The fraudulent act
is somehow interpreted in a common sense way, something that may prohibit
critical reflection, new understanding and adequate action.
According to PricewaterhouseCoopers (2007), only a third of all fraud incidents
were detected by internal control and fraud protection systems, for example
through internal audit, fraud risk management and rotation of personnel. An
additional one-third was detected through what is somewhat vaguely formulated
as corporate culture, for example, internal (29 per cent) or external (14 per cent)
tip-offs. The report comments on this rather gloomy picture:
And the result is continuing evidence of the intractability of fraud
and its apparent immunity to managers attempt to control it: in 2007,
41 % of frauds were detected by chance, an increase of seven percentage
points in the past two years.
What then might support awareness and critical reflection? Part II of this
book will deal with that question in detail. Here, we will lay the theoretical
ground for that discussion by reformulating the question a bit: through what
social processes can the presence of fraud be turned into a social fact, or
something that is noticed by all, judged to be instances of deviant and immoral
behaviour and concretely dealt with? This is equivalent to asking: how can we
adequately reconstruct fraud and corruption in a company?
The usual recommendations urge top management not only to work
with internal control systems but also develop a corporate culture in which
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Figure 9.1
101
102
It goes without saying that fraud and corruption is not normal, meaning: it
is not the norm. Nevertheless, it seems to be common. Paradoxically enough,
realizing that fact and understanding the distinction between norm and
commonality might facilitate fraud prevention and detection. How?
If devious or cruel behaviour is being demonized and attributed to almost
non-human individuals or monsters the result may, paradoxically enough, be a
kind of acceptance and less than optimal reaction. The evil that one witnesses
is then seen as external and alien. What can one possibly do with an evil
monster other than try to eliminate it or hide from it? And since most of us
cannot eliminate our superior, we run for shelter. This is not a very constructive
response towards fraud and corruption.
Another attitude would imply admitting that fraud and corruption is
common, or even banal (Arendt, 1963), and that fraudulent behaviour is a part
of everyones potential behavioural repertoire. That would make it possible
to actively mobilize ones perception and reflection to a higher degree than
innocent naivet would allow. Fraud or fraudulent tendencies can then be
re-cognized, that is to say, known again. This also means realizing that we
already have many relevant experiences to draw on within ourselves. Those
experiences may be used to reveal and deal with fraud and corruption in much
more sophisticated ways than the simple fight or flight reaction.
It would also be less frightening for the bystanders to a fraud to realize
what is going on. It might help opening their eyes, thus supporting internal
reporting of the fraud through normal channels, or even whistleblowing. A lot
of our suggestions for raising fraud awareness work through this mechanism:
it makes fraud and corruption recognizable.
One of the strong drives of the Corporate Psychopath has been shown to
be fantasies of grandiosity. If knowledge about the normality of fraud and
corruption were more widespread, maybe the Corporate Psychopaths would
not have the same aura of infallibility and superiority, aboveness that they
might enjoy today in some cases.
Probably more important is the effect that an understanding of the
commonality of fraud has on bystanders. They can gather strength and pride
from the fact that they have not, like so many others, succumbed to the pitfalls
of fraud and corruption.
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104
Investigate!
We have so far concentrated on how fraud is recognized or ignored, how
individuals resist or rationalize fraudulent acts, how fraudsters deceive their
victims and so forth. Our assumption has been that it is preferable if fraud
and corruption are recognized within the organization when they occur, and
preferable that employees are conscious of the norms and aware of the risks. But
what actually happens when fraud or corruptions do occur and are recognized?
If the organization has prepared contingency plans for this eventuality, and
its employees are aware of the risks and conscious of the norms, then managing
the occasional incidents that occur is routine. We will therefore first concern
ourselves with the organization that is unprepared, less aware of the risks.
When a serious incident imposes itself upon an unprepared management,
it is likely to be treated as a crisis requiring urgent resolution. Most incidents
are not that severe, unless they are mismanaged. But the general perception,
the common sense, is that fraud should never appear in a well-run company.
When it does appear, it is perceived as management failure. Management
has failed to maintain proper internal controls that should have prevented
the fraud. In truth, however, internal controls alone cannot stop fraud from
occurring; the determined fraudster will always find ways to circumvent the
system. There will always be some people who can find the rationalizations
they need to become fraudsters. Management negligence can be a factor, but it
is not a foregone conclusion.
However, because it is perceived as management failure, and because as
we pointed out earlier, managers are highly averse to being associated with
failure, an incident of fraud is highly disturbing. The management that finds a
fraud within its responsibility area seems to assume the shame and guilt that
the fraudster has rationalized away!
The desire to escape the stigma may lead to decisions which are not in the
best interests of the organization. We see in Rose (Chapter 2, Case 1), for example,
that management could not bear to face the Board with their problem, they
preferred to walk away from a substantial investment. In other cases, managers
have found it much easier and faster to come to an agreement with a fraudster,
and reward them with an early retirement package instead of pursuing them
in court. They have their own rationalizations for doing this, such as theres
no point shutting the stable door after the horse has bolted. Its too late.
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It will distract us from more important business. The investigation will cost
more than we can recover.
In fact the investigation probably will cost more than it recovers. If shortterm cost reduction is the only objective, managers might well be correct to cut
their losses and let the fraudsters keep their ill-gotten gains. However more
astute managers may see investigation and eventual prosecution as the best
remediation, both to recover lost assets and to create a deterrent effect for new
potential fraudsters. Unfortunately financial fraud investigations tend to be
long, complex and costly exercises which demand attention and overshadow
the more proactive, lower-profile actions that could keep fraud at bay in the
first place (Iyer and Morino, 2009). But are there other important reasons to
investigate? We would propose the following:
There is still the obvious objective of recovering lost assets, but in most
cases the considerations noted above are far more important; they concern the
future welfare of the organization, that is to say the 99 horses which have not
yet bolted.
When the fraudster is a senior manager, someone with a high profile in
the organization, the decision to investigate is difficult, the temptation to settle
strong. An investigation will lead to unwanted publicity and costs. But taking
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the easy way out sends a dangerous message to the organization: misconduct
pays. Performing the difficult investigation might be just what is needed to
turn around an unhealthy company culture.
It was clear to all that the local CEO (with the support of the CFO) had been
abusing his position for years. The list of red flags was long: conflict of interest,
nepotism, collusion with suppliers, false reporting. As a result a culture had
developed where everything was allowed and this was spread all over the
company. At least half of the senior managers were running their own small
shows, including preferential treatment to favourite clients and suppliers,
kickbacks, secret deals and more. There was no doubt about the need of
further investigation. The question was how much and up to which level?
Would it have been worthwhile to investigate and prosecute every single
case? The pragmatic Head of Group Security decided that a long, drawn-out
investigation would be too painful and would probably not achieve the desired
result. Also he was not sure that he would have been able to prove fraud in
many instances that had been accepted for years. His simple and effective
solution was to gather enough evidence to dismiss the CEO and encourage
the CFO to an early retirement. Soon afterwards several other managers
decided to leave voluntarily and little by little the situation was locally solved
by the honest people remaining in the company. (Example from Case 6, Lapis
Lazuli, p. 19).
Lets return to an organization that is prepared for the necessity of
investigation. They know that incidents of fraud and corruption are inevitable,
and have therefore prepared themselves to deal with them. An incident is not
a crisis but a deviation that needs to be addressed, including identification of
the root causes of the deviation in order that actions may be taken to reduce the
likelihood of reoccurrence.
While this is not a book on investigation, we cannot resist adding a few
suggestions inspired by Nigel Iyer and Martin Samuciuk (2006) on how
managers should react to a fraud incident:
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Act on the assumption that when the full extent of the fraud
is discovered, it will be more serious than the early suspicions
suggest.
Mystification on Stage
Social processes can be analyzed using the theatre as a generative metaphor.
The American literary critic and philosopher Kenneth Burke developed the
drama metaphor in his book A Grammar of Motives (1945/1969). He argued that
what people do, and how events unfold, could be interpreted as something that
has a very specific structure. This structure puts together: What (was done) and
When? Where? By Whom? How? and Why?
In a vocabulary taken from the stage, these questions refer to: Act, Scene,
Agent, Agency and Purpose. When all the pieces fall into place, integrated
in a coherent picture, the interpretation/play works.
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Figure 9.2
109
develop a powerful dynamic of its own. The play itself, that is, a strong almost
mythical story, and not empirical facts, may supply the missing parts in the
scheme and satisfy the demands of mystification. Examples of missing parts
supplied by the play itself are what we now recognize as rationalizations:
this is an exception;
The power of the myth can be so strong that the space for individual reflection
and action is radically reduced. Metaphorically speaking, the characters in the
play take hold of the actors who then abandon their own notions of norms
and values. The fraudulent actions continue and may never be understood and
exposed as such even though all the necessary facts are there.
Mystification can therefore be described as an effect of incomplete
rationalizations resulting in ambivalence. This makes the concept useful when
discussing preventive measures. Mystification if we take it seriously and do
not suppress it could trigger and inspire reflection. That would help us to
avoid blind trust and to question common sense. Maybe we should look for
ways to increase, not decrease, confusion in the company! We will return to this
subject in more detail in Part II.
Investigate Feelings
Let us go back to the remark made earlier about managerial fraudsters having
narcissistic tendencies, and that such personalities leave traces behind in the
organization. Feelings of guilt and energy drainage are two examples, caused
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that follow the companys success. The fraudsters, or at least some of them,
may not want to appear greedy but they find themselves in a situation that they
cannot discuss with others. In those instances, preventive measures could be
about efforts to simplify and encourage an open discussion about the situation:
is it really that bad? Maybe it is possible to solve the problem in a legal way?
Secrecy, not financial need as such, might be the real problem, and that
is a problem that can be solved. We will return to this issue below, under
Communicate!
Moralize!
The word moralize may carry some unpleasant associations. Bigoted and
narrow-minded individuals moralize over the behaviour of other people. To
moralize is to criticize, wanting other people to be ashamed and to feel guilt.
And behind the moralizing gossip, we recognize a sense of self-conceit and
malicious delight on the part of the moralizer. However this is not what we
intend when we use the term here.
Instead, we talk of moralizing as the verb form of morale. To moralize
would then mean to cultivate, to make or even to deliver morale. We want to
stress the necessity of developing what we earlier called judgemental ability,
or the ability to tell right from wrong, good from bad; and not allow that the
native hue of resolution is sicklied oer with the pale cast of thought (Hamlet,
III, i, 84) as Shakespeare put it.
Emotional Reconciliation
Most fraudster personalities seem to be at ease with their actions. For those
with a narcissistic personality, their own grandiosity and the environments
admiration and envy are real. Conscience and empathy do not pose any
problems. In fact, their absence is part of the fraudsters pathological pattern.
Dealing with or setting the narcissistic personality right has proved
to be extremely difficult. The literature on the subject stress that narcissism
is founded in experiences of fear, helplessness or panic in early childhood,
which have created a kind of inner chaos. One should therefore try to avoid
direct confrontation with these compensatory feelings of grandiosity. Instead,
it is better to try and draw clear and safe, non-confrontational, limits for
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the execution of leadership. But the odds seem to be against success. Often
dismissal becomes the only practical alternative.
For the less pathological fraudsters, different forms of rationalizations
justify the crime. They feel that the weight of the favourable definitions
exceeds the weight of the unfavourable definitions to use Sutherlands phrase
we quoted earlier.
However, for some of the bystanders the situation is different. Intuitions
about right and wrong, pride and shame, are constantly being provoked by
what they see happen. The situation doesnt make sense. Their emotional
reconciliation fails, which explains their bewilderment and passivity.
To be bewildered in that sense could be something positive if it is turned
into a starting point not only for a further investigation but also for development
of a fraud prevention programme aiming at strengthening and clarifying
the functions of conscience and empathy at work. Too often, conscientious
individuals believe they are all alone with their doubts, which they seldom
are (remember the discussion about moral muteness in Chapter 5). Realizing
that they are not alone will, in itself, help raise awareness of fraud in the
organization.
Without emotions there is no value. In that sense, one can say that emotions
are indispensable ingredients in any moralizing endeavour. If we take moralizing
seriously, we should continuously compare general principles and values,
found for instance in the code of conduct, with our emotional judgements and
with particular circumstances. We should look for rational arguments and facts
that may confirm or contradict our judgements. The search ought to go on until
we reach an integrated and stable conclusion, a reflective equilibrium which is
how the American philosopher John Rawls (1971) described this state of mind.
Then we know what to do. We regain our hue of resolution. If this search can
be turned into a collective effort, the organizational culture will be less lenient
towards fraudulent behaviour.
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A classic definition of corruption is: The use of public office for private gains.
(Nowadays public office also refers to resources entrusted to employees in the
private sector.) The word: public in this expression should be understood as
the opposite of private as in our private lives. Every employee, and managers
especially, are supposed to be able to keep their public and private roles apart.
You are not supposed to use your office computer for private net surfing, use
the company car for weekend shopping tours, or use your own paid working
time for other purposes than your employers. Thus, corruption refers to a
confusion of the public with the private:
Corruption = Public Private
However, corruption is not only forbidden or inappropriate in a general
sense. It is immoral and unethical. It is condemned in the strongest words
and with considerable emotional back up. Is this formula really adequate in
order to explain societys moral condemnation of corruption and the neverending war on corruption? What, in more detail, is so threatening in mixing
our public and private lives? We need something more in order to understand
the roots of our own frustration.
It has been proposed by the Swedish philosopher and engineering scientist
Thomas Taro Lennerfors (2008) that the confusion of public and private is
provocative in two ways. First, because the confusion is asymmetrical in the sense
that it is an idea about the pure public sphere that is being contaminated with the
idea of a sloppy private sphere. It is not by chance that corruption is pictured in
metaphors like: bad apples, organizational rot and social cancer. Something
dirty is being mixed into that which we want to think of as clean, ordered
and under societal control, that is, the public sphere. Secondly, this confusion
or contamination is connected with a kind of uninhibited, undomesticated or
anarchic enjoyment that is forbidden in the civilized modern society.
The formula for corruption should therefore be completed with this
second contaminating element. Otherwise we cannot explain the strong moral
sentiments connected with corruption. Thus:
Corruption = Public Private + J
Where J would stand for jouissance, a French concept that stands for
stolen or denied enjoyment. Deep within, we long for the same enjoyment that
fraudsters may get from their fraud. We know that private use of public or
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Communicate!
One study by Frederick Bird and James Waters (1987) investigated what kind
of moral standards managers used when they judged activities with a moral
concern. They found that honesty in communication was the most frequently
used. Deceiving customers, colleagues or authorities, but also not living
according to ones words, was considered to contribute to poor planning, poor
utilization of resources and/or the loss of credibility. As they reported:
For honesty in communication called for managers to provide full,
candid accounts of all relevant information bearing upon the ongoing
decisions which other managers in the larger organization regularly
had to make.
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Mobilize!
Let us return to the conclusions of Earl Rubington and Martin Weinberg (1968):
For deviance to become a social fact, someone must perceive an act,
situation or event as a departure from social norms, must categorize
that perception, must report that perception to others, must get them
to accept this definition of the situation, and must obtain a response
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that conforms to their definition. Unless all these requirements are met,
deviance as a social fact does not come into being.
If incidents of usage of public office for private gains have been identified
as incidents of fraud or corruption, meaning that they are seen as departures
from social norms in the organization and that they are condemned as forbidden
and/or unethical, and if that opinion has gained substantial social support in
the organization, fraud and corruption has still not been established as a social
fact. It remains an opinion, albeit shared, until something is done about it. If
it stays as an opinion only in the organization, it means that the fraudulent
and corrupt behaviour may continue. There has to be knowledge about how
to act and motivation to go with it which we discuss in Part II. But visible and
structural changes will also be needed.
Good Bureaucracy
We have seen that many contemporary trends in organizational design, such as
decentralization, deregulation, flexibility, trust-based leadership, values-based
management and so on may have adverse side effects when it comes to fraud
risk.
One could say that a common feature in many organizational development
projects today is to try and replace control mechanisms external to the
individual, for instance structured administrative routines or thorough
personal surveillance systems, with internal or values-based self-control. This
has shown to increase efficiency and motivation but may at the same time open
up possibilities for corrupt behaviour. If that is true, there might be a case for a
small step backwards, towards the reinstallation of a good bureaucracy.
Bureaucracy
Nowadays, the word bureaucracy is often associated with red tape, nonexistent service and inefficiency. However the German sociologist Max Weber
(Gerth and Mills, 1958), the originator of the theoretical concept, described
bureaucracy as a highly competitive organizational form. In fact it was so
efficient compared to the traditional forms prevalent in the nineteenth century
that it soon became standard. Its competitors were plagued by rigidity,
nepotism, fraud and corruption, and because of that also by inefficiency.
Bureaucracy became the winner and so it has remained even up to our own
days. We still very much live in the realm of bureaucracies.
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One of the characteristics with the bureaucratic form when it developed was
that it was purely rational. In other words, every action taken in a bureaucracy
is carefully calculated in order to reach established targets with a minimum of
resources spent. Up until the bureaucratic era, decisions were more strongly
influenced by old traditions, powerful and/or charismatic individuals, religious
or magical ideas, or from emotions, but not in a bureaucracy:
Bureaucracys specific nature develops the more perfectly the
more bureaucracy is dehumanized, the more completely it succeeds in
eliminating from official business love, hatred, and all purely personal,
irrational and emotional elements which escape calculation. This is the
specific nature of bureaucracy and it is appraised as its special virtue.
(Weber, 1978)
Rational calculations, precise documentation and fine-tuning of the
established operating procedures make the bureaucracy efficient.
A fully developed bureaucratic mechanism stands in the same
relationship to other forms as does the machine to the non-mechanical
production of goods. Precision, speed, clarity, documentary ability,
continuity, discretion, unity, rigid subordination, reduction of friction
and of material and personal expenses are unique to bureaucratic
organization. In the case of monocratic administration, these factors
are intensified to the optimum through schooled individual officials
in contrast to colleague-like older forms which are either honorary or
extra-official.
(Weber, 1978)
Speaking of a bureaucratic machine is therefore quite accurate. That
was precisely what its designers intended: a machine consisting of physical
equipment, a dehumanized labour force and formal rules. Not surprisingly,
this way of thinking also gave birth to the extremely tight surveillance systems
of the aptly named Scientific Management school in the beginning of the
twentieth century.
If the organization is a machine, controlled by cold scientists dressed in
business suits, no impostor or narcissist can find the cracks in the administrative
systems or in the minds of their colleagues, necessary in order to launch their
devious plans. No space for corruption here, unless deliberately done by order
of the machine!
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Paid to be Suspicious?
Installing special staff or departments with the purpose of keeping a keen eye on
internal rules and risks is one way of solving the problem with scattered or nonintegrated cultures. These people, for instance internal auditors and external
investigators making checkups, have the responsibility to be suspicious. It is
probably not possible to fully integrate them and their functions in the day-today activities of the firm. Indeed, it is necessary for them to be independent in
order to allow their objectivity. One argument is that they should be protected
from being drawn into the social deconstruction of fraud that might be going on.
Another is to let the positive effects of more clan-like organizational processes
develop undisturbed of the more machine-like surveillance systems.
Summary
This first part of the book began with a presentation of a frame of reference
that recognizes others influence on our knowledge of the world, and thereby
also on our behaviour. We called this social constructivism and have argued
that fraud and corruption occurs because of certain failures in this social
construction of the world. It sometimes makes us mute, blind and paralyzed
when it comes to fraud and corruption. Therefore, we ended this part of the
book by giving some suggestions of what it would take to reconstruct fraud
and corruption properly.
First, both the proper norm and violations of it have to be clarified. Second,
incidences of both fraud and corruption should be investigated, not only in order
to capture the offender but also to learn how to prevent recurrence. Especially
the investigation of feelings was brought forward since we may hunch fraud
and corruption before we know that it happens. Third, we suggested that the
concept: moralizing should be recycled, now depicting a kind of joint training
of our moral judgemental abilities, not shying away from our own envy towards
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Part II
Introduction to Part II
Exploring the Remedies
10
124
organizational structure;
competence of personnel.
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Our focus in Part II will not be to challenge these definitions, but rather
to find new ways for organizations to improve their control environment and
internal control in the broadest sense, so that they might become more effective
in preventing and detecting fraud and corruption.
There are many kinds of unacceptable behaviour which are not strictly
speaking fraud or corruption; sexual harassment, polluting the environment,
exploiting child labour and racial discrimination just to name a few. Together
with fraud and corruption, these deviations from the norm fall into the
broader concept of organizational responsibility or integrity. While fraud and
corruption are main concerns in this book, we find that in awareness projects it
is sometimes difficult to separate them from the wider range of inappropriate
behaviour. Employees who are trained to be aware to the risks of fraud and
corruption will also be more aware of other integrity risks. This is just as well! It
is not uncommon to find fraud and corruption together with other wrongdoing.
The teleopathic fraudster can rationalize any action.
We suggest that fraud awareness is an ability that can be learned. By raising
the fraud awareness of employees, organizations can reduce the frequency and
severity of fraud and corruption incidents. We will, in the following chapters,
explore how this might be achieved.
11
Teaching Awareness
Could we train employees to recognize deception in an organizational
context, to be alert to attempts to manipulate people or processes against the
organizations best interests and intentions? And if we could, would employees
be sufficiently interested and would they want to be trained?
Training is of course possible; the question is whether it is economically
and practically feasible. Few organizations would be able to afford the cost of
sending large numbers of employees on a college-level, comprehensive course
on fraud and corruption. Neither is it necessary for every employee to achieve
the same level of competence that a manager of corporate responsibility, human
resources, audit or security might need. Awareness does not require complete
understanding of the subject.
Acquiring the necessary knowledge and perception may not need a great deal
of time, but it does require that the student participate in the learning process.
We need to capture the interest of employees so that they will understand and
absorb the essence of fraud awareness. The challenge is therefore to overcome
employees initial indifference and inspire lasting fraud awareness, in a short
amount of time and at a reasonable cost. In other words, we need to bring the
subject to life.
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Experiential Learning
Experiential learning is the process of making meaning from direct experience
(Itin, 1999) and focuses on the learning process for the individual. Instead
of hearing or reading about others experiences, one makes discoveries and
experiments with direct knowledge. An example of experiential learning is
diving underwater and learning through observation and interaction with the
water environment, as opposed to reading about animals and sea plants from
a book.
Experiential learning doesnt necessarily require a teacher and relates only to
the means of making process of the individuals direct experience. According to
David Kolb (1984), knowledge is continuously achieved through both personal
and environmental experiences. However, for a real learning experience to take
place, there are several prerequisites:
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century to develop learning programmes that would not be separated from reallife experience. However it was not until the 1970s that experiential learning
became a recognized field of education.
130
several ways and different methods of working with experiential learning, the
common elements for a successful of experiential learning are:
131
132
Figure 11.1
There may also be bystanders, that is to say persons who have no active role
in the fraud but knowingly or unknowingly witness all or part of the deception.
Like the target, the bystanders may be fooled by the deception. For the fraud
to succeed, bystanders must remain passive and not reveal the deception.
Preferably, in the fraudsters mind, the bystanders will not understand the true
situation. In a single fraud case, there might be one or more targets, victims,
bystanders and even fraudsters.
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Writers in the field of experiential learning use the term with two different
meanings. On one hand the term is used to describe the learning that comes
through the possibility of applying knowledge, skills and feelings to a direct
specific setting. Experiential learning involves, according to Borzack (1981),
a direct encounter with the phenomena being studied rather than merely
thinking about the encounter, or only considering the possibility of doing
something about it. Individuals are encouraged to take responsibility for their
own learning and the emphasis is on the process of learning itself.
The second type of experiential learning is, education that occurs as a
direct participation in the events of life (Houle, 1980). In this case learning
is not supported by trainers but by people themselves. It is learning that is
attained through reflection upon everyday experience and is the way that most
of us do our learning.
In the real world, individual employees in a complex organization only see one
small part of what is happening and very rarely are given the chance to experience
a fraud event from the beginning to the end. The salesman sees one part, the
accounting clerk another part, the factory foreman, the procurement manager, the
controller and so on each see a small part of the fraud from a different, narrow
perspective. The fraudster does not need to deceive everyone at the same time,
but instead takes advantage of the complexity and disarray that are a natural part
of any large organization. And to the extent they are deceived, the targets and
bystanders do not realize at the time that they are witnessing a part of a fraud.
Thus the experiential value of actual fraud events is pretty limited.
134
135
to understand these effects in the particular example so that if the same action
was taken in the same situation it would be possible to predict what would
follow as a result. The third step would be to understand the general principles
and rules under which the particular case falls.
We usually think of learning as an individual capability; can an organization
that is a collection of individuals also be capable of learning? In many industries,
for example aeronautics or telecommunications, the final product is so complex
that no single individual fully understands it. Yet there is a common body of
knowledge in the organization that does; collectively the organization has
the knowledge to design, produce and maintain the complex product. Many
experts in different fields are competent for various components, others for
overall design, documentation, logistics, manufacturing and administration.
Most employees probably have a general understanding of the product, that is
to say what it is for and who are the customers. It follows that an organization
is capable of learning, able to change and improve, and therefore we can apply
the learning cycle as if to an individual.
Awareness of fraud and corruption can also be treated like other areas of
knowledge within the organization. A few experts with a deep knowledge
of the subject are needed. Communications and training expertise is needed
to disseminate knowledge throughout the organization. Managers require
special competence to advise employees and correctly respond to incidents.
All employees require general fraud awareness so that they are equipped to
handle dilemma situations within their particular spheres of responsibility and
so that they can recognize signs of improper activities and know how to bring
these signs to management attention.
While an actual incident of fraud or corruption is an undesirable event,
when it inevitably occurs organizations should not miss the opportunity to
learn from the experience, understanding what went wrong. Incidents might
also become the inspiration for case study simulations for training purposes,
with trainees either making decisions to address the simulated incident, or
observing the decisions being made by others. Using actual events, true stories,
for case studies also increases the credibility of the simulation for trainees. One
can say, this really happened.
Following the learning cycle described above it should be possible to use
actual or simulated incidents as a learning tool which should help the individual
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and the organization develop the ability to see a connection between the actions
and effects over a range of situations.
Persons and organizations that have learned in this way may well develop
various rules and generalizations about what to do in different circumstances.
They will be able to say what action to take when, for example, a supplier is
deliberately inflating an invoice, or when they notice an unusual change in the
lifestyle in one of their colleagues. All this may happen in a flash, or over days,
weeks or months, depending on the topic, and there may be a circles within
circles process at the same time.
One could argue that there may be difficulties when trying to apply lessons
learned during one fraud incident or simulation to other settings and situations.
However it should be possible to define footprints and paths, the abstract
concepts, which can then be adapted and applied to the specific situation.
Many organizations however miss the learning opportunity.
When an organization experiences fraud, as a victim or target or both, it is
tempting to jump to the conclusion that management is to blame. An incident
of fraud seems to be evidence of management failure, on the premise that
competent management would have prevented the incident from occurring.
Because of this common misperception, managers therefore tend to treat
fraud incidents as embarrassing events that need to be quickly resolved and
buried with as little attention as possible from their superiors (or worse yet, the
media). This tendency is unfortunate, since organizations miss the opportunity
to analyze and use incidents as a learning experience for the organization and
for its employees. A healthier attitude would be that incidents of fraud are
inevitable in any large organization, but that the costs can be contained through
good management. When incidents are detected and competently addressed, it
is evidence of management strength, not weakness.
However, even if organizations would make full educational use of their
fraud experiences, they naturally would prefer to avoid them. Fraud incidents
create a learning opportunity but not a complete training solution. A more
economical and predictable form of training is needed. So how can we use
the power of experiential training without the inconvenience of actual fraud
incidents? One possible solution which we are exploring is use of the theatre
metaphor as an instrument of quasi-experiential training. One could also say
that this is a way of using generalized experience from many different instances
of fraud, making them transferable to others.
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Summary
In this chapter we suggested that it is difficult to raise fraud awareness, or
to learn to ride a bicycle, without practical experience. We discussed how
the theory of experiential learning can be applied as a method to both raise
individual and organizational awareness of fraud and corruption and also
provide trainees with useful tools on how to deal with concrete situations in
the future. While real fraud incidents provide valuable lessons, they do not
fill the training need. In order to provide the required practical experience,
we need to use simulation. People without experience in fraud and corruption
situations may be nave concerning the risks. But most people are skilled in
the art of deception, having learned it at an early age in the normal course
of development. Our task is to take this understanding of deception and
demonstrate how it is applied in fraud and corruption situations.
12
140
141
The duke blamed his lack of success on the stupidity of the audience, rather
than his own lack of talent. But while he was a poor actor, he was successful as
a fraudster. Acting is apparently the more difficult profession.
While acting is not fraud, fraud often involves a kind of acting. The fraudster
creates the deception, or takes advantage of a deceiving situation. When the
fraudster is, for example, an employee deceiving their employer, they must play
a role that is consistent with the deception, and possibly keep up the faade for
years. Bystanders mystification must be avoided or satisfied. Fraudsters may
be extremely believable, so comfortable with the role that they can even fool
themselves and believe their own lies. At the same time fraudsters have an
advantage over their targets as compared to an actor, in that the fraudsters
targets do not expect to be deceived. If the target also personally knows the
fraudster, as a work colleague for example, then the fraudsters advantage is
even greater. The target trusts the fraudster.
Sketch 12.1
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Nick: So? Thats not illegal. Listen, this agent is a rich man. Very
well connected to the Royal Family. We are lucky to get access to
his services.
Russ: Well, I guess so. Its odd how many of our agents have bank
accounts in Switzerland, dont you think?
Nick: Not at all I keep several accounts there, dont you? Just kidding
Russ, just kidding!
Nick chuckles as he leaves the room, as Russ stares after him, not finding
it funny at all
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Table 12.1
Actor
Acting on an artificial stage
Acting a fiction
Entertaining story
Follows a script
Audience aware of fiction
Short performance
Audience watches
Actor is a third party
Other directed interest
Fraudster
Acting in a real-life setting
Living a lie
Distraction
Follows a plan, improvised script
Audience is truly deceived
Never ending story
Bystanders participate
One of us
Self-directed interest
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145
the time comes they will notice the signs and with a heightened awareness, be
mystified, and frustrate the deception when they search for answers.
Sketch 12.2
The whistleblower
Its getting late, and Dawn has just cleared and locked her desk, the end
of her daily routine. After six months at Deluxtronics Ltd they have finally
put her label outside the door Room C010816, Dawn Rade, Internal
Audit. She is surprised to have a visitor now, Leigh Wey from accounts.
Leigh: Am I disturbing?
Leigh is apparently nervous, even looks back over her shoulder to check
that nobody has seen her come in.
Dawn: No, please sit down Leigh.
Leigh: Thanks, but I just wanted to drop off something you might be
interested in.
Dawn: Well, all right, but what is it about?
Leigh: If you dont mind, I would rather you have a look first, then if you
like we can talk. I think you will find it interesting reading.
Short silence as Dawn takes the file and opens it
Dawn: What on earth is this? Where did you get it?
Leigh: Got to go
Dawn: Thanks a lot.
Leigh is already gone. Dawn unlocks her desk again and starts to read.
She is clearly intrigued by the papers, and leafs through them quickly,
looking for something.
We made the point in the first pages of this book that when fraud is detected,
it is usually by accident or as the result of a tip. The term whistleblower is
sometimes used for the person providing the tip, and in the short scene above,
Leigh is playing that role. Dawn, the internal auditor, is given a file which
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contains something shocking; evidence that fraud is taking place. The actors
are setting the stage for the fraud drama.
Role Playing
As the Oxford English Dictionary states, role playing is the changing of ones
behaviour to fulfil a social role. The behavioural change can be unconscious
in the case of filling a social role, or conscious, when a person acts an adopted
role.
The term role playing was first used in the 1920s by Jacob L. Moreno, a
Viennese psychiatrist who concluded that patients achieved more from learning
about their problems by acting them out than by talking about them (1947).
In social science, role playing refers to psychodrama and sociodrama.
While psychodrama deals with the personal role, sociodrama deals with the
collective aspects of a role (Dayton, 2004). Role playing follows the lines of a
theatre performance and includes many actors. The participants are put into
hypothetical situations, usually playing as themselves rather than as another
pretended person. They are the main characters. Their lives or abilities and their
roles, are the ones that are observed and analyzed. The secondary characters
include anyone else who put the main characters within the situation. The
audience is any watcher who may provide feedback. The stage is where the
performance takes place, and the director is the expert who guides the exercise,
perhaps as the facilitator in a workshop.
Role playing can be used for teaching communication skills, interpersonal
skills, leadership training, organizational management, professional training
and even sports. It can also be an effective teaching technique for raising
employees awareness and vigilance for the risks of fraud and corruption.
One reason that role play is so effective is that it forces participants out
of their comfort zone and into a danger zone, into the spotlight of attention.
As with any dangerous situation, the adrenaline flows and the challenge
commands the full attention of the participant! But by avoiding the dangers
of the real-life situation, role playing allows participants to test a new action
repertoire without suffering from real panic.
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Through role play, trainees could learn not only about fraud and fraudsters
behaviour but also about how victims, informants, management and all the other
corporate players behave and react in suspicious or fraudulent situations.
Awareness to fraud and corruption and the ability to detect signs of
malicious deception is a valuable skill. Our subconscious is already equipped
with formidable tools for recognizing deception, but we need to train ourselves
to be alert for the signals so that we can take conscious defensive actions.
Training by the book is not enough; experiential training is called for. We cannot
build a training programme around real fraud incidents as they are happening,
but we can simulate the incidents using the tool of drama.
Summary
Children learn the reflexes of cycling under the watchful eyes of their parents,
with a couple of training wheels. Fighter pilots make extensive use of simulators
to learn how to handle difficult situations that would be too dangerous to
teach in the air. Pilot simulation training is necessary in order to provide the
hands on experience the pilot might suddenly need in the performance of his
normally routine duties. In the same way, we can use the drama metaphor as
a simulator, and use role playing to give people concrete experience on how
a typical fraud incident would or could take place in the real life. It allows
participants to acquire the hands-on experience they cannot obtain from other
kinds of training. With the learning acquired it becomes possible for trainees
to define for themselves general rules describing the experience. They can
then use these rules to recognize and proactively modify the next occurrence
of the experience, taking actions that will lead to discovery and frustration of
actual incidents. When fraud and corruption take place for real, the more alert
bystanders will be more likely to be curious and suspicious, less likely to accept
unsatisfactory explanations to the inconsistencies they notice. Experiential
training is also a convenient way to make awareness training entertaining in
order to attract employees attention and make an impact during a relatively
short training period.
13
This above all: to thine own self be true, and it must follow, as the night
the day,
Thou canst not then be false to any man
Hamlet, I, iii, 78
Code of Conduct
One of the principal responsibilities belonging to the highest level of authority
in any organization is to establish the ethical values that the organization
will follow. In a simple corporate structure with a Board of Directors, Chief
Executive Officer (CEO) and an executive management team, the Board has
the responsibility to approve and monitor the companys ethical values. They
appoint and direct the CEO and the executive team, who through their policies
and actions determine the shape of the organizations ethical behaviour on a
daily basis. The Board is also responsible for reviewing the performance of
the executive team, monitoring that they do what is necessary to ensure that
operations take place within the ethical framework the Board has defined
and approved. It is apparent that in an organization with many thousands
of employees, mechanisms are needed to ensure that each employee is acting
within the mandated ethical framework. The Board should therefore approve
a formal code of conduct for the organization, ensure that it is effectively
communicated throughout the organization, and ensure that compliance is
monitored. The code of conduct might have another name or consist of one or
more documents, web pages or brochures. Thus we see statements of ethics,
corporate values, responsibility and Corporate Governance.
No matter how well designed, a written code of conduct cannot be
sufficiently detailed to clearly establish the norm for employee behaviour in
every situation. It is simply not possible to foresee every specific ethical dilemma
150
that might occur and to define the appropriate response. Neither is it practical
to do so; if the document is too long, few will read or remember it. Because it
must be concise, the code of conduct can only provide general guidance. It is
up to each individual in the organization to interpret the general guidelines
and apply them to the specific situations they encounter. If the employees, and
their direct managers, have not received the necessary guidance and training
that would enable them to recognize ethical dilemmas and competently make
the right decisions, then they are less likely to recognize the situation or make
the right choice.
Moralize
In Part I we used the word moralize as the verb form of morale. Our goal is to
cultivate and deliver morale. We have seen that fraud and corruption succeed
in part because fraudsters rationalize their behaviour, while bystanders fail to
recognize or react to activities that are in variance with the norm. If the norms
themselves are not clearly defined or understood, it is of course more difficult
to recognize deviant activities. But, on the other hand, if the organization can
clearly define the norm and ensure employees understand and can apply
its principles to different situations, it becomes more difficult for fraudsters
to rationalize their actions and for bystanders to ignore the deviations they
observe.
Fraud awareness training is necessary for raising employee understanding
of the code of conduct and organizational values, but another awareness tool
is also important in this regard. Often called the tone at the top, the personal
example set by the leadership, members of the Board and top management is the
most important element in establishing the ethical direction of the organization.
If top managers by their own example demonstrate the code, and ensure that
lower levels of management understand and follow the same practice, then
employees will more easily understand and follow the rules themselves. If, on
the other hand, top managers imply by their words and actions that they are
above the code of conduct, not bound by it, then managers and other employees
at lower levels will tend to also ignore the rules, and to define in practice more
convenient norms to govern their own behaviour.
Sketch 13.1
151
Starting to dig
The policies and values that top management themselves follow and apply
to their own behaviour determine what policies and values will be followed
in the organization, regardless of what is written in the code of conduct. In an
organization where the top managers pay themselves secret bonuses, abuse
expense privileges or otherwise misuse their power for personal benefit, other
employees are unlikely to pay much attention to an ethics statements or code
of conduct.
152
Risk Appetite
Another responsibility that rests with the Board or highest authority is to
consider and monitor the major risks and opportunities facing the company.
The Board decides what level of risk is acceptable for each risk area and
instructs the CEO and the executive team to manage the risks accordingly. For
certain financial risks, the Board might set specific quantitative limits, such as
setting a maximum amount of credit that may be granted to a single customer,
or establishing a formula for limiting the amount of foreign currency exposure.
The Board must also ensure that the CEO has adequate resources to implement
their risk decisions.
The risks of fraud and corruption are not easily definable or quantifiable,
but the Board must anyway consider these risks and instruct management on
how to manage them and what level of risks to accept. The Board must also
ensure that sufficient resources are dedicated to adequate internal control,
appropriate code of conduct and other polices, and communication of these
polices to all employees.
If we accept as realistic the surveys by PricewaterhouseCoopers (2007), and
by the Association of Certified Fraud Examiners (2008), which examine the
cost and frequency of fraud, then we have to conclude either that fraud costs
in the neighbourhood of 5 per cent of sales is reasonable, or that Boards and
managements have been largely unsuccessful in their fraud risk management
efforts. We believe the latter explanation; we are simply not good at managing
fraud risks. What is the reason for this failure?
Perhaps the explanation is that the Board and management have traditionally
relied on internal controls, in the belief that strong internal controls will prevent
fraud. At the same time, too little attention has been paid to raising employee
awareness. Lets recall for a moment our discussion of rationalizations from
Part I. Persons with type one rationalizations, who have detached themselves
from the norms, will find a way to create the opportunities they need. They will
defeat even the best internal controls. But if the employees who maintain the
controls are made aware of the risks, and easily suspicious, then the fraudsters
task becomes much more difficult and the possibility of detection much higher!
They will not be cured, but they will find things uncomfortable, and will
perhaps look for another, less vigilant organization to defraud.
153
Understanding Integrity
Integrity is not an abstract quality. In an organizational context, integrity refers
to consistency between what is said and what is done, between policy and
practice. Unfortunately, one often sees empty rhetoric in the code of conduct
and other communications such as:
154
Statements like these, especially when they come from organizations with
a mediocre or poor ethics track record, do more harm than good. Like the
narcissist Corporate Psychopath, the exaggerated claim demands admiration.
Employees do not believe the statement; they simply accept it as the official
version of the truth. The combination of historical flaws and statements like
these will be understood as: We have to write something here for show, because
we have to show something. But we dont really expect you to follow literally
what we state.
In the unlikely case that someone should examine the claim of highest
ethical standards seriously, they might reasonably wonder: What standards?
Where are they defined? Which moral authority says they are the highest?
Compared to whom?
Pirates famously had their own codes of conduct, such as this one described
by Johnson (1724) set by Captain John Phillips of the ship Revenge:
I.
Every Man Shall obey civil Command; the Captain shall have one
full Share and a half of all Prizes; the Master, Carpenter, Boatswain
and Gunner shall have one Share and quarter.
II.
If any Man shall offer to run away, or keep any Secret from the
Company, he shall be marooned with one Bottle of Powder, one
Bottle of Water, one small Arm, and Shot.
III.
If any Man shall steal any Thing in the Company, or game, to the
Value of a Piece of Eight, he shall be marooned or shot.
IV.
If any time we shall meet another Marooner that Man shall sign
his Articles without the Consent of our Company, shall suffer such
Punishment as the Captain and Company shall think fit.
V.
That Man that shall strike another whilst these Articles are in
force, shall receive Mosess Law (that is, 40 Stripes lacking one)
on the bare Back.
VI.
That Man that shall snap his Arms, or smoke Tobacco in the Hold,
without a Cap to his Pipe, or carry a Candle lighted without a
Lanthorn, shall suffer the same Punishment as in the former
Article.
155
VII. That Man shall not keep his Arms clean, fit for an Engagement,
or neglect his Business, shall be cut off from his Share, and suffer
such other Punishment as the Captain and the Company shall
think fit.
VIII. If any Man shall lose a Joint in time of an Engagement, shall have
400 Pieces of Eight; if a Limb, 800.
IX.
If at any time you meet with a prudent Woman, that Man that
offers to meddle with her, without her Consent, shall suffer present
Death.
This code of conduct is clear and concise, and even specific to the potential
consequences of violations. It was probably well understood, with little
training required. Any experiential training was not simulated and the harsh
consequences of violations were undoubtedly useful in promoting awareness.
156
Of course the pirates business model was fairly simple, and they were not
concerned with such modern niceties as human rights, legal compliance or
environmental protection. It is unlikely that a modern enterprise could achieve
the same level of concise and elegant simplicity, or apply the same level of
disciplinary harshness. Even so, there undoubtedly arose situations where the
pirates needed to interpret the code. Under Article VII for example, when can
a Pirate be said to neglect his business? Each pirate would have needed to
use some common sense judgement to apply this requirement to a particular
situation. They must have had many interesting discussions on the subject.
Modern day business models are more complex and subject to more rules
than pirates needed to contend with. The modern code of conduct is likely to
be less specific than the pirate code, but it should not be deliberately vague.
Consider the following alternative anti-corruption rules:
We respect the integrity of public servants and of the decision makers
with whom we do business.
Or,
It is never acceptable to pay a bribe for the purpose of obtaining business.
We only reluctantly make facilitation payments, in the following
circumstances:
Or,
It is never acceptable to pay bribes or make facilitation payments.
The first statement is elegant, but it does not provide clear guidance. It could
be interpreted that bribes are acceptable, as long as the initiative comes from
the other party. The second set of statements is much more useful, and more
likely to be effective. The second statement also recognizes the inevitability of
facilitation payments. Perhaps they are. If, in a particular business, facilitation
payments are inevitable, then it is better to provide practical guidance in
the code of conduct than to like in the third statement pretend that such
payments can always be avoided, turning a blind eye to the actual cases. If
the code of conduct is not truthful about facilitation payments, perhaps other
sections will not be taken seriously.
157
ensure that its values, code of conduct and policies are meaningful
and appropriate;
158
the employee had never seen the code of conduct, it was not well
communicated.
Employees do face situations like these, and they need practical guidance.
Grandiose, empty statements do not satisfy their need. A humble, credible
approach is more useful.
In Part I of this book we examined narcissist Corporate Psychopaths who
believe they can do no wrong. Top managers unfortunately sometimes exhibit
the same characteristics. This is no accident; narcissists may exhibit many of
the same qualities that the Board wants its management to have: charisma, selfconfidence, intelligence, ambition and drive.
159
Well, perhaps that is a little bit too humble and honest. But if organizations
seriously want to improve their internal ethical culture, they need to get
employees attention and support. High ethical standards might be described
as a goal to be achieved, rather than an accomplished fact. Top managements
message should not be, Look at me, follow me, I am beautiful but rather Help
us! Lets do this together.
One of the best ways of showing that the top is humble and sincere when
they are talking ethics is to build up consensus around code of conduct
issues and invite employees to be part of the process. No matter how strong
top management may be, the detailed knowledge of the business, and its
160
integrity risks, lies with the rank and file. Engaging employees in the process
demonstrates respect for their detailed knowledge, and using their feedback
will likely lead to a more practical and useful policy.
Employees should also be assured that their honest efforts to live by the
code will receive full support from the highest managerial level.
161
Summary
The Board and top management, through their policy decisions, communication
with employees and their personal example, set the ethical tone for the entire
organization. Establishing a sound and ethical culture, moralizing the
organization, requires continuous effort over a long time. It is not a short-term
project. Writing a strong and useful code of conduct is the first step, which
might be accomplished in a few months. Effectively communicating the letter
and the spirit of the code of conduct to employees is a much more difficult
task. Employees in different locations, cultures and functions will face an
162
endless variety of ethical dilemmas. Often these dilemmas will not be simple or
obvious. There will be powerful motivations for making the wrong decisions.
Giving employees knowledge and motivation to make the best decisions in the
spirit of the code of conduct requires real training. Such training also serves to
make participants less vulnerable to most rationalizations, and therefore less
likely to commit fraud. It might be said that most organizations have placed too
much reliance on making systems resistant to fraud, too little effort into making
organizations resistant to fraud. By providing resources and visibly supporting
awareness training, top management demonstrate their commitment to ethical
values and their understanding of the difficulties involved in applying the
values consistently throughout the organization.
14
164
Who is right? Who is best able to describe the risks that are present? It
is a matter of perspective, and both perspectives have their pros and cons.
Employees are better able to identify the risks in the operations and processes
that they work with on a daily basis. The problem with this perspective is that
it may miss out the bigger and long-term picture. We can call this the risk of
making so-called myopia errors. Managers have a helicopter perspective, and
can spot broader risks that may not be obvious at the detail level. Of course,
this also means that something may be lost. Managers run the risk of making
superficiality errors. Fraud awareness workshops are a powerful tool to
combine insight from different perspectives.
Management will in the end decide which fraud risks are relevant, how likely
they are and how to address them. But by including the employee perspective
and providing feedback to employees, management can better ensure that
important risk areas are identified, and that there is employee acceptance of
the risk mitigation measures that are finally decided. When considering fraud
awareness and risk identification workshops, one must ponder:
Can we use a cascade approach; train key employees who will then
train other employees and so forth?
165
make the organization resistant to those risks, but who must be trained? All
employees? Key employees? Managers? Bookkeeping personnel? Training
costs money; where should the investment be?
Most organizations come to the conclusion that because fraud can occur
anywhere some level of awareness training is suitable for all employees and even
for non-employees such as sub-contractor employees. Any employee might find
themselves witness (or bystander) to fraud. The content and depth of training is
likely to vary for different groups. For some employees, in-depth training might
be needed, while for others a small amount of training might be enough.
It is a tempting thought to only train managers. Managers are responsible
for maintaining internal control and preventing fraud within their area of
responsibility, if they are fully aware of the risks, isnt that sufficient? Consider
the following question that arose in the course of an actual training session,
during a discussion of acceptable and unacceptable gifts:
Mike is an information system administrator. Gail is another participant in the
training session.
Mike: Lets say the company was looking for a computer application
to accomplish some task. I happened to know a small supplier, an
old school friend, who would be perfect for the job.
Trainer: So what would you do?
Mike: I make the contact, recommend my friend. I am not involved at all
after that, but my friend gets the contract, and he does a great job,
delivers just what the company needs and charges a fair price for his
work. Everyone is happy. Would it be wrong of me to accept 1,000
euros from my friend in thanks?
Gail: Of course it would be wrong! It could be a bribe.
Mike: But the work was all finished, I didnt ask for the money.
Gail:
It might anyway influence you the next time
Mike: OK, OK. Maybe 1,000 is too much. How about 100 euros? A bottle of
wine? Tickets to a football match? What is the limit?
For many people, common sense would say that a gift of 1,000 euros from
a supplier to an employee would be improper. Mike recognized that it was
questionable, but really did not know the answer to this dilemma. And his
next question, what limit is acceptable? is usually not an easy one to answer
for many organizations, particularly if the organization spans many different
cultures and includes many different categories of employees.
166
167
12
Head
Office
6
190
Total
USA/
Canada
1
95
25
Europe
Production
14000
Purchasing
1389
612
Sales
2097
Service
1460
Finance
330
99
Staff functions
Administration
TOTAL
4100
South
America
2
Asia
Pacific
1
Mideast/
Africa
67
3500
6400
90
201
450
710
450
358
486
85
461
256
310
290
140
30
110
20
55
70
45
91
30
545
42
150
42
58
160
93
20122
189
6242
886
4486
7926
393
168
Different groups of personnel face different risks and issues, and require
training adapted to their situation. At the same time, the organization needs to
deliver a consistent message across the entire organization. These conflicting
constraints can be satisfied through a common training platform completed
with various modules designed for the different categories of participants. The
common message can then be delivered to each group using examples, dilemmas
and other teaching devices relevant to them, in a language they understand. Lets
go back to XYZ. For this company, training variations might be:
Focus
Regions
Language
1a
English
1b
Factory
Europe
English
1c
Factory
Asia
Local translators
1d
Factory
South America
Spanish
Sales
Worldwide
English
3a
All other
English
3b
All other
Latin America
Spanish
169
processing. In large groups, shared services functions have been created where
personnel in one central location are processing transactions from different
group companies that are geographically dispersed, even internationally
dispersed. Through standardization and centralization, costs can be lowered
and compliance with processes and accounting rules improved. Thus a
centralized back office can improve internal control. At the same time,
accounting personnel are farther away from the business and less likely to
understand the transactions they are processing. As transactions are mass
processed, employees are less likely to notice unusual transactions if they
fulfil process requirements. Therefore a centralized back office can also lead to
internal control weaknesses.
Training for back office personnel should focus on raising awareness of their
importance in the overall system of internal control. Personnel can be trained
to recognize and report red flags that signal possible questionable transactions,
even if all process requirements have been fulfilled. Back office employees
often underestimate their own importance compared to higher-paid employees
working in operative areas. They need to be empowered and motivated to take
the initiative. The back office has privileged access to transaction data and
can therefore perform proactive detective testing, as a back office initiative or
together with other functions such as internal audit or internal control. Such
tests are further discussed in the final chapter of this book.
If an empowered and fraud-aware back office develops a reputation for
recognizing and questioning dubious transactions, this will contribute to a
deterrent effect. When making their Fraud Triangle calculation, potential fraudsters
will perceive a smaller opportunity, they will fear that the back office will not be
deceived, and will find it more difficult to rationalize. NOT everyone is doing it.
Purchasing Function
In employee surveys, the purchasing or procurement function is often singled
out as the function most likely to be involved in fraudulent activity. Certainly
the power to select suppliers, agree prices and issue purchase orders creates
opportunities for potential fraudsters!
In our experience, fraud is more likely to be perpetuated by managers
who bypass the purchasing function than by purchase department employees
themselves. The purchasing function itself is an important control function,
and its employees are professionally trained to deal with suppliers.
170
Factory Employees
Factory employees are exposed to a wide range of potentially fraudulent
activity. Compared to employees who work mainly with documents, data
and relationships, factory workers deal physically with their products and are
likely to notice unusual behaviour that might not attract the attention of office
employees.
Depending on the nature of the business, factory workers might be
unskilled labourers or highly educated specialists, or anything in between. In
some countries and organizations, the relationship between factory labour and
management might be traditionally confrontational. These factors need to be
taken into account in any awareness training. In a confrontational environment,
factory workers are less likely to report suspicious behaviour.
It is especially important that awareness training for factory employees is
not seen as a threat but as an invitation. If the participants are convinced of the
sincerity of the training, and understand that its purpose is to enlist their help,
not to threaten them, then they will help in the fight against fraud.
171
Because sales frauds are so varied and are relatively difficult to detect,
gathering feedback on possible methods of fraud and corruption is particularly
valuable when dealing with sales and service personnel.
172
During a code of conduct and Fraud Awareness workshop, the subject of gifts
is discussed. The code reads: Employees should not accept expensive gifts
from suppliers or other third parties with whom they do business. If in doubt
whether or not a gift is appropriate and may be accepted, employees should
consult their direct manager. One of the workshop participants told that she
had consulted with her manager, and was not allowed to accept the gift (a
jogging suit). But one of her colleagues in another department was allowed to
accept the same gift, because her manager was more flexible. Is this fair?
Not every situation can be foreseen in a written code of conduct, and
most organizations allow for some flexibility. Employees are more likely to
respect the rules and follow them if they are seen to be fair. Managers at all
levels are expected to ensure that the rules are followed within their area of
responsibility.
risk of fire;
credit risk;
173
For most of the risks we deal with, responsibility for managing the risk
can be assigned to specific persons in the organization. Treasury manages
exchange risks, purchasing manages supplier risks, human resources manages
employment risks and so on. Who manages the risk of fraud? Because fraud
can strike at any part of the business, it is difficult to assign responsibility for
managing the risk. While security or internal audit may have expertise and be
able to assist, they do not own the risks.
Another difference is that most risks are dependent on factors that can be
managed using appropriate control mechanisms. We have sprinkler systems
designed to stop fires, credit limits to avoid excessive credit losses, hedging
transactions to mitigate exchange rate risk and so forth. Internal controls are,
however, not very effective in preventing fraud. Fraud occurs because people
are able to deliberately bypass the control system. The sprinkler system might
stop accidental fires, but it would not effectively stop a deliberately set fire. The
culprit could easily disable the sprinkler system.
Awareness training for employees with expertise in risk management
should, therefore, focus on the unique and difficult nature of fraud and
corruption, and effective management techniques.
In most present-day companies, employees are empowered and authority
is widely delegated. Internal controls systems are designed to prevent or detect
errors, and employees and managers enjoy the trust of their employers. As
we have pointed out, this should not become blind trust, but an atmosphere
of mistrust and suspicion would be intolerable. A few employees, such as
security and internal audit, are expected to be suspicious, or more politely,
professionally sceptical. These suspicious functions allow other managers and
employees to more easily work in an atmosphere of trust, with suspicion largely
delegated. As professional sceptics, internal auditors might never be fully
integrated or accepted by the rest of the organization. They are even required
by their professional standards to maintain an objective attitude. Awareness
training for these employees can examine what it means when you are paid to
be suspicious.
Because audit, security and internal control employees are likely to be
involved in responding to suspected incidents of fraud or corruption, their
training might also include response planning and investigation management.
174
Getting Started
Ideally, we believe organizations benefit most from a comprehensive fraud
and awareness training programme for its employees, covering the whole
organization and taking into account differing requirements of each group of
employees. Unfortunately this is not always possible. Competing priorities and
budget limitations might force a more limited approach.
Even in a small project, however, it is worthwhile to plan for the long term.
It should be clear what sort of training is to be delivered and what objectives
and expectations associated with it. It is also important to be aware of what
other initiatives have been undertaken, both to take advantage of synergies and
avoid confusion.
If there are already trainings on topics that interact with each other then
this should be explained to the trainees.
A major international company developed a code of conduct training
sponsored by Corporate Responsibility, an anti-corruption training sponsored
by the Legal function and an anti-fraud training sponsored by Internal Audit.
When employees received, during the same year, invitations to each of these
trainings they thought they were all the same, those who had already attended
one of them didnt go to the others and in some (worse) cases people did not
attend to any of them because: I dont understand what is what and I dont
have time to waste.
Management has to be concerned about overloading employees with
too many messages. Top management is often supported by an assortment
of corporate staff functions, each with its own specific area of responsibility
and messages to disseminate. While each of the messages is worthwhile,
taken together the messages become overwhelming. Consider the following
guidelines that employees might be subject to:
information security;
environmental concerns;
export guidelines;
quality management.
175
Sketch 14.1
Paula has worked as Nick Elbacks assistant for nearly four years, her first
full-time job and she is good at it. Not much happens that she doesnt
know about! She is proud that her boss trusts her so completely. She is
sitting at her desk, Nick standing over her giving instructions.
Nick: I need you to compose another invoice for me, this time from the
Dubai company, Middle East Services Limited.
Paula: When do you need it?
Nick: Actually its pretty urgent, can you do it right away? You can use
todays date.
Paula: Of course Mr Elback. Just tell me the amount, and what text to
include.
Nick: 75,000 Swiss francs, and you can use the same text as last time.
Dont forget to put a new invoice number!
Paula: Here is the model; we wrote: Market development and liaison
activities in accordance with agreement.
Nick: Thats fine. 75,000, Yes thats it. Just print it out, two copies please.
176
Paula:
Nick:
Paula:
Paula looks down, a bit hurt but used to it, while Nick leaves with the
copies. After Nick leaves, Paula continues with her typing
177
Summary
Organizations need to balance the need to deliver consistent training across
the organization with the need to reach different categories of employee with
content that is relevant to their particular situation. The requirements for
awareness training will be different depending on the nature of business and
its risks, the size of the organization and the geographical location. Even within
the same organization, the training needs to be adapted for different groups
and sometimes in different languages. Managers and others with a special
responsibility for maintaining internal control and managing risks will need a
deeper level of training than employees with other responsibilities. Employees
in the purchase department will best understand examples related to suppliers,
while sales and marketing staff are more comfortable with customer-related
scenarios. It is also important to take into account related initiatives, and avoid
overloading employees with conflicting or overlapping messages.
15
National Culture
As a cost-savings measure to avoid printing its advertising posters in multiple
languages, a pharmaceutical company developed a language-neutral poster
designed to promote its particular brand of pain relievers. The posters were
printed, billboard space was obtained and the posters went up in cities around
the world.
Figure 15.1
Advertising blooper
Within hours of the posters going up in Cairo, Egypt, retailers all over the
city were calling to complain. It had never occurred to the campaign manager
that in North Africa, most people read from right to left!
While this story is probably a myth, it illustrates the importance of taking
local culture into account. People look, talk, think and behave differently in
180
different parts of the world. When rolling out a training programme, local
culture needs to be considered both in terms of how the message is delivered,
and in the content of the message itself.
Local Environment
Every year, Transparency International issues its highly respected public sector
Corruption Perceptions Index (CPI) which ranks countries on a scale of 0 to
10 according the perceived level of public sector corruption. A higher score
indicates a lower level of perceived corruption. In 2009, out of a total of 180
countries, only five countries scored 9.0 or better, while 129 scored below 5.0.
The CPI is not a measure of the honesty of each countrys citizenry, but it does
say something about the local environment and risks.
One might be tempted to conclude that fraud and corruption awareness
training is likely to be difficult or even a waste of time in countries with an
apparently high level of corruption. Surprisingly however, in the experience of
the authors, awareness training for employees living in a corrupt environment
is often easier and more rewarding than in countries with a low perceived level
of corruption.
Local employees in a country with high levels of corruption are more likely
to be the victims of corruption than the beneficiaries. They are sensitive to the
problem, and are often more than willing to contribute to the fight against
corruption if they are convinced that management is serious, and not corrupt
themselves. Employees in countries with endemic corruption are, however,
often sceptical regarding managements motives. In their experience, authority
and corruption are often related, and awareness training needs to take this
inherent mistrust into account. In that respect, it can be beneficial to have
training sessions where both senior managers and other employees are present
to demonstrate that everyone is a trainee. On the other hand, the presence of
senior managers can intimidate other employees, who will be less free to say
what they think. We will discuss this situation later in this chapter.
In Part I, we stressed the importance of knowing about present norms and
values in order to be able to see fraud. In countries with a low perception of
corruption, participants are less likely to believe that management is corrupt.
In fact the problem can be to convince participants that there is any risk at all!
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Company Culture
One of the advantages of a strong internal company culture is that it helps
bridge the gap between the company and the various local cultures. Some
multinational companies intentionally use their national origin as part of
their external profile. When the Swedish IKEA first opened in the outskirts of
Paris, for example, they playfully installed Caution Moose crossing signs in
the parking lot, to the amusement of the French public. IKEA products have
Scandinavian names, and Swedish meatballs are served in the cafeteria.
Figure 15.2
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Thus the multinational approach can also be said to be the more monocultural,
the multi-domestic approach more multicultural.
The monocultural company is more likely to have relatively more expatriate
employees in key management positions around the world. In order to develop
a consistent corporate culture in the territories they operate, experienced
employees from the parent company or established group companies are
assigned to key positions in other countries. The expatriates tend to be better
paid and better connected than their local colleagues, which if not managed
can lead to internal resentment and to the existence of two parallel company
cultures in a single location. As we discussed in Part I, inequality reduces the
general level of trust in a society, and the same can be said for an organization.
When an us versus them mentality develops, each group will adopt its own
ethical norms, based on in-group trust. The code of conduct delivered from the
foreign headquarters is unlikely to succeed in becoming the norm for the local
staff. Thus when attempting to spread awareness, one must take into account
and deal with the us versus them situation, if it is present.
In one case, a code of conduct training was carried out in a South East Asia
subsidiary to a European company. Three sessions were held, in order to ensure
that all employees could attend in fact attendance was mandatory for the 70
employees. The staff included 12 European expatriate employees, on long-term
assignment from the parent company. The attendance results were revealing.
All of the local employees attended, with the exception of one person who
was sick. But only five of the expatriates attended, the others making various
excuses of more pressing priorities.
Seven expatriate employees, the elite, were not interested in the training,
and even though it was supposed to be mandatory, they did not attend. By their
example, they sent the message that the training was not important, and that
they were not interested in the code of conduct.
Multicultural companies tend to have relatively fewer expatriate employees,
and thereby avoid the problems and resentment caused by an expatriate elite
class. They are more able to maintain a company culture in tune with the local
environment. At the same time, it is more difficult for multicultural companies
to maintain a consistent ethical culture across the organization.
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184
185
In some cases the employer owned the houses where employees lived
and their rent was deducted from their salary. Food was purchased from the
only store in town, the company store. Locals did what they could to survive,
and developed a healthy mistrust of the company and of outsiders in general.
Fraud against the dominating company, if you could get away with it, was not
considered wrong.
While these abusive practices are no longer present in most parts of the
world, these communities can still be challenging. Fraud against the company
might be seen as acceptable, but cooperating with outsiders to investigate
fraud is not. Individuals know that if they break the unwritten code, they risk
being ostracized by the community. An imprudent cooperation by a father at
the office can lead to repercussions against his children in the school yard! One
way to deal with the situation can be to specially train one or more local people,
and let them help design and lead the training.
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Acquired Companies
A special situation arises when one company acquires or merges with another.
The internal culture of the acquired company is often much different than that
of the company that purchased it. Employees, who may have been more or
less loyal to an old organization, are asked to transfer their loyalties to a new
group. Some employees may feel resentment over lost status or promotion
opportunities, or feel they have been betrayed by former owners.
Awareness training in a newly acquired company can be therapeutic.
One needs to be open to the possibility that some processes, internal controls,
ethical values and policies in the acquired company may have been superior
to those of the purchaser. By discussing these issues openly with employees,
and listening to their ideas, it is possible to both heal resentments and obtain
feedback that might be used to make improvements.
Organizational Levels
Employees at any level in the organization can be involved in fraud and
corruption. Frauds might also be perpetuated by suppliers, customers or total
outsiders. The most damaging incidents, however, are likely to be caused by
senior managers, as they have more power and possibilities to bypass controls
and deviate from normal processes.
We have suggested that awareness training should be presented as an
invitation to employees at all levels to assist in the battle against fraud and
corruption, and to avoid the appearance of management lecturing employees
on the subject. One method to demonstrate solidarity is to perform workshops
where employees from different organizational levels participate as equals.
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188
Sketch 15.1
Dawn has managed to get a booth in the corner of the coffee shop,
giving some semblance of privacy. She watches the door, looks at her
watch, waiting. Finally Leigh Wey enters, sees Dawn and walks over to
join her.
Leigh: Sorry Im late.
Dawn: I appreciate you taking the time to meet me. Quite a bundle of
mysteries you left me with last week!
Leigh: Look, maybe I was out of line. Its probably nothing. Its the end
of the third quarter, and there is a lot of pressure on.
Dawn: Isnt that normal in accounting? Closing the books at month
end?
Leigh: The work is fine. But I dont like the way the CFO keeps
interfering. We cant close the books until he approves the
results, and its a lot of extra work when you start changing
things, reducing reserves and so on.
Dawn: Are you telling me he is cooking the books?
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Leigh: Well I dont know, I mean he is the CFO and I guess he knows
what the reserves should be. They are just estimates. But I got
frustrated, thats why I gave you the X-files.
Dawn: The X-files?
Leigh: Oh sorry. Thats just the nickname we gave them in
bookkeeping.
In this last scene, the whistleblower drops a hint that reporting manipulation
might be taking place. While many audiences would recognize the implications,
some would not. When using drama in training, one must make sure it is suited
to the participants it is intended for. For that reason, it might make sense to
arrange different versions of the same sketch for different audiences.
Achievement of training objectives requires working through the local
culture, rather than working to overcome it. When raising awareness to the
risks of fraud and corruption, the concepts are quickly understood by most
groups. Creating an environment where employees are willing and able to
communicate suspected incidents can be more difficult and requires not only
that employees feel a strong sense of loyalty to the organization and respect for
its leaders, but also that they trust that they will not suffer adverse consequences
by coming forward. A strong, ethical company culture, where managers adopt
a sincere and approachable style, will help employees develop the necessary
organizational loyalty.
Summary
While every society and culture condemns fraud, there are differences in
how fraud is perceived, what constitutes inappropriate behavior. In addition
to national, regional, and ethnic differences we have to take into account the
organizational status quo; how different groups or categories of employees get
along with and trust or mistrust each other. In an environment where employees
are divided into two classes, such as an elite expatriate class and a local nonelite class, mistrust between the groups can make fraud awareness training
difficult. In an organisation or industry that has a long tradition of accepting
certain types of fraud, there is likely to be strong resistance to change.
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16
Be not too tame neither, but let your own discretion be your tutor.
Hamlet, III, ii,16
Organization
Employees or members of any organization may not do as they please. They
are constrained by laws and other government regulations, collective labour
agreements, contractual agreements with business partners, financial covenants
with lending institutions and so on. The owners, Board of Directors or equivalent
set additional constraints by defining internal organization, appointing managers,
issuing policies and guidelines, including the code of conduct and so forth. Taken
together, all of these constraints create a framework for employee behaviour.
Employees are expected and required to perform their agreed tasks within this
complex framework, but they can only do so to the extent that they are aware of
the rules and regulations, understand how to apply them in their daily work, and
accept that following the rules is the right thing to do.
An awareness training programme helps employees to know, understand
and accept the rules. It motivates them to explain and promote compliance to
other employees around them, and to be aware of threats both internal and
external.
While some companies prefer a focused fraud awareness training, others
have opted for a broader training that includes fraud, corruption and other
types of malpractice or unethical behaviour. Either approach can work. The
code of conduct, internal ethical guidelines and policies are normally anchored
at the highest levels in the organization, and it is natural that a fraud awareness
training programme would be similarly handled. Deciding the scope of
awareness training is one of many issues to resolve during the design process.
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Figure 16.1
Figure 16.2
193
Figure 16.3
Reaching consensus
194
At first glance, it might seem excessive to take such rigorous approach. How
hard can it be to put together fraud awareness training? In truth, it is not very
hard to gather relevant material and create a presentation. Creating training
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that makes an impact, that changes how employees will act in challenging
situations and how they react when they notice the signs of improper behaviour
by others is much more difficult.
We chose to describe our design process in four phases, divided into ten
steps. The research phase involves figuring out what kind of product we need.
What are the overall objectives? What will grab the attention of end users? Who
are the end users and what will motivate them? What products may already
exist on the market? Have any related projects been done, or are any related
projects planned?
The design phase involves taking the results of the first phase analysis, and
turning it into a detailed blueprint for production. This is the creative phase,
and it works best when it makes use of the creative talents of a design team
with different backgrounds and perspectives, and with a solid understanding
of the organization itself.
The build phase involves the production of presentation materials, which
might include overhead slides, case studies, group work instructions, film
clips, role playing scenarios, brochures and other printed materials, games
as teaching devices, and more. This third phase is where most of the money
is typically spent. If the preceding design phase was well done, it will allow
an efficient production. If the design was not well thought through, or if the
project owners keep changing their minds during production, then money is
likely to be wasted on rework.
The deliver phase of the design process involves rolling out the training to
the target group and, at an appropriate time, evaluating the results. These four
phases will be further explored in this chapter.
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A successful design must satisfy all the constraints. You could make the
chair out of titanium, it would be strong and light, but it would cost too much.
You could make it out of iron, it would be strong and cheap, but it would be
too heavy.
It is, of course, possible to define a set of constraints that are so strict as to be
impossible to satisfy. In the problem definition phase, our job is to define reasonable
constraints that will lead to a product that meets the organizations need.
The design constraints for an awareness training project should include:
What per cent of employees shall complete the training within what
timeframe?
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198
information about actual incidents of fraud, they are often happy to share
information about prevention and training.
3. Research
Now, with a good idea of what is required, the project team is able to research
what is available in order to deliver it. The team might look for existing products
that could be used or adapted, or for suppliers who have delivered similar
products. Cost is, of course, always a factor; the project team must find a way
forward that will meet all of the constraints that have been defined. Research
should also include an analysis of resources and capabilities needed in order
to understand whether and what needs to be outsourced and what is already
present in the company.
4. Design Specification
The challenge of the design phase is to balance creativity with practicality,
which is sort of like trying to fly while keeping your feet on the ground. The
solution, of course, is to have a team that together can combine the necessary
skills. To a certain extent, design specification and idea generation take place
simultaneously, but for the sake of efficiency the project team should set strict
limits for itself. As a rule of thumb, 80 per cent of the design should be decided
during the first 20 per cent of the budgeted development time. Agreeing the
basic structure of the training at an early stage will save time and money.
The design specification will require firm decisions on the form of the
training. Will it include workshops? Multimedia self-training? Drama and web
drama tools? What languages will be used? How will feedback be captured?
How will the project be supported with brochures, invitations, presentations,
articles in internal magazines or other methods?
The development team should also consider what options are likely to
be added in the future, and design with flexibility in mind. The first priority
in the first project must be to build a solid platform that can be updated and
improved in the future. It may be preferable to start with a modest platform
that can be adjusted and reused, rather than a complex system that might not
be sustainable.
Sketch 16.1
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Counterattack
An irritated Dawn Rade is in her own office, sitting at her desk writing
when the telephone rings. It is a call from Nick Elback. Nick heard that
Dawn has been asking questions about special payments.
Nick: I was surprised to hear you are doing an audit of Russ Tecarrs
manual payments. Dont you know the external audit auditors
already did a full report at the end of last year?
Dawn: Im not doing an audit; I just asked him a few questions.
Nick: Sure, sure, OK. Have a look at the Blynde & Deff report, its all
there.
Dawn: Thanks for the advice, I will do that.
Nick: (Not wanting to hang up) Anything particular you are looking
for?
Dawn: I will certainly let you know if there is. But since you ask, why
do you order so many manual payments? Why not pay your
consultants through the normal accounts payable process?
Nick: Confidentiality. These consultants are important people with
important contacts. They help us get the big orders, but we
have to keep our relationship confidential. We cant have their
invoices where every clerk can see them.
Dawn: Confidential from the tax authorities you mean?
Nick: Take my advice, dont go there. Wasting your valuable time on
something that is already approved is not going to help your
career. Just read the report.
Dawn: Goodbye Nick.
Nick has already hung up. Dawn shrugs her shoulders and returns to
her writing.
It is obvious by now that Nick has been engaging in activities that do not
bear close scrutiny, possibly with the support of even more senior managers.
He sees the danger of internal audits meddling and gives us a glimpse of his
nasty side as he tries to scare Dawn off. Will she give in?
200
5. Idea Generation
A time-tested method for generating ideas and encouraging broad participation
in the process is facilitated brainstorming. Assemble a group of people with
diverse talents creative, practical, knowledge of the organization, knowledge
and experience of the subject, training expertise and communications skills.
Put them together, show them the problem definition constraints and assign
them the task of devising a solution. The services of a professional facilitator
can help ensure the process is not dominated by the loudest voice.
Of course like most things, idea generation can be outsourced. Suppliers
with experience in awareness training can quickly come up with a menu of
ideas, drawn from their own experience and materials. When using external
suppliers, however, care should be taken to ensure the training does not use
unfamiliar examples or language. On the contrary, the training should use inhouse examples and terminology to maximize its relevance. It is also important
that the external suppliers possess the necessary experience in fraud awareness
training and on the subject of fraud and corruption in general.
6. Design Decisions
A design decision can be described as a compromise between the various
design constraints that were established during the first phase of the design
process. But taken as a whole, the design decisions are also a calculated gamble
on what will work to meet the overall project objectives. When designing a
chair, a project team can, with a high degree of certainty, know how much it
will cost to build, how much weight it will bear and what it will look like.
But will anyone buy it? That is less certain, and the same uncertainty faces the
awareness training design team.
Decisions also require a consensus among the team, who may have very
different opinions on what will work and what will not. If the project has started
with clear objectives, and has developed a clear, written problem definition
during the research phase, then decision making will be easier than in a project
with unclear objectives and an undefined problem to resolve.
It is not always easy to reach an agreement but it should not be put off. The
creative phase must come to a stop, and the compromises reached so that the
design can be frozen and the project moved forward to the production phase.
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7. Production
Project teams are sometimes tempted to rush into the development stage,
without a clear idea of what must be developed. This mistake is even more
likely if the project team has underestimated the difficulty of creating an
effective awareness programme. Beginning development without a design
is a waste of resources, as changing design decisions will require premature
development to be redone. More seriously, the developers may lose sight of the
overall objectives.
If, on the other hand, development only starts when a clear blueprint has
been agreed, developers can use their time to solve the technical issues they are
trained for.
Ideally a project manager (can be internal or external) should be appointed.
That person would be in charge of liaising with the developers as well as
keeping the management updated on the work in progress and taking care of
any adjustment/modification of the original specification.
8. Testing
The more complex the product, the more testing is required. The tests naturally
depend on the nature of the product. Any written product requires careful
proofreading; no matter how accurate the developers are, spelling errors have a
way of appearing in the final text. The problem increases if multiple languages
are involved.
Multimedia self-training packages require, in addition, testing of
functionality, speed, navigation tools and all of the many details that will
comprise the users experience.
In addition to the purely technical testing, some pilot tests can be used to try out
the new training tool on real users. Their valuable feedback regarding what works
and what doesnt can then be taken into account in the final release version.
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10. Evaluation
The project does not end with implementation. If the organization is serious
about the awareness objectives, then it should be prepared to measure the extent
to which they are being met. And if the objectives are not being fulfilled, that
must be reported to management so that they can take appropriate corrective
measures. Evaluation is also a way to repeat to the organization the original
message, a way to raise fraud awareness once again. It is also a way for the
project steering committee to learn more about any eventual resistance towards
the message, local or general.
Fraud and corruption training will likely become a regular in-house training
for employees and managers, and as such should be reviewed and updated on
a regular basis, to ensure that it remains relevant and compatible with policy,
guidelines and the organizations culture.
Summary
Organizations must understand that internal controls will not effectively
prevent or detect fraud and corruption until the majority of employees are
made aware of the risks and the rationalizations. While it is a simple task to
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Workshop Techniques
17
206
Attitude
In many organizations, communications regarding ethics have the appearance
of self-praise for the organization and its leadership, preaching to the employees
and warning them of the dire consequences of misbehaviour. The code of
conduct might start with a letter from the president, where, under whose proud
picture, a fine speech describes in glowing terms the organizations ethical
standards. While the intentions are probably good, the employees who read
the rule book might feel themselves to be in the role of potential sinners against
the good and ethical organization. Employees may be asked to sign statements
that they have read and understood the policies, which often include vague
threats of disciplinary actions in case of disobedience.
Naturally, this type of communication is not very effective. Employees
are turned off by the seemingly proud and aloof attitude and dont usually
believe or care about the fine words. Employees too often have seen examples
of the opposite, whether it is accusations of bribery, discrimination, nepotism,
unjustified bonuses to top managers, managers abusing travel privileges and
so on.
In the workshop, the facilitator should avoid the role of preacher and adopt
a humble attitude. Before achieving an open and meaningful communication,
the facilitator needs to gain the trust of the participants and be accepted into the
group. A basic premise of fraud awareness is that most people are imperfect,
and can be tempted to break the rules from time to time.
One of the hypothetical questions we often ask in an awareness workshop
is, Who is most likely to commit fraud, a top manager, a middle manager, or a
rank and file employee? The reactions vary, but employees are often quick to
point out that senior managers have more opportunities to commit fraud than
lower-level employees, and management frauds tend to be costly. These are valid
points! At the same time, the question helps to make clear that the awareness
exercise is not an accusation or threat against lower-level employees.
Workshop Techniques
207
In Part I we discussed the risk that trust becomes blind trust. Employees
and particularly managers enjoy a high level of trust; the organization could
not function otherwise. Managers and employees are empowered to take
initiatives and make decisions, and are trusted to do so in the best interests of
the organization. But the power to decide creates opportunities for personal
gain, and since people are imperfect they will be tempted. Some internal
controls are required to reduce the opportunity, to reduce the temptation.
The facilitator needs to convince participants that awareness training and
internal controls do not signal a lack of trust, but recognition of the fact that
trust should not become blind trust.
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Workshop Techniques
209
Presentation Tactics
Keeping in mind the overall objectives of awareness training as discussed
earlier, one can consider specific tactics for each part of the training methods
selected. Specific tactics for the facilitators presentation style and attitude need
to be adjusted to the audience, but in general:
have a very practical approach and bring real examples into the
discussion which are relevant to the participants (read the local
newspapers, pick local examples that fit the crowd to illustrate
points);
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Brainstorming Techniques
The concept of brainstorming was promoted by Alex Faickney Osborn (1963) as
a method to generate creative ideas and solutions to problems. Many variations
of the brainstorming method exist, some more formalized than others. In some
variations, participants proceed through predefined stages from defining the
problem to agreeing the solution. Different supporting tools may be used,
everything from post-it stickers to computer network applications.
In a brainstorming session, each participant applies their own particular
expertise, experience and perspective to the task of generating ideas to solve
a common problem. Because there are as many different perspectives as there
are participants, a wide range of ideas will be generated, and ideas from one
participant may trigger new ideas from others.
Typically, in a brainstorming exercise, all participants are treated equally
regardless of position in the organizational hierarchy. No ideas or suggestions
by a participant should be rejected. Criticism of ideas is withheld, so that
participants are encouraged to make unusual and unconventional proposals,
the more the better. The exercise is normally led by a facilitator, who provides
a degree of direction and organization, and an occasional suggestion, allowing
the participants to indulge themselves in chaotic creativity.
Workshop Techniques
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212
The first exercise groups people from different departments but with
similar seniority or management level; the second exercise groups a diagonal of
Workshop Techniques
213
employees from different levels and departments, and the final exercise groups
by department. Breaking established patterns of work experience and power
and forcing people to work in new combinations stimulates idea generation
and builds confidence.
Group work might consist of a scenario, or short story, where the groups
are asked to identify risks and suggest countermeasures.
The group work itself needs to be challenging, not too obvious, and tailored
to the participants capabilities. It does not work well to provide a marketing
scenario to a group of accounting personnel, or a production dilemma to a
group of salesmen!
In fraud and corruption cases, the distinction between fraud and not fraud,
what is fraud and what is corruption, between right and wrong, is rarely clear.
This ambiguity can be reflected in group work scenarios, so that a single correct
solution will not be expected. The objective of the workshop is not to teach
participants to solve fraud cases, but to get them to think about, and talk about,
and increase their own awareness and understanding of fraud and corruption
risks. If there is disagreement among the participants on which approach or
solution is preferable, so much the better! It could be the first step in order to
break up common sense misunderstandings.
Depending on the time available and number of participants, different
scenarios and tasks can be assigned to groups, so that each group has an equal
opportunity to present the results of their work.
Dramatic Techniques
The value of using of dramatic techniques as an experiential learning tool was
discussed earlier. In a programme where numerous workshops are held, in
multiple locations, it is probably not economically feasible to travel with a
troupe of actors. It is, on the other hand, perfectly feasible to produce short film
clips suitable for use in a workshop. The workshop organizers can integrate
these into their programme, coordinating the workshop discussion and filmed
episodes.
The facilitator dims the lights
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Sketch 17.1
Chief Financial Officer (CFO) Allan Dente is expecting Dawn Rade, who
asked for an appointment. He waves her in through the open door, not
leaving his desk.
Allan: Good morning Dawn. So, whats the bad news?
Dawn: Bad news? Oh, I get it. Audit means bad news.
Allan: Am I wrong?
Dawn: Well I guess no. I mean, there might be logical explanations
to everything but we seem to have payments to bank accounts
in tax haven countries, a manager who secretly owns the office
building we are renting, then we have a consulting company in
the Cayman Islands with no employees, and a promise of more
to come. What do you think it is?
Allan: Wait, wait take a breath (looking amused but a bit worried
at the same time) Where is this information coming from? You
have proof for all this?
Dawn: Ok the payments are a fact, but Im not sure what is legitimate
and whats not. Im told the Cayman Islands company is just a
vehicle to pay secret management bonuses.
Allan: (Silent while this sinks in) Oh hm Who told you that?
Dawn: So its true!
Allan: Im pretty sure you must be referring to a perfectly legal
confidential pension programme for senior executives. Where
did you get the information?
Dawn: It is all here in this file and more is to come if we want to have
more
Allan: Listen, I think you we need to reflect on this and dont rush
things I have a meeting in 10 minutes, why dont you give
me the file, I look at it and then we go through things more
properly tomorrow?
Dawn and Allan stare at each other politely. Will she give up the file?
The film fades out.
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215
At the end of the film as the lights come up, the facilitator will have prepared
relevant questions for the participants to discuss: Did Dawn do the right thing
going to the CFO with her information? Allan wants to know how Dawn found
out about the Cayman Islands company. How should she answer? Assuming
it turns out to be legal, is there any reason for Dawn to be concerned about the
confidential bonus programme? Should Dawn give the file to the CFO?
The use of film clips increases the variety of the workshop and allows the
participants to directly observe and experience a realistic fraud or dilemma
situation.
As a substitute or a complement to film clips, the facilitator can invite
workshop participants to take the place of the actors to perform a fraud
scenario. The actors will not have time to memorize the scripts, but good
results can be obtained simply by reading scripts out loud, as if it were an
acting audition. The results will be less realistic and serious than the film clip,
but the participants will nevertheless experience the situation, think about it,
discuss it and hopefully have some fun.
Role playing is another variant, where the participants are given a role and
instructions, but not a script, and asked to act out a scenario using improvisation.
The results can be surprising, and again the workshop participants are
immersing themselves into the subject, not only intellectually but also in the
sense that they can feel the excitement, the fear and the temptations.
Storytelling can also be used as a dramatic technique, where the facilitator,
a special guest or a participant describes a fraud situation from their own
experience. By consciously using storytelling techniques, the facilitator avoids
a dry recounting of facts and pulls the participants into the story.
The different dramatic techniques can be used alone or in combination.
For example, after leading with a short story example, the facilitator can show
a film clip and afterwards invite volunteers to a role play, showing what they
would do in this situation!
216
Opposition is more likely to come from middle and higher positions in the
company. Employees at lower levels are more likely to welcome any kind of
training as a break from the normal routine, and less likely to want to sabotage it.
The most common form of passive resistance is that expected participants
simply do not show up for the workshop. Proper planning and management
emphasis in advance of the workshop should prevent excessive skulking, but it
is difficult to prevent the more senior people from deciding at the last minute
that they have urgent business to attend to. The facilitator cannot cure this
management issue. The best defence is to run a great workshop, and also to
ensure a record of participants is kept so that management is informed.
Another form of passive resistance is the participant who shows up, but is
visibly uninvolved, sleeping, sending SMS messages or otherwise ignoring the
workshop. The facilitator might adopt a soft approach, such as simply asking the
offender during the workshop or during a break what the problem is. Another
approach is to try to get the offender involved and ask him questions like,
What would you have done in this particular situation? A harder approach,
eventually asking the offender to leave, may be an option in extreme situations.
Once again, the local culture must be taken into account.
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217
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negative comment, such as: This is silly, I have worked here 20 years and there
is no problem with fraud.
It has also occurred that a workshop participant, when their rationalizations
collapse, suffer a guilty conscience and become physically distressed, with
headaches, perspiration or other symptoms normally associated with a person
confronted with evidence of their guilt. This is exceptional and unusual; the
main purpose of the fraud awareness workshop is not to expose fraudsters
among the participants, and normally none are exposed. The workshop leader
should, however, be aware of the possibility and be able to recognize the
symptoms when they occur.
Summary
Classroom training has some clear advantages over other alternative training
techniques. Trainees can participate more completely than in pure multimedia
training through dialogue with the moderator and with the other trainees.
Group work and case studies can be used to stimulate participation. Role play
is another tool that gets attention, and gives participants almost real first-hand
experience dealing with a fraud situation. Workshops for selected participants
can also be used to analyze real incidents which have occurred. There is
much to be learned from the real cases that have occurred, in terms of what
happened, how it was handled, whether it could have been detected earlier and
so on. Companies that sweep their incidents under the rug in order to avoid
embarrassment are wasting a valuable improvement opportunity!
Multimedia Interactive
Techniques
18
Multimedia (from Latin: multus, several, medius, media) is a term that is used to
describe a communication tool which uses a combination of different content
forms. The added word multi is used in contrast to the simple use of the word
media which is normally associated only with the use of traditional forms
of printed or hand-produced material. Examples of multimedia can include
content delivered through a combination of still images, animation, video, text,
audio and different forms of interaction.
Multimedia is usually accessed through computerized and electronic
devices, even though it can also be part of a live performance.
When deciding to use multimedia self-training delivered over the Internet,
one has to be aware that it cannot provide the same depth of discussion and
exchange of ideas as a classroom workshop. It does, however, have the advantage
of being able to reach any number of people in a fast and cost-effective manner.
Another advantage is that a multimedia training application will deliver a
consistent message across the organization. While it may not be feasible or
economically justified to organize onsite workshops for all employees in the
organization, all employees still need a basic understanding of the risks of fraud
and corruption, and a knowledge of how to report concerns. Multimedia selftraining can provide that, following the same general lines as the workshop.
The benefits of using a multimedia solution to deliver basic (or more
advanced) knowledge and training can be summarized as follows:
220
There are no time constraints: the training can be taken at any time
and that makes scheduling easy and allows a greater number of
students to attend.
221
required to deliver a multimedia solution that will have the desired impact on
each person in the diverse group.
Different overall approaches can be taken to awareness training. One
approach is to get employees in front of a screen and let them go through
an interactive training with minimal external intervention. But when the
multimedia tool is intended as the complete training solution, a higher level
of sophistication and interactivity is probably in order. Another approach
is to use multimedia as an assessment tool and combine the fact of being in
front of a screen with the presence of a consultant or mentor acting as coach. A
third variation might be to use multimedia as a teaching forum where several
employees are sitting together in front of a wide screen with a consultant or
mentor leading the education process. For example, one company took groups
of factory workers in China through multimedia online training, with the PC
display on a big screen and a moderator to talk the participants through the
training.
The overall strategy taken to raise fraud awareness should be carefully
formed using a design process approach as described previously. Multimedia
is an attractive option for extending coverage throughout the organization,
and can be extremely effective when used as part of a consistent and cohesive
integrity programme.
222
The third generation moves from exclusively dealing with hard skills
and starts including the concept of soft skills. Soft skills, such as a physicians
bedside manner, are often intangible and therefore not easily taught. They
tend to be more of a behavioural nature and include personality characteristics
such as motivation, sociability and work ethic. Examples of soft skills include
leadership, creativity, ambition, interpersonal abilities and reliability. The heart
of the teaching packages is now on emotional intelligence, human interaction,
blended learning, customized programmes and standard programmes,
enhanced focus on content, strategic focus and Learning Management
Systems. With this third generation, management starts being involved in the
development together with Human Resources and IT developers.
The emerging fourth generation is moving in the direction of virtual
reality, virtual rooms, voice recognition, strategic change, creative learning and
perceptual experience. Management, Human Resources and IT developers will
need to work even more closely together and often bring in special expertises
according to the needs.
223
Participants Involvement
Verbal, Vocal and Visual are the 3 channels that any individual uses during
their learning process. In addition to that one can gain knowledge by speaking
and/or doing.
224
Figure 18.1
While reading, listening and seeing are relatively passive ways of learning,
speaking and doing kindle the interpretation and realization process in a more
active way. Normally people learn through a combination of all of these and the
overall awareness training approach can include them all.
For most people, active learning will stimulate the imagination, encourage
the analytical process and greatly increase memory retention. It is easier to
remember something you have said or done, as opposed to something you have
seen or heard. Of the passive techniques, listening and seeing have a greater
potential impact than reading, but only on the important condition that the
student is paying attention! Reading, where the brain analyzes abstract letters
on a printed page and processes them according to a set of rules to logically
produce meaning, is the least efficient of the learning methods. Granted, some
students prefer learning on their own from books than attending lectures,
particularly when learning an abstract subject such as mathematics. After
all, you are reading this! Many people also claim to prefer a book to a movie,
perhaps due to the relative qualities of each, or because they prefer to create
characters in their own imaginations rather than have them predefined on
a screen. But when the objective is to stimulate interest and create a lasting
impact on a large number of employees, to change the way they think about
fraud and corruption, reading material alone is not likely to be effective.
Multimedia training normally includes passive training like reading text,
listening to audio clips, watching video clips and seeing pictures and graphics.
Speaking can be simulated through the keyboard, answering questions posed
by the multimedia or completing tests. If the multimedia system is permanently
available, it might include e-mails and message boards where users can
exchange ideas about particular points. More interactivity can be achieved
225
Sketch 18.1
Dawn is back in the office of Russ Tecarr. The safe open, revealing that it is
full of files. One of the files has been removed and lies open on the desk.
Russ: Pension Builder Trust, Cayman Islands. Its all right here.
Establishment documents, bank opening documents, payment
records. You can look, but no copies please!
Dawn: Who owns Pension Builder Trust?
Russ: Nobody owns it, thats the beauty of a trust. There is a trustee
who manages the assets, here they are, Tried Trusts Limited,
British Virgin Islands.
Dawn: This is how we pay management pensions? To a Swiss bank
account owned by a Cayman Island Trust managed from the
Virgin Islands?
Russ: Thats just the legal setup, you know, for tax reasons. All the
administration is done by a law firm in London, here are their
invoices.
226
Russ takes another file from the safe, and gives it to Dawn who begins
leafing through it.
Dawn: Establishment, trustees, annual fee ... (turning pages) hey,
look here. This invoice refers to another company, Middle East
Advice Network Ltd. Who are they?
Russ: Thats one of Nick Elbacks. You have to ask him, I just set it up
and make the payments.
Dawn: You make payments but you dont know what they are for?
Russ: He gives me the approved invoices, and I pay them. I dont care
what they are for. Its none of my business. Ask Nick.
Dawn smiles the smile of a hunter who has found his prey, unable to
escape.
The other key thing to take into consideration is the level of customization of
a multimedia. While an off-the-shelf solution will simplify the design process,
employees will more easily identify with a multimedia training that has their
organizations look and feel, with organization-specific scenarios, visual effects
and examples. An employee working in retail sales might not easily identify
with a scenario set on an offshore oil platform. It would not seem relevant. It is
preferable to create a training which reflects their specific situations on a daily
work basis. Customization (which can go from simple branding to include
company policies and related documents to specific scenarios) will make the
training more credible and relevant for the users, that is, They are talking about
my company, me, my daily job, and the difficulties I face and giving me advice
on how to deal with them.
227
Figure 18.2
Table 18.1
Concrete experience
Observation and
reflection
Lectures on specific
topics
Information on rules
and procedures
On-the-job learning
(everyday tasks)
Possibility to give
feedback
Sharing of ideas,
Tests, examination
feelings and thoughts
Testing in a new
Forming abstract
situation
concepts
Role play, virtual games,
Case studies
scenarios and dilemmas
Group work
Theory solving
Home work
Assessment and
evaluation
228
scenarios or problems that the participant needs to solve. The scenarios can
be both integrated into the training and included at the end as test questions,
where the participants are asked to display their understanding of the issues.
229
Questions such as What do YOU believe are the three most important
fraud risks in this organization? can give very interesting results when cross
sections of employees respond.
Figure 18.4
To reduce the risk that respondents automatically provide the answers they
think the management wants to hear, answers to perception questions can be
accumulated in an anonymous manner, without the possibility of retrieving
specific answers by individuals. If employees are convinced the survey is
anonymous, they will feel more comfortable giving their true opinions. For
surveys conducted across an entire organization, it is useful to analyze results
by country, division, region, position or other similar criteria.
Multimedia training can also include, or act as a bridge to onymous and
anonymous channels of communication. Employees who wish to report an
incident or a suspicion might be more comfortable doing so through a training
230
programme, rather than over a grim looking link on the security departments
web site. In order to further lower the psychological barrier, the instructions
for the communication channel might ask employees to please report their
concerns about any possible weaknesses in the internal control system, or
suggested improvements to the system. An employee with information might
not be keen on pointing the finger at someone or report a fraud, but still be
willing to report a weakness: Im not saying that something is going on, but if
someone wanted to do this it would be possible to do it in this way.
Summary
By creating multimedia training, designed for use over the Internet, it is possible
to reach every employee in a cost-effective manner. Even employees who are
not normally tied to a computer can take a break from their normal routine
and logon to the training from home or from a workstation at a training point.
Another advantage of online training is that it standardizes the training across
the organization. Standard does not mean rigid. Language versions can be built
in, and parts of the training might vary, using different scenarios and examples
depending on the country, position and function of the employee. Multimedia,
as the name suggests, can combine images, text, voice, animation and video
clips of live fraudsters (actors), all with the desired level of interactivity.
231
19
234
235
When will the event take place? It could, for example, be during
working hours, in the evening, on a weekend or as a summer school
event.
Participants
236
Content
Printed Materials
When you go to the theatre, you normally expect to receive a programme that
details the cast of characters, a schedule of acts and intermissions, and perhaps
other interesting material. When producing a corporate theatre experience, the
programme can help set the tone for a theatre experience, even if the theatre is
the company cafeteria. A program might look like the example in Figure 19.1.
Because our intention is to use theatre as an educational device, we need a
high level of interaction with the audience. One straightforward approach is to
ask the audience, after the performance, to give their observations and analysis,
through a question and answer session or through organized group work. In
the following example, we ask the audience to work in small groups during
the breaks between the acts and then to play the role of journalists at a press
conference, and ask questions of their own choosing!
Figure 19.1
237
238
Sketch 19.1
Langco Engineering surprised the market with a big loss in the third
quarter. There are suspicions of accounting irregularities, and the Stock
Exchange has started an investigation. Langco CEO and CFO are holding
a press conference in an attempt to defuse the situation.
CFO:
so as a result of these unexpected supplier problems in the
Far East, our project will be delayed until the end of next year.
Unfortunately this will increase project costs. We estimate
that the final loss on the project will be no more than 75
million euros, which is the amount we have provided for in
the current quarter. We have reported this amount as an
exceptional loss; we have also prepared pro forma statements
which show a substantial profit before these extraordinary
items.
Journalist 1: Can you please explain the reasons that you are restating
earnings from the last two years?
CFO: Hmm, yes, well because we expected substantial profits
on the Far East projects, according to the percentage of
completion method of accounting we were required to
show part of those profits last year and the year before. But
since we now expect a loss on the projects, we must
restate earnings.
Journalist 2: Why did you fail to recognize the supplier problems? Surely
they must have been known to you before this week?
CFO: No, no. Well there has been a failure, yes, well, we are
very disappointed with our team in the Far East who did
not advise us of the true situation until now
CEO:
We have started an internal investigation.
Journalist 1: Last year, after reporting strong earnings, important
bonuses to top management were approved and paid, but
with these adjustments we see there have in fact been no
profits for two years. Will you be returning your bonus?
CEO: Hmm, well that is a question for the Board of Directors, we
have not considered the issue of senior management
compensation.
The floor is opened to all of the members of the audience, who are asked
to act as journalists, improvising questions.
239
In Sketch 19.1, the audience have the opportunity to get into the act as
journalists. Because they have watched the whole play, they have plenty of ideas
about what is going on at Langco and will have no trouble finding embarrassing
questions for the hapless CEO and CFO. In their learning experience, they have
witnessed the fraud and corruption, detected the deceptions, analyzed and
formed theories about what is taking place.
A fraud and corruption awareness theatre production titled House of
Cards Ltd (Iyer, 2008) has been held as a theatre awareness event in a dinnertheatre setting, with mixed audiences of between 50 to 200 people seated around
tables. At the end of the production, the different tables become teams for group
work, and are asked to give their opinions on a number of issues. The fictional
play is based on a fraud and corruption scenario in a make-believe company,
Build-IT. As the production reaches its climax, with ever increasing audience
participation, the scandal breaks complete with newspaper stories as shown in
Figure 19.2. In one performance of House of Cards Ltd, the audience became
so involved in the situation that when it reached the end, they continued to
play their parts for an extra 45 minutes.
The results of raising the awareness of fraud and corruption with a theatre
event can be surprising. The spectators are drawn into the plot which unfolds
in short scenes. Even if the audience can consist of representatives from many
different companies, they can easily assume the roles of company employees at
a big event. They are the bystanders, watching step by step as the tale of fraud
and corruption unfolds. As in real life, the bystanders are only given a few
pieces of the puzzle, but by watching the fraudsters and their targets in action,
they can soon imagine the missing pieces and see the full picture. As the play
reaches its conclusion, the cast and audience are normally so comfortable in
their roles that they continue the play with several improvised scenes of their
own!
Participants are both entertained and educated by the dinner-theatre
event and what is most significant is that even several years afterwards they
remember not only the event, but also details of the theatre piece. While use of
theatre as a fraud awareness training method is still experimental, its capacity
to make a lasting impact on participants is proven.
240
Figure 19.2
241
Summary
A powerful technique for raising awareness is through the theatre experience,
where the audience is entertained by a short play with a plot based on fraud
and corruption. While the characters and situations might seem exaggerated at
times, on the whole it is designed to be realistic and believable. The audience
become increasingly involved in the play, for example as employees of the
organization where it all happens, or in the sketch above, as journalists. By
the end of the performance the audience and cast are usually having so much
fun with the concepts and characters that they sometimes even spontaneously
improvise additional scenes. The lines come naturally; everyone understands
the previously hidden motivations of the various players, and the kinds of
frauds that are taking place. The theatre experience can be a successful training
exercise for that reason; the key messages are effectively communicated and
the participants understand those messages logically and emotionally. Several
years after the first event, participants would have no trouble recalling the
experience.
Organizational Resilience
to Fraud
20
244
prevention becomes easier. The risk of getting caught that the potential fraudster
perceives is, finally, the most effective deterrent. If the risk is too great, the
dedicated fraudster will leave, looking for easier targets. Other less sinister
employees will be less likely to fall to temptation, more likely to feel loyalty to
an organization they are proud of.
245
Reporting Incidents
Internal controls, management supervision and even internal audit too often fail
to detect fraud because the fraudster knows how to avoid them. Most frauds are
probably not detected at all, and those that come to light often do so by accident,
or because somebody who is not part of the normal control structure tips off
management that something is amiss. This person, who might sometimes be
called a whistleblower, is perhaps an employee or former employee, but might
also be a supplier or customer or someone else who just happens to have inside
knowledge about the inappropriate activity. There are cases where valuable
tips have come from the jealous former spouse of a fraudster, for example.
Because it is so difficult to prevent incidents, persons with knowledge or
strong suspicions provide a valuable service to the organization when they come
forward. If fraud is going on, it is clearly in the best interest of the organization
that the fraudulent behaviour is reported. Unfortunately, it is not always in the
best interest of the person reporting it! Historically, organizations have been
quicker to punish the whistleblower than the fraudster, especially when the
persons accused are more important and powerful than the person reporting
the fraud. As Sophocles and Shakespeare have pointed out, nobody welcomes
the bearer of bad news. Potential informants are often reluctant to report their
246
concerns, and only do so when some strong personal motivation allows them
to overcome the reluctance. Some try to avoid the risk of reprisal by reporting
anonymously, but the risk remains that the identity of the whistleblower will
be guessed.
Not everyone who reports a problem or suspicion can be labelled a
whistleblower. The very word raises images of someone making lots of noise,
going out of their way to force their unwelcome suspicions on everyone they
meet! Surely this is not the best way to inform management of a problem. The
fault lies not with the whistleblower but with the organization that failed to
provide accessible channels of communication, or failed to educate employees
about their existence and how to use them. Typically, whistleblowing is a last,
desperate attempt to get attention when other less noisy methods have failed to
produce a result. Being the very last resort is also the only excuse for blowing
the whistle, since it implies that the basic loyalty one ought to show towards
ones superior is broken; the companys brand image may be hurt, costs may
be incurred and innocent individuals may suffer during the following turmoil.
Still, the whistleblower may be morally excused if everything else has failed.
One could also add that a necessary prerequisite for defending external
whistleblowing is that the trouble one causes by whistleblowing should be
proportionate to that is, less than the problems, costs and destructive effects
(including the effects on society at large, the public interest) of the fraud/
immoral things that are going on in the company.
The whistleblowers motivation might be a sincere outrage and sense of
loyalty to the organization. Or, the motivation might come from jealousy or a
desire for revenge. An employee who is passed over for promotion, dismissed
or otherwise mistreated (in their own eyes) might feel they have nothing to
lose. There have been cases where one fraudster reports another because
they felt they did not receive their fair share of the loot! With these strong,
sometimes negative motivations, whistleblowers sometimes report selectively
or untruthfully. Persons responding to whistleblower reports must separate
fact from fiction and get the full story.
Organizations can and should take steps to lower the barriers, making it
easier for people to raise their concerns. A clear policy that explains that reports
are treated confidentially, the identity of the person reporting is protected and
that nobody will be punished for concerns raised in good faith is helpful in
increasing the trust and confidence of individuals who might want to come
forward. Establishing dedicated communication channels to handle such
247
Ready to Listen
If employees are encouraged to report their concerns, the organization had
better be prepared to handle their reports. Responsibilities need to be assigned,
legal requirements understood and a process for systematically reviewing and
addressing complaints defined.
The right touch is very important when dealing with persons who
courageously come forward with information. When meeting with someone
who has taken the initiative to report, one must understand and show sympathy
for their situation and put the person at ease so that they are willing to tell the
entire story. At the same time, one must be able to recognize the significance of the
problem, ask the right questions and avoid making commitments or revealing
confidential information to the informant. The qualifications and knowledge of
the key persons assigned to this role can be assured through training and role
playing. We will discuss the strange world of the whistleblower later in this
chapter.
Behind the well-trained appropriate person/s that will be dealing with
incoming complaints and the individuals related to them, there needs to be a
suitable structure and process in place.
248
Figure 20.2
249
work is required. The group must also take into account issues such as the
protection of a whistleblower against reprisal, the rights of persons accused to
be informed of the accusations against them, and the restrictions that privacy
laws may bring regarding personal information stored in computer systems. An
approach for dealing with anonymous whistleblowing should also be defined.
250
The Health Check can start with the questions: We know that some fraud or
corruption is likely, but what might it look like? What form will it take? By
imagining (for example in an awareness workshop brainstorming session) what
kinds of fraudulent transactions could occur, it becomes possible to search for
them efficiently and systematically. Another Health Check method involves
routinely screening managers and key employees for involvement in external
companies, travel habits and expense reporting and compliance with internal
rules and code of conduct. Such a review need not be secret, or perceived as
an expression of distrust. On the contrary, managers should be informed that
such reviews will take place, and that they are an opportunity for managers to
demonstrate the proper tone at the top.
If there is a management narcissist with fraudulent tendencies in the
organization, as described in Chapter 6, Working with a Corporate Psychopath,
it is likely that their habits will betray them during a Health Check exercise.
The Health Check is designed to single out suspicious activities or transactions,
and when these signs appear on the radar screen additional research will soon
determine whether or not misbehaviour is present.
The use of corporate Health Checks can detect fraud at an early stage, as
compared to accidental discovery or reports by whistleblowers which tend to
concern incidents that have continued for some time. Through a systematic
analysis of patterns and indicators of potential red flags it is sometimes even
possible to predict what sorts of fraud are likely to take place in the future.
By pre-empting what the problem could be it becomes easier to take the right
measures to prevent it happening. If potential frauds are detected at a very
early phase, issues can be addressed in a calm and routine manner. Disciplinary
actions, if any, will also be minor.
251
often noted when first starting a fraud awareness project, as previously hidden
situations are brought to light.
It is somewhat problematic to assign a label for those persons who, in spite
of personal risks, come forward with information about fraud and corruption.
Whistleblower, informant and complainant all have negative associations,
and other words to describe the act of providing information about another
persons suspected misbehaviour are even more insulting. Fink, rat, squealer
and tattletale come to mind. It is not surprising that fraudsters, when found
out, are negatively inclined towards the person who, in their mind, betrayed
them. As discussed in Chapter 6, Working with a Corporate Psychopath
we see that while the narcissists seemingly pleasant mask makes colleagues
uncomfortable, the mask removed reveals a scary monster. No wonder people
are afraid to report.
To make matters worse, the whistleblowers motives are not always
completely honourable, even if they accurately describe a fraudulent situation.
Strong motivation is required to overcome the natural reluctance to report
wrongdoings. The whistleblower also has incriminating information that is
not generally known. Where does that information come from? Most often
the person reporting is, or was, in close contact with the persons they accuse,
perhaps trusted or, in the case of the narcissist, dominated by them. In many
cases, the whistleblower has at some point gone along with and even benefited
from the fraud they are now reporting, but have suffered some grievance that
motivates them to report. The reports and evidence from the dishonourable
whistleblower are likely to be biased, minimizing their own involvement and
maximizing blame on the subject of their wrath.
Not all whistleblowers have dishonourable motives. Some have found
themselves in an unenviable position of having to choose between participation
in the fraud (and sharing in the blame when it is eventually discovered),
or refusing to participate and immediately compromising their situation.
Whistleblowers who take the high road at the risk of losing their livelihood are
certainly not acting dishonourably.
In either case, the true whistleblower is likely to be subject to strongly
conflicting emotions. With their future hanging in the balance, they tend to
consider the incriminating information they are reporting as overwhelmingly
important and deserving of immediate and strong actions. Even in less dramatic
252
situations, the person coming forward with information may have conflicting
emotions and an exaggerated sense of self-importance.
The organization needs to be prepared to meet informants and to
professionally deal with their complaints and anxieties in a way that will protect
the organization and respect the rights of both the accuser and the accused.
The person meeting the informant often starts with only the vaguest idea of
what will be discussed, yet they have to in short order acquire the trust of the
informant, obtain information and evidence which might be critical or might
be without value, might be true or false, avoid revealing potentially harmful
information to the accuser while convincing them that the allegations will be
taken seriously. There are plenty of potential pitfalls in such meetings.
It is very helpful to establish a trusting relationship with the informant.
There is usually no possibility to get complete information during the first
meeting, as the most pertinent questions become apparent only after review
and analysis. It is more important to make sure that the person will agree to
continue to cooperate, and also will not take matters into their own hands by
spreading rumours or initiating confrontations.
Thus, the persons who interview informants need to possess a highly
developed awareness and understanding of the risks involved, as well as an
ability to communicate effectively and sympathetically.
Incident Management
Be prepared is the Scout motto, and it applies here. When an incident occurs,
it naturally tends to disrupt the normal order of things. Who can be trusted? Is
it critical to stop the fraud immediately? How can we secure evidence? How
can we ensure business continuity?
Every incident is different, but the practical details of starting an
investigation can be thought through in advance. We discussed the importance
of investigating earlier in Part I. Most organizations do not have their own,
dedicated investigation department sitting around waiting for cases. But it is
possible to decide in advance responsibility for quickly and efficiently putting
together an investigation team on a project basis. It is also possible to prepare
in advance guidelines, checklists, sources of advice and so forth rather than
making spontaneous decisions in the heat of battle.
253
Communication of Results
When an incident of fraud or corruption happens, it is instinctively seen as
evidence of poor management. As a result, managers often opt to limit the
damage by dealing with incidents as quickly as possible. Many serious
fraudsters, when discovered, have therefore never been investigated but instead
been rewarded with early retirement or other lucrative compensation packages.
The decision to reward the fraudster is defended as pragmatic. Investigations
are expensive, we need to put this behind us and move on, the story goes. The
fraudster, with pockets full and curriculum vitae untarnished can calmly begin
looking for the next victim. No wonder they wind up as narcissists!
Organizations that take the easy way out fail to take into account the
damage that is done to the company culture. A company that rewards fraud
and incompetence, rather than hard and honest work, is unlikely to develop
a culture of loyal and content employees. They are likely to suffer repeatedly
from incidents of fraud and corruption, as potential wrongdoers see there is
little risk.
254
Sketch 20.1
Epilogue
255
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261
Index
73855 rule 223
264
common ignorance 54
common sense 658, 99100
common values 912
communication
barriers to 6973
channels for 43, 2468, 22930
and cultural differences 1879
effectiveness of 11415, 206
importance of 41, 11415
of incidents 2534
and training 1634, 223
types of 223; see also 73855 Rule
company culture 478, 6971,
915, 99100, 1817, 2534
conformity 74
construction industry 1856
control environment 1245;
see also internal controls
cooperation 278
coordination of functions 1934
corporate culture, see
organizational culture
Corporate Psychopaths 846, 101,
102, 114, 158, 217, 250
impact upon others
869, 10911, 251
corporate values 100103
corruption
biological theories 259
definitions 45
and power 645
and public/private
spheres 11314
public sector 3840, 180
social constructions 3143
social deconstruction 4577
social reconstruction 99119
see also fraud
Corruption Perceptions Index 180
Cressey, Donald 48, 56
index
265
266
screening of 250
trust in 924
manipulation 130
media reporting 61
Mehrabian, Albert 223
memories, reconstructed 545
Millon, Theodore 856
mindsets, closing of 97
mobilization 41, 43, 737, 11518
monocultural companies 182, 1834
Montessori, Maria 129
moral blame, absence of 5668
moral decay 478, 612, 7980
moral muteness 6971, 93
moral relativism 357
moralizing 11114, 15051
multicultural companies 182, 1834
multi-domestic approach 1812
multimedia training 184,
188, 201, 21931
multinational approach 1812
mystification 1089, 13940
myopia errors 164
Myth of Amoral Business 6064, 70, 94
navety 102, 110, 131
narcissism 58, 60, 846, 11112,
114, 158, 217, 250
impact upon others
869, 10911, 251
national culture 17980
need 4950, 513, 11011
Nevander Fristrm, Lena 89
non-verbal communication 223
norms 4043, 468, 5760,
100103, 14962
objectivity 335
one-company towns 1845
opportunity 50, 513, 169
index
267
268
Wsterfors, David 66
Waters, James 70, 114
wealth distribution 389
Weber, Max 11617
Weick, Karl 71
Weinberg, Martin 40, 11516
whistleblowing
barriers to 43, 88, 2457
communication channels
for 43, 2468
dealing with informants 43,
1889, 2479, 25052
importance to detection
77, 7980, 1456, 245
motivations for 2456, 251
wishful thinking 556
work-life balance 834
workshops 1767, 184,
1867, 20518, 230
Risky Business
Psychological, Physical and Financial Costs of High Risk
Behavior in Organizations
Edited by Ronald J. Burke and Cary L. Cooper
Hardback: 978-0-566-08915-2
e-book: 978-1-4094-0553-5
Corruption
An International, Interdisciplinary, and Multi-sectoral Reader
Daniela Herrmann and Clare Fletcher
Hardback: 978-1-4094-1129-1
e-book: 978-1-4094-1130-7