How to Avoid Corporate Scandals and White Collar Crime

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Seven Signs Of Ethical Collapse > Forum > How to Avoid Corporate Scandals and White Collar Crime

How to Avoid Corporate Scandals and White Collar Crime
Jaap de Jonge, Editor, Netherlands
I must have written it a dozen times by now: short term value creation (listening too much to financial markets and greedy investors) is a sign of poor leadership, is also the reason behind most white collar crimes and resulting corporate scandals, and was even the reason behind the last economic downturns.
White-collar crimes include things like bribery, cheating, embezzlement, fraud, money laundering.
Recently there have been corporate scandals at Alstom, Odebrecht, Petrobras, Rolls-Royce, Siemens, Telia, Teva Pharmaceutical, VimpelCom, Volkswagen, etc.

New research by Prof. Healy and Prof. Serafeim confirms that the root causes of these white-collar crimes and following corporate scandals isn't ineffective regulations nor compliance systems, but weak leadership and a flawed corporate culture. A culture in which making the short-term numbers trumps any concerns about how the targets are met.

Not much seems to have changed since Marianne Jennings' excellent 2006 book "Seven Signs Of Ethical Collapse". While Jennings already provided detailed antidotes to each of the 7 reasons for ethical collapses she mentioned, Healy and Serafeim say corporate leaders have to be deeply involved in setting social norms at their firms and in managing the risk of misconduct in the following ways:
  • Broadcasting a clear message that crime hurts everyone in the organization.
  • Not making exceptions when they punish perpetrators.
  • Recruiting and promoting managers who value integrity.
  • Creating decision-making processes that reduce the opportunity for illegal or unethical acts.
  • Going the extra mile in making their transactions in corrupt countries transparent.
  • Being proactive when it comes to cleaning up their industry’s dirty practices.
  • Supporting societal institutions that empower corporate accountability and honest business behavior.
Surprisingly Healy and Serafeim do not mention in above list that leaders should manage for long term value creation, even when they do mention that short-termism is the ultimate reason behind most white collar crime. Anyway, the issue is not we don't know what has to be done; the issue is that a number of global firms still don't do it, a global regulator is missing and local regulators still let them get away with it, often to protect local interests.
Paul Healy and George Serafeim: "How to Scandal-Proof Your Company", HBR Jul-Aug 2019.

How can we Avoid White Collar Crimes
Graham Williams, Management Consultant, South Africa, Premium Member
Yes. Legislation, compliance mechanisms, policies, committees, ombuds, best practice manuals, norms, standards and procedures, deviation-detection software, whistle-blower hot-lines... All the laws, rules, regulations, ethical principles in the world will not guarantee virtuous behaviour.
Complex pycho-social factors apply at the individual, team, and organisation levels. So, although challenging, we need to develop psychological and ethical maturity in our people. We must convert carefully chosen values to virtues. There are ways of doing this, like behaviour indicators, behaviour modification techniques, authentic purpose and sustainability programmes, creation of psychologically safe work spaces where people can speak out.

Real Value Sustains Us
Connie James, Professor, Member
I agree that true leadership creates long-term value for all major stakeholders.
The problem is that few leaders can motivate followers to see a vision of the future that creates real value. It is easier to sell short-term products and services than to really contribute to the quality of a person’s life.
Real leaders create real and lasting value. They make our lives better. They make us better.

Holistic Framework to Avoid Corporate Scandals
srinivas, Lecturer, India, Member
To me corporate scandals and white collar crimes cannot be avoided unless and until a holistic framework is taken into consideration and is implemented. Such holistic framework is based on providing good experiences to the people involved in the delivery mechanism. It's a framework that includes the righteousness, aims at continual improvement, and is giving consideration to values and spirit behind the values to all activities involved in the delivery mechanism.

Avoid White Collar Crimes by Frequent Audits
Owolabi funso, Member
Thanks, but in my view relying too much on managers without frequent auditing of accounts equally encourages White collar crime. Take my personal case as an example. A manager was employed in my small scale business in 2007 on whom all managerial power was entrusted. I took up a job that didn't allow me to supervise him.
To my dismal on my retirement in 2019 a sum of #80,000,000 was fraudulently misappropriated. I now realized and learned my lesson in a bitter way.
So in my experience, monitoring and policing the business financiers and entrepreneur and frequently auditing the firm is the best method to curb white collar crime.

The Role of Corporate Culture to Avoid White Collar Crime
Gandhi Heryanto, Management Consultant, Indonesia, Premium Member
Strong internal control systems as well as corporate governance have been proven insufficient to detect and prevent frauds.
Corporate culture plays a critical role in managing the risks of fraudulent acts. Particularly, when ethics are solidly implanted in the corporate culture and exemplified by top ethical leadership. An ethical corporate culture leads to appropriate ethical behavior within all the organizational levels.
Creating an organizational culture of ethical values such as integrity and openness can help to reduce the risk of fraud. Top management should create and sustain an ethical corporate culture that integrates an organization’s core values, motivates employees in doing what is right. Employees should be empowered to voice out their suspicions and to see their crucial role in minimizing frauds.
Source: Ocansey E., Ganu J., 2017, "The Role of Corporate Culture in Managing Occupational Fraud", Research Journal of Finance and Accounting, 2017.08.24.

Stock Market Short Focus
Ronald Ainsbury, Management Consultant, New Zealand, Member
In addition to a long-term profit focus and culture I think that Purpose and Values are vital.
My theory is that most businesses start with a clear purpose, a la Drucker. They have found a customer and their purpose is to deliver value and benefit to that customer. Successful smaller enterprises manage to retain this focus.
The problem starts when the business needs capital and takes the IPO route. Then the stock market purpose starts to override the company purpose. The stock market being the only enterprise whose primary purpose is short-term profit. Once a company can source capital from investors seeking longer-term returns they are freed up to focus energy on purpose - in a way that is what Unilever has achieved and hopefully as B-Corps and Benefit Corporations grow we may see a 'long-term stock market' emerging.

Conduct a Forensic Audit
Prof. Arup Barman, Professor, India, Premium Member
The exercise of a forensic audit in a corporation can be a good weapon trapping any corporate scandals. A forensic audit is an examination and evaluation of firm’s individual’s financial records to derive evidence that can be used in a court of law or for legal proceeding. Through almost all large accounting firms have a forensic auditing branch, they follow rigorously the legal procedure of accounts with the forensic legal experts.

The forensic audit is an important field of financial study that covers a wide range of investigative activities. It may be conducted to impeach a party for its fraud, their embezzlement, or other financial crimes.
In the process of a forensic audit, the auditor may be called to serve as an expert witness during trial proceedings. It could also involve situations that do not involve financial fraud, such as disputes related to bankruptcy filings, business closures, and even divorces too.
The main reasons to conduct a forensic audit are:
  1. To uncover, or to confirm, various types of illegal activities. It is in addition to regular audit when there are evidences collected that may be used in court.
  2. To detect the corruption or fraud by with help of investigator when one find the conflict of interest, when fraud-star uses his influence for personal gains to detriment the interest of the company.
  3. To detect the case of bribery.
  4. To detect extortion by- the wrongful use of actual or threatened force, violence, or intimidation to gain money or property from an individual or entity.
  5. To detect any assets misappropriation.
  6. To detect any fraud on financial misrepresentation.
The process of a forensic audit is similar to a regular financial audit—planning, collecting evidence, writing a report—with the additional step of a potential court appearance.

One company can have the provision and arrangement for forensic auditing branch where there is chances of such fraud. A company can volunteer to appoint a forensic auditor in order to stop the scandals in the company and to protect stakeholders.

How to Develop Skills for Forensic Accounting
Prof. Arup Barman, Professor, India, Premium Member
Forensic accounting is a vital knowledge domain for the detection or investigation of crime and the administration of justice, providing crucial accounting information about the evidence found at crime scene of accounting and finances in any corporation.
It is hardly a new field but in recent years, banks, insurance companies and even police agencies have increased the use of these experts. The increase in white collar crime and the complications faced by law enforcement agencies in uncovering fraud have been contributing to the growth of this profession. Many accounting firms believe that the market is sufficiently large to support an independent unit devoted strictly to forensic accounting.

In court or legal in environment, the forensic accountant can be an expert witness, a consultant, or play other roles such as trier of fact, special master, court-appointed expert, referee, arbitrator, or a mediator. Being a forensic accountant is a lucrative career in the USA and UK. Forensic accountants do not get paid a salary and are rather contracted to do a specific task for a company.
The job prospects for forensic accountants are excellent. India is yet to meet the growing demand for fraud examiners because of a shortage of training institutions. The demand for forensic accounting skills is high in India, but there is shortage of qualified people.
At the same time the growing information technology crimes, growing business competition, and harsh economic realities are making some workers to steal from their employers or sell company secrets.
To develop forensic skills and become a professional forensic accountant, one should be well-trained.

A forensic accountant must have the following few area of knowledge as well as skills. They are-
• Introduction to Forensic Science, Forensic Accounting and Fraud Examination;
• Principles of Forensic Accounting and Fraud Examination;
• Roles of the Forensic Accountant;
• Introduction to Fraud and Forensic Accounting;
• The Nature of Fraud, Why People Commit Fraud, Fighting Fraud Fraud Prevention, Fraud Detection,
• Recognizing the Symptoms of Fraud;
• Data-Driven Fraud Detection, Fraud Investigation, Investigating Theft Acts;
• Investigating Concealment, Conversion Investigation Methods;
• Private Sources of Information, Inquiry Methods and Fraud Reports Honesty Testing, The Fraud Reports, Management Fraud;
• Financial Statement Fraud; Revenue-and Inventory-Related Financial Statement Frauds;
• Liability, Asset, and Inadequate Disclosure Frauds;
• Fraud Against Organizations, Consumer Fraud; Identity Theft, Investment Scams, Money Laundering;
• Bankruptcy, Divorce, and Tax Fraud, Fraud in E-Commerce; Resolution of Fraud, Legal Follow-Up, Being an Expert Witness;
• Financial Statement Fraud Standards;
• Avoiding common mistakes in fraud risk assessment and examination;
• Credit Card Frauds, Online Transaction Frauds, Cheque Frauds;
• Study of forensic science and related aspects, etc…
While in training and HRD for forensic skills development, the above items are important items or course contents. The recruitment agent while recruiting and engaging forensic experts or accountant in permanent basis, should take a test of all these angles as well as the genuinity of bonafide certification.

There are different agencies and institutions offering forensic certificate courses covering the above contents.

White Collar Crime Probability
Maurice Hogarth, Consultant, United Kingdom, Premium Member
There seem to be three aspects to this. Two seem to be 'criminal' in nature the other more 'scandalous'.
1. The individual criminal who embezzles from the organisation for personal benefit.
2. The criminal organisation: where the organisation (or part of it) is set up to operate criminally e.g. laundering money / fraudulently acquiring money from businesses or individuals.
3. The business image (reputational) scandal. The demand for short-term financial success, to satisfy shareholders and/or display the organisation as 'successful', can motivate individuals to mis-represent metrics, to siphon or create money (from Peter) so as to pay the shareholder (Paul).
As such behaviours are ingrained into individuals the likelihood of 'legal' prevention is low.
The need is for a change in mind-set/attitude, a change in social norms... Probability zero.
Consequently transparency, forensic monitoring and punishments should be high. The foundation crime is the breaking of trust. 29-8-2019

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