Employee Fraud – Back in News

In Dreams Begin Responsibilities: Delmore Schwartz

Employee Fraud – Way Forward from Organizational Perspective

Corporate frauds or white collar frauds are not committed by professional criminals but well-educated employees who know that committing frauds can damage their reputation and destroy/limit career options. While a few recent cases have gained media attention due to the huge sums, almost all financial services organizations grapple with multiple incidents of employee fraud.

What Drives Employees to Commit Fraud?

In the corporate world, fraud occurs majorly due to false representation or disclosure of wrong information and due to abuse of position. From an individual’s point of view, there are three conditions required for employee fraud to occur:

·    Pressures due to Dire Necessity: There could be many reasons for an employee’s overpowering need to commit a fraud, e.g., medical/family emergency, debt, lavish life style, personal financial emergencies, expensive habits, gambling, etc.

·         Taking Advantage of Opportunity: An act for personal gain with least chances of getting caught.

·         Rationalizing Precedences: An employee with a strong need and a reasonable window of opportunity to commit fraud can find ways to rationalize his/her act.

Preventing Employee Fraud

This can be addressed through a three -pronged approach:

A. Organizational Policy: Having a set of unambiguously drafted and unequivocally articulated organizational policies relating to employee fraud is a pre-requisite. These include policies pertaining to fraud:

·             Prevention: Employee background checks, compulsory job rotation, avoiding potential conflicts of interest, access to sensitive data, etc.

·                 Detection: Maker-checker-auditor approach, vigilance squads, compulsory leave, multi-level customer interaction, whistle-blower protection, etc.

·       Management: Internal investigation process, disciplinary actions including criminal proceedings, etc.

·                      Communication: Detailed and continuous communication of these policies is necessary to drive a clear understanding of expected behaviours.

B. Organizational Incentive Processes: Rewarding short-term achievement could end up incentivizing behaviour, which may not be in line with organization’s long-term goals. Disproportionate focus on the year’s KRAs against long-term contribution and value creation could result in employees taking a short-term approach to their work.

·         Setting Target at Reasonably Stretched Level: While “stretch” targets are necessary, setting them at unreasonable levels may tempt employees to take short cuts.

·         Fostering Right Management Attitude: While an over-aggressive attitude of management toward profitability and performance can lead to an environment that is ripe for fraud, a lax attitude toward internal controls and valuing ends over means can also result in pitfalls.

·         Uniform & Consistent “Zero Tolerance” Policy: As the way an organization responds or reacts to detected fraud cases plays an important role, a swift, uniform and consistent “zero tolerance” policy is sine qua non.

·         Timely Communication: Timely communication to all employees without compromising on confidentiality helps in reducing speculations, building transparency and making employees partners rather than just recipients of management actions.

C. Organization Culture: Perhaps the most important and least appreciated aspect is the impact of the prevailing organizational culture on employee fraud.

·         Ensuring Daily Observance of Value Statement: A well-articulated organizational value statement/code of ethics/conduct is the hygiene factor, while actual daily observance by each member within an organization is the real differentiator.

·         Healthy Precedence: The way leaders/managers are rewarded and the way their careers are affected go a long way in shaping the personal career strategy of an employee.

·         Uniform Philosophy on Integrity – Irrespective of Environment: An organization’s overall philosophy on integrity in the external environment is also important. An organization that aims to be a model corporate citizen with a “clean” image is more likely to inspire a high standard of behaviour among its employees.

Organizations – Victims of Employees Fraud

·         Reebok India: Mr. Shubhinder Singh Prem & Mr. Vishnu Bhagat (former COO)

·         Tata Finance: Mr. Dilip Pendse & his associates

·         United Bank of India: Ms. Archana Bhargava (Former CMD)

·         NSEL: Mr. Anjani Sinha (Former MD & CEO), Mr. Amit Mukherjee (Former AVP – Business Development) & Mr. Jai Bahukhandi (Former AVP – Warehousing)

Conclusion        

Employee fraud – being a complex issue – requires a multi-pronged approach, consisting of employee-friendly HR policies, intelligent organization design and control systems, clear organizational policies, smart incentives and leadership by example.