Written by Priscilla Capes, CPA, CFE, AAP

Being an Ethical Company is not only the right thing to do – it’s good business.

You don’t have to look far to find articles describing misbehavior in businesses, both large and small, but what’s staggering is the actual cost of that misbehavior.  In their 2010 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) estimates that that the average company loses 5% of its annual top-line revenue to occupational fraud.  Occupational fraud encompasses not only theft of assets and cash, but also things like misrepresentations, such as falsified financial statements or personal credentials, and corruption, commonly in the form of kick-backs, bid-rigging, and conflicts of interest.  In addition to fraud, other bad behaviors on the part of employees such as sexual harassment and negligence can cost a company dearly, not only in hard dollars, but also by a damaged reputation.  Unethical behavior is a huge liability. 

So, what’s the best defense?  A healthy dose of ethics is the best immunization against these ills.  Unfortunately, the ACFE’s study also found that many of the victim companies had a code of conduct in place and still fell prey to occupational fraud. Why? Because most didn’t back it up with tools like a specific anti-fraud policy, employee training on fraud, and an anonymous way for employees to report fraud.  And these steps cost relatively little.  The lesson here is as old as business – you have to walk the talk.  You not only have to have a code of conduct, but you have to live it. You have to behave as an Ethical Company.

Behaving as an Ethical Company:

• Team up with your most important ally, your employees – the most common way fraudulent and unethical behavior is detected is by an employee tip – by a large margin.  Forty percent of the cases in the study were detected this way.  The next highest method was by a management review at 15%.  To be even more effective - provide a Whistleblower Hotline.  For companies that provided their employees an anonymous means to report suspected bad behavior, median loss per scheme was $100,000 compared to $250,000 for those without a Hotline.   This is primarily because companies with a Whistleblower Hotline, on average, detected the fraud within 13 months of inception versus 20 months for those without a Hotline.

• Explain what constitutes unethical behavior and make it clear it will not be tolerated – as already discussed, develop an anti-fraud policy, communicate it, and train your employees on how to spot fraud.  Educating your frontline of defense is the best investment you can make.

• Perform surprise audits – this is another effective control that is relatively inexpensive but rarely used.  Less than 30% of the victim organizations in the ACFE study conducted surprise audits.

While all this may sound negative, the actual result is a positive attitude and improvement in employee morale.  Everyone functions better in an environment where they understand the rules, the rules apply to everyone across the board, and breaking the rules is not tolerated.  And if you have an employee who bristles at these expectations – what might that tell you about them?  To close with a quote from Warren Buffet, a businessman known for old-school ethics:

"In looking for people to hire, you look for three qualities: integrity, intelligence, and energy.  And if they don't have the first, the other two will kill you."

Foster that integrity that you so carefully looked for when you hired that person, and they’ll flourish in your "Ethical Company."

Priscilla Capes, CPA, AAP, and a Certified Fraud Examiner (CFE), leads the forensic and fraud accounting practice at Harding, Shymanski & Company, P.S.C.  For more information on setting up an Anonymous Reporting Hotline for your employees contact Priscilla at (502) 584-4142 or pcapes@hsccpa.com.  During this challenging economic period, understanding the financial consequences of every decision is critical. Thus, analyzing financial statements has become of utmost importance for business managers as they seek to improve the financial position of their organization.