Companies victimized by occupational fraud can experience significant financial losses, bad PR and reduced employee morale. Therefore, you must use every tool at your disposal to prevent and detect criminal activity in your organization. This starts with robust internal controls, including a confidential reporting hotline or other reporting mechanism. And, if it becomes necessary, you should hire a forensic accounting expert to investigate possible theft or financial statement manipulation.
There's another, relatively new antifraud strategy that you may not have heard about but might want to consider: Ethical nudging. Let's take a look.
Ethical nudging is a behavioral tool that encourages employees to engage in honest behavior. As its name suggests, it involves communicating subtle cues about how workers should act in certain situations. It also helps discourage self-seeking actions, including fraud, and pushes employees to make decisions that protect your company.
The following examples help illustrate ethical nudging at work:
Rewarding good work. Let's say that one of your employees declined a bribe from a supplier to accept substandard materials. Without disclosing specifics to allow for identification of the vendor, you might want to recognize and reward the employee for doing the "right thing" and reporting the bribery attempt. Rewarding ethical behavior lets employees know what you value and expect from team members. Often, it can make a more powerful impression than punishing bad behavior — for example, publicizing the termination of a worker caught stealing inventory.
Providing role models. To promote a positive, ethical culture, you need to provide role models. Try inserting taglines in your emails that quote business leaders, athletes and celebrities known for their honest practices and good works. Or hang posters of inspirational leaders around the office.
Of course, for many employees the most important workplace role models are their company's management. You're probably familiar with the phrase "tone at the top." This refers to owner and executive behavior, including whether management follows (or doesn't follow) internal controls, conducts ethical sales or even tells employees the truth about recent company performance. Such behavior often is noticed — and copied — by rank-and-file workers.
Emphasizing upfront compliance. Most companies require employees to sign forms such as expense reimbursement requests, attesting to the honesty and accuracy of the information provided. And usually these statements are placed at the end of such forms as a final step before submitting the form for approval. Consider doing something different: Require your employees to sign a statement before they start filling out a reimbursement request. This forces them to think twice about the information they plan to supply — and whether it's honest.
Explaining why rules matters. Employees sometimes struggle to understand why certain policies and procedures are in place. Consequently, they may comply with them haphazardly or ignore them altogether. To nudge employees toward compliance with internal controls, explain the reasoning behind each policy or set of steps. For instance, if your company requires two levels of signoff before an uncollectable receivable can be recorded, make the case for the policy. Explain how fraud could be committed if only one signature is required or relate a real-life example of what happened when someone decided to override the control.
Your company's employees weigh decisions every day that could potentially line their own pockets at your business's expense. Internal controls are essential operating rules that have been proven to protect against workers bent on fraud. So if you don't already have comprehensive controls, talk to your financial advisor about implementing them as soon as possible.
But you might also want to consider a more subtle method of encouraging compliance. Ethical nudging is a relatively simple and cost-effective way to encourage employees to listen to their better angels.
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