Culture and Leadership Prevent or Promote Fraud and Corruption

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Businesses and public organisations lose millions of rands each year to fraud and theft, often perpetrated by their own employees.

Moreover, the value that organisations are supposed to create – for shareholders, employees, customers and communities – is destroyed through unethical conduct.

Remember, for instance, how schools and scholars suffered due to the textbook scandal in Limpopo in 2012. While some of these instances of organisational misconduct are exceptional occurrences masterminded by greedy and sneaky individuals (the Bernie Madoffs and so-called “Gordon Gekkos” from Wall Street), the more alarming cases concern misconduct that has become normal and routine – a widespread norm in the firm.

In such cases, leadership and culture have failed.

These key influences – leadership and culture – can act as controls against misconduct, or could inadvertently (sometimes intentionally) direct employees towards fraud, theft, corruption or anti-competitive behaviour.

The Problem – Lack of Ethics

The importance of ethics is hardly denied today. The King IV Report on Corporate Governance for South Africa (2016) elevates ethics (or “an ethical organisational culture”) to the first outcome of good corporate governance. “Ethical leadership” has become a favoured topic at academic and professional conferences. And few companies today have not articulated or published their own Code of Ethics.

Yet there is no shortage of examples where organisations and their employees have been guilty of reckless conduct, whether opening bank accounts without customer consent to reach sales targets or installing defeat devices enabling the sale of vehicles with illegal levels of emissions.

In these cases, lack of leadership, inconsistent enforcement of standards, and a weak or unhealthy culture could be encouraging employees to park their company values and choose a corrupt route.

Culture, largely formed by the decisions of leaders, can encourage wrongdoing in different ways, including:

  • Setting and militantly enforcing unrealistic performance targets;
  • Rewarding reckless or irresponsible behaviour (creating dangerous role models); and/or
  • Focusing on strategy, but neglecting culture (allowing unchecked and risky assumptions, behaviour or norms to develop).

It is no surprise, then, that the King IV Report describes corporate governance as the exercise of ethical and effective leadership and recommends that the management of ethics must be appropriately resourced.

Competent and passionate specialists must be appointed to provide ethics thought leadership in order to shape and safeguard an ethical culture. It is against the backdrop of such a culture, that more sophisticated (hard) controls, like those that form part of a Fraud Risk Management Strategy, become effective.

The Solution – Fraud Risk Management

The reality is that fraud can happen at any type of organisation/industry resulting in large sums of monies being lost by organisation’s each year to fraud.  Companies should adopt Fraud Risk Management (FRM) which is an ongoing process that provides an organisation with the tools to manage fraud risk in a manner consistent with the regulatory requirements as well as entity’s needs.

Having an FRM strategy that is effectively implemented throughout the organisation gives credibility to an organisation’s zero tolerance stance to fraud. FRM encompasses controls that achieve the following key objectives: Prevention, Detection, and Response.

In order to meet these objectives, the following four phases need to be implemented:

  1. Assess the risk – Profiling the current state of the FRM framework, setting targets for improvement.
  2. Design – Designing programmes that encompass controls to prevent, detect and respond to incidents.
  3. Implement – Deploying a strategy to implement the new controls throughout the organisation.
  4. Evaluate – Assessment of existing controls to ascertain if they adequately mitigate the potential risks that the organisation is exposed to.

Therefore, in order to achieve this, the first and most important requirement is a visible, practiced ethics culture and leadership, and demonstrated commitment to FRM coming from the top of the organisation.

And so, CEOs and the BoD’s have a critical and unique role to play in ensuring that the business objectives are met and in meeting these objectives it is imperative that the organisation is lead from an ethical foundation in order to support an organisation’s zero tolerance to fraud.


Pumla Ntsubane | Associate Director: Fraud Risk Management | KPMG South Africa | pumla.ntsubane@kpmg.co.za | https://home.kpmg.com/za/en/home.html |


 

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