Brief on 'Taming Corporate Frauds from the Root'- A Behavioral White Paper offered by OD Synergy exemplifying the importance of the integrity principle in total organization development and in creating organizational effectiveness.

Taming Corporate Frauds from the Root

Corporate frauds and financial malpractices have become cankerworms globally. In the African region, a staggering amount of the equivalent of U.S. $1.75 million is lost yearly to corporate frauds, defined here as frauds committed against organizations. Such an amount may be peanuts when compared to large scale corporate frauds in more developed economies. Integrity is critical to total organization development and long-term corporate success. No organization can reach its potential or attain corporate excellence when paralyzed financially, and , particularly so, from within. There is an urgent and increasing need for organizations to address these financial behemoths from the root in order to enhance their level of financial fidelity and ensure long-term corporate success.

What are organizations doing to enhance their level of financial fidelity or stymie financial infidelity? In view of the pervading cankerworm of frauds at various levels in the corporate environment globally it is apparent that financial behavior in the corporate environment is largely a matter of an executive’s psychological make-up. Organizations can attain much mileage in enhancing the level of financial fidelity by a deliberate attempt on the part of corporate management to understand the critical elements underpinning corporate frauds and adopt key programmatic approaches to manage them.

The focus of the white paper is the financial integrity of organizations and 'corporate fraud'' is conceptualized in the white paper as 'fraud perpetrated within an organization by employees, management or some other stakeholders.' Here is a brief overview of some of the key behavioral-linked approaches to understanding and managing corporate frauds.

Behavioral Explanations

Current behavioral analyses point to a combination of personal, cultural, situational and experiential factors in the understanding and management of corporate frauds. Let us consider three of such. This brief is an excerpt from our white paper on: ‘Taming Corporate Frauds from the Root.’ The white paper addressed more than twenty behavioral approaches to understanding and managing corporate frauds.

1. Socio-cultural Factors:
Values make a social system tick. A breakdown in values is at the heart of lack of respect for the general good, which frauds epitomize. The increasing wave of frauds in the last 15 years is symptomatic of the discontinuity in the value system and ethical commitments of key corporate players -the shareholders, the management, the employees, the customers, and, if you like, the larger society. In most social circles, particularly in African and many third world societies, the decisive test of a person’s worth is how liquid he or she is. How he or she gets the cash is a non-starter!

Many employees, members of management, shareholders and customers program themselves to get rich quick, or to catch up with the Jones, in the instinctive fear that patient and honest efforts in the right direction may devastatingly impact on their instinctual drive for pleasure, self gratification and economic security; more so in societies with chronic lack of organized social security. A core corporate inference, with antidotal impact, is the increasing need to create a socially responsible organizational life and a benign, ethical corporate leadership.

2. The Availability Syndrome:
Corporate frauds happen where the funds or resources are available! They take place where the conditions are conducive. Fraudsters tend to exploit the slightest opportunity to perpetrate fraud if the time is ripe. Thus, fraudsters will wait, and even scheme, for the opportunity and for the right moment to act. Like a hot radiator that explodes at the careless handling by a motorist, fraudsters will lay low-perfecting their acts and biding their time where they know the funds or resources are abundant to snap-waiting for any carelessness or imperfection in the system.

What conditions- what lapses, what facilities, what machinery- in your organization can potential fraudsters exploit? What surveillance, perhaps of an autopilot nature, is in place to outsmart insider frauds?

3. Innate Psychological Imbalance:
Innate psychological elements are often seen as important causes of corporate frauds. The psychologist, Sigmund Freud, and other Freudian theorists believe that human beings have the innate tendency to be antisocial (in this context, to commit corporate frauds) because of their uncontrollable instincts, called id impulses. Freudians see human personality as consisting three elements, which are: the id (the instinct), the ego (the reality gauge or rational centre), and the superego (the value judge or conscience). For Freudians, antisocial behavior (in this context, corporate fraud) results from various dysfunctions of these psychological elements.

Thus, a faulty ego, in which the individual has problem with learning from experience, handling frustration and insecurity, and inadequate perception of social reality, may predispose the person to such acts as corporate frauds. Where the person has an underdeveloped superego or conscience, he or she does not feel remorse for wrongdoing and, thus, may see fraud as an organizational game. Such propositions as were made by Freudians, suggest, for example, the need for robust staff recruitment systems and the use of appropriate psychological and psychometric tests.

Programmatic Management of Frauds

The management and control of corporate frauds should be at three key levels: corporate, work group, and individual. The leadership at the level of corporate governance is critical. Here are three of the programmatic approaches for taming corporate frauds.

1. Psychometric Testing:
Knowledge of employees who hold attitudes, values and beliefs supportive of fraudulent behavior will enable an organization orientate its monitoring antenna. A beginning step in this respect is to engage psychologists to administer personality tests and rating scales on new employees, with emphasis on issues of integrity. These usually consist of a sizeable array of emotional, social and attitudinal variables. Besides, there may be need to institutionalize a system of psychometric testing at key employment phases such as entry, mid-career, and towards retirement. Much of this could come in terms of well-structured 360-degree assessment and follow-through.

2. Reward System Optimization:
The reward system should focus on ethical performance, integrity, responsible self-leadership on the job, and standards-linked incentives. More over, there should be a commitment from top management to mitigate inequities, nepotism and sectionalism in the organization. Besides, the management should promote enhanced objectivity and transparency in the performance appraisal system and use balanced measures with strong emphasis on behavioral attributes linked with values of corporate excellence.

3. Cultural Reorientation:
There may be need to review the corporate values and the prevailing way of life in the organization. This may require a systematic diagnosis of the cultural alignment with the strategic situation of the organization. Norms and values relating to self-managed high performance and team responsibility as well as strategic mentoring may be considered.

Therefore, should you want to enhance the level of financial fidelity in your organization a first step may be to sensitize your key people and raise their financial fidelity-alertness with the white paper, ‘Taming Corporate Frauds from the Root.’ (PDF, Price U.S. 5.0)

To buy the white paper, 'Taming Corporate Frauds from the Root', click, Taming Corporate Frauds from the Root White Paper.