Updated: May 3, 2021

Advancing Organizational Effectiveness Through Taming Corporate Frauds

Corporate frauds undermine organizational effectiveness.
Understanding the root causes of corporate frauds and dealing with them is critical to advancing organizational effectiveness and corporate integrity. Understanding corporate frauds is more than skin deep. It’s truly a matter of understanding the heart. This excerpt from our white paper, 'Taming Corporate Frauds from the Root', gives you some hints.
Corporate fraud is becoming hydra headed in nature. Its scourge is increasing globally. Attempts to understand and tame corporate frauds, conceived here as frauds committed against organizations, would enhance organizational effectiveness and the level of corporate integrity and fidelity. However, there is need to focus on far more fundamental root causes of corporate frauds.
In view of the pervading nature of corporate frauds, it is apparent that financial behavior in the corporate environment is a matter of the psychological make-up of executives. This article addresses this.

The Scourge

Frauds and financial malpractices have become cankerworms globally. Corporate frauds, defined here as frauds committed against organizations, undermne corporate success, growth and effectiveness. No organization could reach its potential or attain corporate excellence when paralyzed financially—and, particularly so, from within.
The damaging impact of corporate fraud has been grim wherever it found a niche. For example, the U.S. Association of Certified Fraud Examiners estimated the annual cost of occupational fraud and abuse in the U. S. to be an outrageous amount of $600 billion in 2002, up from $400 billion in 1996. These crimes are seen as crimes against the organization by employees rather than corporate crimes against outside interests or employees. Also, according to an article in The Financial Times Ltd on August 9, 2006, corporate frauds in Argentina was projected to reach over $9.5 billion by the end of 2006, which was estimated at about 5% of Argentina’s GDP.
In view of the pervading cankerworm of frauds at various levels in the corporate environment globally, it is apparent that financial misdemeanor in the corporate environment is no respecter of national boundaries or color. We have to factor in an executive’s psychological make-up. Therefore, organizations could attain much mileage in enhancing organizational effectiveness, corporate integrity, and 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. Here is a brief overview of a few 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.

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 corporate frauds epitomize. The increasing wave of frauds in the last 30 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!
Some employees, members of management, shareholders and customers would program themselves to get rich quick, or be wealthy over night, in the instinctive fear that patient and honest efforts in the right direction may hinder their instinctual drive for pleasure, self gratification and economic security—moreso 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—responsive and responsible governance, and a benign, ethical top-management leadership. It is imperative to promote and embrave sound core values in businesses.

The Availability Syndrome

Corporate frauds happen where the funds or resources are available! They take place where the conditions are conducive. Fraudsters would exploit the slightest opportunity to perpetrate fraud if the time is ripe. Thus, fraudsters would 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 would 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 could potential fraudsters exploit? What surveillance, perhaps of an autopilot nature, is in place to outsmart insider frauds?

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 center), 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.

Block Quote

Attempts to understand and tame corporate frauds....would enhance organizational effectiveness
and the level of corporate integrity and fidelity.

Programmatic Management of Corporate Frauds

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

Psychometric Testing

Knowledge of employees who hold attitudes, values and beliefs supportive of fraudulent behavior would enable an organization orientate its monitoring antenna. A beginning step in this respect would be 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 or constructs.

Reward System Optimization

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

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.

The Nub!

Yes, there is a lot involved in understanding corporate frauds. Much progress would be made by a greater understanding of the hearts of people!
Therefore, should you want to advance organizational effectiveness, corporate integrity and financial fidelity in your organization a first step may be to sensitize your key people and raise their awareness regarding such root causes as are discussed in the white paper, ‘Taming Corporate Frauds from the Root.’ (in PDF).
Download the White Paper

About Author

About the Author

Dr. Oladele Akin-Ogundeji, a first-class organizational development specialist, and public service management and state governance consultant, is based in Lagos, Nigeria. He holds Ph.D. of the University of London. He leads the OD Synergy team and coordinates ODSynergy.Com. He has more than 40 years teaching, research and consulting experience. He also coordinates BetterPoise.Com, promoting people's capacity to be on top of their world and attain sustainable self-fulfilment.

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