By David Morgan – Managing Director of PKF Integrity
The number and nature of the recent Royal Commissions into the financial, aged care, disability and franchise sectors brings into sharp focus the relationship between misconduct and integrity in a business context. It has led to the urgent need for corporate Australia to reassess business integrity frameworks and bring about much-needed change.
In a Western country which, for all intents and purposes, is seen as quite mature in terms of business governance, the findings of the various inquiries of widespread corporate misconduct have highlighted the fact that corporate Australia is not as squeaky clean in terms of governance and integrity as previously perceived. This has led to:
- Significant brand and reputational damage
- The demise of high-profile board and management careers
- A huge wake-up call for corporate Australia
PKF Integrity is actively helping our clients heed this call for change by assisting to critically assess integrity frameworks and implement strategic and operational change. The benefits
of achieving and maintaining a strong, organisational ethical culture are myriad and include, but are not limited to:
- Improving the bottom line. While it can be difficult to quantify, achieving and maintaining a culture of integrity in business has a positive financial effect
- Greater willingness of stakeholders to speak up about misconduct. This is further enhanced when the stakeholder’s organisation acts on matters reported
- Reduced staff churn. Employees working in an environment based on integrity and ethics feel more secure and are more likely to stay. This has a positive financial impact due to the decreased cost of recruiting and training new staff
- Customer/client retention. e.g. when a corporation responds quickly and fairly to negative feedback, customer loyalty grows and so does the organisation’s brand and reputation
- Reduced reliance on complex and inefficient control structures. Because a workforce whose actions are base on principles of integrity become the moral pulse and caretakers of the organisation
- Less exposure to the risk of regulatory action
One of the fundamental strategies to building the desired culture is raising awareness about why acting with integrity in a personal and business context is such an important factor. Making employees aware of the positive and negative consequences of their conduct, together with strong ethical leadership that overtly supports and lives the right culture, will empower them to proactively assist a business to manage integrity risk.
Factors leading to integrity issues in business
Factors that contribute to an increase in integrity -related issues in a business primarily relate to:
- A lack of awareness on the part of management of the drivers of workplace misconduct, e.g. the elements of the fraud triangle
- Pressure, such as personal financial stress or work-related pressure, such as achieving financial KPIs
- An all-consuming focus on financial performance and a dismissive attitude of the positive influence of workplace integrity
- Opportunity, e.g. a person in a position of trust who can circumvent or override controls
- Rationalisation. closely related to culture, but basically justifying one’s conduct because others are behaving the same way
- Poor leadership behaviour, more commonly referred to as ‘tone at the top
- Lack of written guidance and training about operational processes or expected standards of behaviour among employees
- Inadequate and/or ineffective operational controls
Why awareness of integrity-related issues is relatively low inside some organisations
The bottom line is that some businesses fail to recognise the benefits that an ethical culture can bring to a workplace. Many will exert little effort in achieving it because they see the activities associated with doing so as a cost to the business or they pay lip service to it by implementing written policy as a ‘tick the box’ exercise without intending to bring about real change.
These types of attitudes are hard to understand, given the dynamic, ever-changing business world. Consequently, the risks an organisation is exposed to will change or evolve over time. This presents the ongoing challenge of effectively managing business risk, including integrity-related risks.
“While most leaders and managers are aware of common integrity risks, such as fraud, corruption and conflicts of interest, a large proportion of employees lacks the required level of understanding of these and other risks”
While most leaders and managers are aware of common integrity risks, such as fraud, corruption and conflicts of interest, a large proportion of employees lacks the required level of understanding of these and other risks. For example, in the matters we investigate we often see that while an organisation may have a conflicts of interest policy, the individual being investigated in relation to an undeclared conflict of interest has either blatantly ignored the policy or just did not have a full appreciation of the issue.
As eluded to above, change is a key factor and has a significant impact on how integrity-related issues manifest themselves. For example, the technological age has changed the way in which misconduct can occur in the workplace. Workplace bullying and sexual harassment issues now often occur online through social media platforms or via email, text and web-based messaging platforms, leading to a new phenomenon called ‘cyberbullying’. There are many other emerging integrity risks.
A business is exposed to potentially significant negative financial and reputational outcomes when it fails, for whatever reason, to:
- Recognise that technological, environmental, social and regulatory change is occurring on a regular basis
- Implement measures, such as training and awareness initiatives, to mitigate organisational risk, including integrity risks
Let your employees be your eyes and ears
Your employees can be your most important asset when it comes to managing risk and identifying integrity-related issues. Let’s face it, the most significant cost to business is generally staffing cost, so why not harness the power of that resource.
The 2018 Association of Certified Fraud Examiners (ACFE) Report to the Nations found that 40 per cent of all fraud investigations conducted over the period of analysis (2016 to 2018) were discovered due to tip-offs and that 53 per cent of those tip-offs came from employees. Nearly one-third (32 per cent) of those that led to fraud detection came from people outside the organisation: customers, vendors and competitors. This highlights the importance of developing effective channels for key stakeholders such as employees and suppliers, to report misconduct. Educating them about how and why to report misconduct is equally important.
The report also found that effective integrity strategies and processes reduced the time to detect fraud and corruption.
Where there was a code of conduct in place, the time to detect fraud was reduced by 46 per cent with a corresponding reduction in financial loss of 56 per cent. A code of conduct is a vital policy because it provides guidance about the organisations behavioural expectations. The results relating to having this measure in place are, in our view, closely aligned with those for organisations that have training programmes in place for their employees.
The report found that of the frauds examined, they were discovered 50 per cent faster in organisations where fraud training programmes were provided to managers/ executives and employees. This increased speed of detection resulted in financial losses being reduced by 41 per cent in the case of employee training programmes and by 35 per cent where training programmes were provided to managers/executives, compared to organisation who did not provide such programmes.
The report found that all the key controls and processes considered, contributed to reducing the risk of fraud. Some of the other key controls and processes were:
- Formal fraud risk assessments This resulted in a 50 per cent reduction in the time to detect fraud, which resulted in a 38 per cent reduction in financial losses, compared to organisations that did not conduct regular fraud risk assessments
- Hotlines This resulted in a 50 per cent reduction in the time to detect fraud, which resulted in a 50 per cent decrease in financial losses incurred, compared to organisation who did not have a hotline.
While we have only highlighted some of the key processes and controls considered in the report, the statistics clearly show the benefits of implementing and maintaining a multi-faceted integrity system; a key element of which is providing training and awareness.
“Your employees can be your most important asset when it comes to managing risk and identifying integrity-related issues. Let’s face it, the most significant cost to business is generally staffing cost, so why not harness the power of that resource”
In many of the matters we investigate, education and awareness programmes
have either been non-existent or are poorly contrived with only a compliance objective in mind. Providing training programmes that provide relevant, practical examples of the integrity risks in an organisation and that provide guidance about how those risks should be navigated, are the most effective in achieving the desired culture and risk mitigation objectives.
How do employees report an incident that may be suspicious?
As alluded to above, the willingness to speak up about misconduct in the workplace is fundamental to detecting it. It affords a business the opportunity to deal with it before it becomes a much bigger problem.
However, the willingness of an employee to speak up is dependent on feeling secure in doing so and in the knowledge that whoever the issue is reported to will do something about it. A 2013 article about three University of Michigan studies relating to ethicality in the workplace and its effect on willingness to report misconduct, cites two of the main reasons for the reluctance to report misconduct as ‘“…in summary, as being a feeling of futility and a fear of retaliation, whether that’s being fired, demoted or ostracised. ‘You can be retaliated against by your boss or your peers, so there is a big risk in speaking up,’ the report says. ‘In summary, the studies found that ‘…although the ethicality of one’s supervisor matters, co-workers must model the same ethical behaviour if we want employees who witness unethical conduct to report it to management.”
This only highlights our earlier contention about the importance of cultivating an ethical culture right across an organisation from leadership through to middle management and all employees.
While new legislation in Australia now provides greater protection for whistle-blowers, the driving force for achieving strong cultures of ethics and speaking up should be that it just makes plain common sense.
In most organisations, written guidance in the form of a whistle-blowing policy that provides the ‘how to’ and emphasises protection of whistle-blowers, should be provided to all employees, regardless of whether there is a legislative requirement to do so. The principles and operational aspects of the policy should then be driven home through ongoing training and awareness initiatives.
Workplace misconduct will happen in any organisation, but the prevalence of it will diminish when an organisation establishes and nourishes a strong ethical culture; one that is supported by strong ethical leadership and ongoing communication, awareness initiatives and training.
About the Author:
David is based in the Brisbane office and is head of the National Forensic and Risk Services team (PKF Integrity).
David has over 15 years’ investigation, fraud, corruption and misconduct-related experience. Prior to joining PKF, David worked at Deloitte and PwC and also has a background as a Detective in the Metropolitan Police Service, London.
His extensive experience covers financial and non-financial investigations, integrity due diligence reviews and whistle blowing incident management and reporting. David also provides advice on how to improve internal control environments and delivers a range of education programs on fraud, corruption, misconduct and investigation skills.
1.2018 ACFE Report to the Nations on Occupational Fraud and Abuse, page 17
2.2018 ACFE Report to the Nations on Occupational Fraud and Abuse, pages 27-29
3.2018 ACFE Report to the Nations on Occupational Fraud and Abuse, pages 27-29