Proper Corporate Culture Helps Deter Fraud

One of the best ways to stop fraud in the workplace is to establish policies, rules and procedures that let employees know in no uncertain terms that fraud or other unethical behavior will not be tolerated.

You can start emphasizing ethical corporate culture during initial interviews with applicants. During the interview process, collect as much information as you can on potential employees, including work history and address history (not just current address). Has the applicant moved frequently? Although there can be legitimate reasons, a history of repeatedly moving can indicate more investigation is warranted. If an applicant is reluctant to provide information, this can be another red flag. (However, federal and state laws restrict some of the questions that you can ask about a person's background.)

Though you may be able to glean a lot of information in the interview, this is only the beginning. An ongoing proactive approach to preventing and detecting fraud is important.

Develop a code of ethics that all employees must sign. The document, which can also be made part of the staff handbook, should spell out corrective action that will be taken if the policies are violated.

Of course, not all issues can be covered in a code of ethics. Written rules should be augmented by personal contact. It's important that company executives talk with employees on a regular basis. Being out among staff members can promote good relationships - and help uncover potential fraud before it costs your company a fortune. Remember the "smell" test: If something smells like fraud or unethical behavior, there's a good chance it is.

Companies used to try to keep internal fraud incidents secret, but that's not an effective deterrent. Instead, every time there's an episode, make employees aware that it was dealt with, and if warranted, that the conduct was turned over to law enforcement. Employees should be put on notice that the company is serious about ethics and will deal with violators. It also curtails the "grapevine" that often passes around a distorted version of what happened. Get the basics of the story out - although it's seldom necessary or wise to reveal all the details.

Leading by Example

Establishing an ethical code does little good if upper management looks the other way when unscrupulous actions take place - or if the rules apply to employees but don't apply to executives.

The case of former Boeing CEO Harry Stonecipher illustrates the importance of leading by example. In 2005, Boeing announced that its board of directors asked for, and received, Stonecipher's resignation after it discovered a personal relationship between the married CEO and a female executive at the company.

Boeing stated in a press release that Stonecipher's actions were "inconsistent" with the company's Code of Conduct. "The facts reflected poorly on Harry's judgment and would impair his ability to lead the company," according to the board chairman.

An immediate and comprehensive investigation of the matter was ordered by Boeing's board after receiving information that was sent anonymously to the board chairman and the company's legal and ethics officials. The resignation was not related to the company's operational performance or financial condition. "However, the CEO must set the standard for unimpeachable professional and personal behavior," the board chairman stated.

Boeing officials said the relationship itself did not violate the company's conduct code, but the liaison and some reportedly inappropriate e-mails sent from Stonecipher to the woman did violate a portion of the code that prohibits conduct that can "cause embarrassment to the company."

In recent years, many companies and not-for-profit groups have established ethics or conduct codes. The Sarbanes-Oxley Act generally requires all public companies to adopt a Code of Ethics for the CEO and senior finance officers, but many organizations apply similar rules to all employees.

At the same time, in response to Sarbanes-Oxley, many companies have set up anonymous hotlines and other mechanisms that allow employees to report misdeeds in confidence. In fact, the Boeing Code of Conduct requires employees to report any suspected violations and provides an "Ethics Line" to do so. Retaliation against those who report improper conduct is prohibited under Sarbanes-Oxley.

Like Boeing, companies should hold executives to high standards. If staff members become aware that their leaders are permitted to get away with shoddy principles while lower level employees are held accountable, the damage can be immeasurable. Everything starts with leadership.

About Romanchuk & Co.

Romanchuk & Co. is a boutique investment banking and advisory firm with a focused expertise within the energy and industrials sectors. We specialize in providing sell-side M&A advisory services to lower middle-market companies and their owners. Our team advises owners on the preparation and sale of their company, assists them in identifying strategic opportunities and then helps them execute upon those strategies. Through our CPA advisory practice, we provide independent business valuations, financial due diligence services, forensic accounting investigations, litigation support and restructuring advisory services.