Fraud, Ethics, & Accountability

Transcription

1 Fraud, Ethics, & Accountability Changing Role of the CFO The Moral Dimension of Leadership and Organizational Culture: Why Ethics Matters CFO Roundtable Meeting April 10, 2013 Joseph Weiss, Ph.D. Professor of Management Bentley University

2 Fraud in the Post-Subprime Lending Crisis World Should CFOs be concerned? The Fraud Triangle and other causes of Fraud Role of CFOs in the New Workforce Tensions CFOs and Financial Professionals experience Ethics and Compliance: both/and, not either/or The moral dimension of organizational leadership and culture: -Courage, authenticity, trust, fairness, caring How CFOs can embody, use, and lead with ethics in their roles, relationships & organizations

3 Severe Risks Putting own interests ahead of organization Lying to employees Abusive behavior High Risks Stealing/Internet abuse/misreporting hours worked Discrimination and Harassment Improper hiring practices Guarded Risks Environmental violations Misuse of confidential organizational information, including competitors inside information Alteration of documents or financial records National Business Ethics Survey 2010

4 any attempt to deceive another party to gain a benefit. Health care fraud, identity theft, padded expense reports, mortgage fraud, theft of inventory by employees, manipulated financial statements, insider trading, Ponzi schemes the range of possible fraud schemes is large, but at their core, all of these acts involve a violation of trust. It is this violation, perhaps even more than the resulting financial loss, that makes such crimes so harmful Report to the Nations ACFE

5 an employee abuses the trust placed in him or her by an employer for personal gain. The formal definition of occupational fraud is: The use of one s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization s resources or assets 2012 Report to the Nations ACFE

6 Asset misappropriation schemes, an employee steals or misuses the organization s resources (e.g., theft of company cash, false billing schemes or inflated expense reports) Corruption schemes, in which an employee misuses his or her influence in a business transaction in a way that violates his or her duty to the employer in order to gain a direct or indirect benefit (e.g., schemes involving bribery or conflicts of interest) Financial statement fraud schemes, in which an employee intentionally causes a misstatement or omission of material information in the organization s financial reports (e.g., recording fictitious revenues, understating reported expenses or artificially inflating reported assets) 2012 Report to the Nations ACFE

7 2012 Report to the Nations ACFE, 1388 cases, 100 countries 6 continents the typical organization loses 5% of its annual revenue to fraud. Applied to the estimated 2011 Gross World Product, this translates to a potential global fraud loss of over $3.5 trillion. The median loss caused by the occupational fraud cases in our study was $140,000. Over one-fifth of the frauds caused losses of $1 million. Small organizations are disproportionately victimized by occupational fraud Report to the Nations ACFE

8 2012 Report to the Nations Higher-levels of authority perpetrators cause the greatest damage. Owners/executives three times as costly as frauds committed by managers; more than nine times as costly as employee frauds. Executive-level frauds also took much longer to detect. More than 77% of the frauds were committed by individuals in one of six departments: accounting, operations, sales, executive/upper management, customer service, and purchasing.

9 More than 87% of occupational fraudsters are first-time offenders, never previously charged or convicted for a fraud-related offense. Fraud perpetrators often display warning signs that they are engaging in illicit activity. The most common behavioral red flags displayed by the perpetrators were living beyond their means (36% of cases),experiencing financial difficulties (27% of cases), close association with vendors or customers (19%), and excessive control issues (18%) 2012 Report to the Nations ACFE

10 Fraud Triangle Donald Cressey Opportunity Incentive / Pressure Attitude / Rationalization

11 Fraud Triangle Opportunity: Internal control weaknesses: poor supervision and review, management approval, segregation of duties, system controls. Attitude/Rationalization: Personal financial problems, personal vices --gambling, drugs, extensive debt, unrealistic deadlines, budgets and performance goals. Incentive/Pressure: Rationalization: ordinary, honest people caught in a bad circumstance. Justification for fraudulent acts: immediate need for money will pay back soon; company more forgiving than the IRS. Dononald Cressey

12 Tip < 36.1% > % Management Review By Accident Document Examination Account- Reconciliation External Audit Notified by Police Confession Surveillance/ Monitoring Other IT Controls

13 OLD Paradigm Stability Control Competition Uniformity Self-centered Hero NEW Paradigm Change, crisis management Empowerment Collaboration Diversity Higher ethical purpose Humble Based on R. Daft, 2011

14 Acting with an insensitive, abrasive, intimidating, bullying style Being cold, aloof, arrogant Betraying personal trust Being overly ambitious, self-centered, thinking of next job, playing politics Having specific performance problems with the business Overmanaging, being unable to delegate or build a team Being unable to select good subordinates

15 Unable and/or unwilling to see reality Hubris, grandiose narcissism Emperor has no clothes syndrome High external locus of control Lack of self-awareness and concern for others Increased perceptual biases: selective memory; self-serving attributions; rationalizations; selffulfilling prophecy

16 Utilitarianism: Benefits outweigh the costs: Ends justify means Universalism: Duty; Means justify ends; altruism Rights: Entitlements legal, moral, contractual Justice: Procedural, Compensatory, Retribution, Distributive; fairness Virtue: A Moral Character Approach: Good morals, values The Common Good: All members of society should have access to certain resources Relativism: When in Rome, do as they do. Self-interest is the focus of individual ethics.

17 Honesty, justice, courage, compassion, generosity, fidelity, integrity, fairness, and prudence Forgiving, balance, concern, self-control, generosity, love, tolerance

18 Reputation, said Brad Buss, CFO at Cypress Semiconductor, is ultimately the most important thing a CFO can have. "Once it's tarnished, you're unemployable." He recommended that CFOs have a clear understanding of this with their CEOs when they take the job. Recalling such a conversation, he said, "I told the CEO, I will think of the shareholder first, the board second, and the CEO last. If you want a CEO lapdog, I can name some other guys, but that's not me."

19 "Finance professionals can become ethics ambassadors throughout the company. They are uniquely qualified to take a leadership role in embedding ethics through the organization because finance is plugged into virtually all facets of a business, John Batty, formerly CFO of Affymetrix. CFOs can take a "higher order perspective" on ethics, advocating for it "not just because we have to but because we want to. Ethics offers many advantages to an organization, fostering trust, goodwill, employee retention, and reputation, George de Urioste, Marvell Semiconductor CFOs can mentor and role model a conscience of a company balancing stakeholder and stockholder interests, utilitarian and universalist principles in the leadership team, department leaders, and younger professionals

20 Strong Corporate Culture Characteristics Widely shared philosophy Value the importance of people Have heroes (president and products) that symbolize the success of the company Celebrate rituals, which provide opportunities for caring and sharing, for developing a spirit of oneness and we-ness

21 D. Goleman Self-Awareness Emotional self awareness Accurate self-assessment Self-confidence Self-Management Emotional self-control Trustworthiness Conscientiousness Adaptability Optimism Achievement-orientation Initiative Social Awareness Empathy Organizational awareness Service orientation Relationship Management Development of others Inspirational leadership Influence Communication Change catalyst Conflict management Bond building Teamwork and collaboration

22 Moral Courage: Key Capacity of Leadership, The ability to step forward through fear 1. Courage means nonconformity when necessary. 2. Courage means pushing beyond the comfort zone. 3. Courage means asking for what you want and saying what you think. Courage to Be and Do 4. Courage means fighting for what you believe. 4. Courage means treating others the way you wish to be treated. Reardon, 2007; Vogel, 1993;