Ethics and Fraud Policies for Every Business

Published May 15, 2011 - Business Value Magazine

By Ken Wilson, CFE, CSAR

A written ethics policy is an excellent tool by which management can effectively communicate to employees its position against fraud and unethical conduct. Employees model the conduct they observe from management. Therefore, it is paramount for management to demonstrate appropriate conduct by setting the example for all employees to follow. This includes having written policies and procedures.

Employees want and need to know what is expected of them. A successful ethics policy must be conveyed to employees in a non-threatening manner and the employees should feel they had a part in the creation of the policy. Educational seminars will enable the employees to understand the policies and how each employee personally benefits from them. Honest employees want to work for an ethical business and dishonest employees, when faced with clear policies, will look for employment elsewhere.

A good policy must be clear and concise. It must describe what conduct is inappropriate and clearly describe the sanctions for the misconduct. The policy should be conveyed to all employees, including management, in a positive and non-accusatory manner. The policy should explain that inappropriate conduct hurts everyone. The business is hurt through lost revenue and adverse publicity. There is then a “trickle down” effect to all employees through job cuts, shortened hours and reduced moral.

It has been estimated that only 2% to 3% of all employees will engage in unethical and/or fraudulent activity. These employees account for the loss of approximately 6% of business revenue. The lost revenue would otherwise benefit the business and all employees.

A recent survey entitled, “Report to the Nation on Occupational Fraud and Abuse” concluded that employees accounted for 58% of the fraudulent activity within a business, resulting in a median loss of $60,000.00. Managers comprised 30% of the illegal activity totaling a median loss of $250,000.00. Owners, on the other hand, were involved in 12% of the fraudulent activity amounting to a median loss of $1,000,000.00. The conclusion reached by the report was the higher positions of trust and authority had greater access to company funds and assets. These figures will, of course, vary according to the type and size of the business.

Failure to implement an ethics and fraud policy is costly to every business and the employees in many ways. These costs include not only the loss of revenue, but also the costs associated with hiring and training new employees, the time and expense associated with remaining in compliance with State and Federal regulations, higher insurance premiums, loss of customers and vendors as a result of unfavorable publicity, and potential civil and/or criminal liability.