by Kevin Phillips
Most accountants and auditors know the “fraud triangle”: the combination of incentive, opportunity and rationalisation that creates a risk of an employee defrauding a company.
But the fraud triangle alone isn’t enough. In the wake of Enron and other high-profile corporate disasters of the past decade, there has been a new focus on how factors at the organisational level, not just the individual level, can increase the risk of fraud. Chief among these is that nebulous thing called “organisational culture”.
One of Enron’s enduring mysteries is how a company that boasted a highly regarded set of management controls could implode so spectacularly. The consensus is now that under the leadership of charismatic CEO Jeff Skilling, those controls were systematically undermined and subverted. Employees were under immense pressure to deliver more and more spectacular results or face losing their jobs. Bad news was not allowed, information was strictly controlled and feedback was restricted.
Good people can turn bad very easily
In a culture like this, honest people can quickly lose their moral bearings and may commit fraud without even knowing it. If your entire organisation is united in praising you for delivering profits no matter what it takes, making subtle adjustments to the numbers – booking that sale a bit early or offering an “incentive” for the deal – can soon come to seem trifling and routine.
The lesson that history teaches us, from Stalin’s Russia to Enron and beyond, is that if the boss makes massaging the numbers a condition of staying alive or keeping your job, you will massage the numbers.
Don’t set your company culture up for fraud
So an organisational culture that sets unrealistic targets, and punishes people for failing to meet those targets, is already setting itself up for fraud. But the crucial ingredient, as at Enron, is that information flows must be compromised: Something must happen which makes the official story diverge dangerously from reality. Maybe:
- Those at the top are so removed from the original source of information they have no way of checking it,
- The information is so complex it defies proper understanding, or
- There’s just so much information that there is no way to separate the signal from the noise.
The antidote to all of this is transparency
The larger the number of people who can see and understand what’s going on, the lower the chance that any one of them will step out of line. When less is hidden, you get better information available for decision-making.
To achieve this transparency, you need to share relevant financial information freely – not just among the few in the organisation who are trained in accounting, but among everyone who is responsible for a budget. This means that the financial information must be easy to understand and access. Accurate reports, available on time and in a format that makes sense to most people, are crucial.
Even ten years ago, this was hard to achieve, but with online access to central data stores there is no longer any excuse. It’s now easy to give everyone an intelligible view of the numbers that matter to them, which are up to date, and in a way they can understand. If your organisation isn’t already doing this, how much longer can you afford to wait?
This article first appeared on HR Pulse.