Advancing Organizational Effectiveness Through Understanding and Taming Corporate Frauds: The Heart of the Matter by:Dr. Oladele Akin-Ogundeji

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.

The Scourge

Frauds and financial malpractices have become cankerworms globally. In the African region, where there is less than thorough statistical record, anecdotal reports indicate that a staggering amount of the equivalent of U.S. $1.75 million is lost yearly to corporate frauds, defined here as frauds committed against organizations. For example, in Nigeria the indication was that between 2003 and 2005, over N12 billion was lost through frauds and forgeries in the banking industry alone! That's a huge amount of money; more than the national budget of one or two of Nigeria's less endowed neighboring countries. Although such amount of money may be peanuts when compared to large scale corporate frauds in more developed economies, no organization can 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 behaviour in the corporate environment is no respecter of national boundaries or colour. It is largely a matter of an executive's psychological make-up. Therefore, organizations can 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. It is based on an excerpt from the white paper Taming Corporate Frauds from the Root (http://www.odsynery.com/taming-corporate-frauds-white-paper.html. The white paper addressed more than twenty behavioral 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.

1. 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 15 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 acid test of a person's worth is how liquid he or she is. How he or she gets the cash is a non-starter!

Many employees, members of management, shareholders and customers program themselves to get rich quick, or to catch up with the Jones, in the instinctive fear that patient and honest efforts in the right direction may devastatingly impact on their instinctual drive for pleasure, self gratification and economic security; more so 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 and a benign, ethical top-management leadership.

2. The Availability Syndrome:

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

3. 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 centre), and the superego (the value judge or conscience). For Freudians, antisocial behaviour (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.

Programmatic Management of 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.

1. Psychometric Testing:

Knowledge of employees who hold attitudes, values and beliefs supportive of fraudulent behaviour will enable an organization orientate its monitoring antenna. A beginning step in this respect is 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.

Besides, there may be need to institutionalize a system of psychometric testing at key employment phases such as entry, mid-career, and towards retirement. Much of this could come in terms of well structured 360 degree assessment and follow-through.

2. Reward System Optimization:

The reward system should focus on ethical performance, integrity, responsible self-leadership on the job, and standards-linked incentives. More over, there should be a commitment from top management to mitigate inequities, nepotism and sectionalism in the organization. Besides, the 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.

3. 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.

Yes, there is a lot involved in understanding corporate frauds. Much progress will 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.

About the author

Dr. Oladele Akin-Ogundeji leads OD Synergy, http://www.odsynergy.com, a firm of HR & Organizational Development consultants in Africa providing businesses insightful organizational development solutions for sustainable high performance. He also leads BetterPoise.com, http://www.betterpoise.com, providing people insightful self actualization and confidence building solutions. OD Synergy Resource Center, http://www.odsynergy.com/od-resources.html, gives you helpful information fostering high organizational performance.

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