Culture is the Cure: Building Fraud-Resistant Organizations from the Inside Out
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Evoking the Stanford Prison Experiment, a now-infamous 1971 study that explored the effects of social roles on behavior, Dr. Iram Fatima Ansari, CFE, illustrated how environments and assigned roles shape human behavior — often unconsciously and unpredictably.
“Just like the those assigned roles in that simulated prison, our organizations can unintentionally create environments where well-intentioned and law-abiding employees make harmful choices,” Dr. Ansari said.
In her session at the 36th Annual ACFE Global Fraud Conference, “Building an Anti-Fraud Culture,” Dr. Ansari, a professor and the head of the accounting department at Sultan Qaboos University, highlighted the importance of maintaining a strong, ethical and proactive organizational culture to combat fraud threats and empower employees to uphold these values.
The Behavior of Fraud
“Fraud isn’t just about financial losses,” Dr. Ansari said. “It’s primarily a people’s problem. And hence, it also has severe non-financial consequences. Particularly, the loss of employee morale and the loss of employee trust.” When the organization, regulators or systems fail to protect against fraud, it creates further opportunities for fraud to occur. The goal, as Dr. Ansari told attendees, is to change the paradigm and create an organizational culture where proactive prevention helps reduce the number of frauds from happening in the first place.
The Fraud Triangle helps us understand how and why fraud occurs through pressure, opportunity and rationalization. Adding depth to this idea, Dr. Ansari cited three behavioral theories that further explain fraudulent behavior in the digital age.
Social Cognitive Theory: When unethical behavior is widely practiced, the motivation to commit fraud increases.
Time Inconsistency and Discounting: When faced with digital or procedural loopholes, the opportunity to commit fraud grows.
Incremental Dishonesty: With a “slippery slope” provided by small, unethical acts that are normalized, often when tone at the top is lacking, justifications for fraud become engrained in the culture.
Tone at the top is extremely valuable in combatting fraud within organizations; this was a strong and consistent theme throughout the session. If leadership is complacent (or worse, complicit) in fraud occurring, it becomes a pervasive issue throughout the organization.
Improving Fraud Efforts: A Case Study
Siemens AG, a German corporation, was embattled in a bribery scandal and Foreign Corrupt Practices Act (FCPA) violations, as $1.4 billion in illicit payments was brought to light in 2006. In the aftermath of the fraud, Siemens embraced transparency and proactively addressed shortcomings to counter these issues in the future.
Dr. Ansari highlighted the ways in which Siemens improved its anti-fraud efforts:
The company implemented an initial change process for the first six months, an intermediate plan over the next 6-12 months, and long-term changes for one year and beyond as their roadmap.
Fundamental changes included overturning top leadership roles, hiring a CEO externally, recruiting at least 15 compliance officers and revising existing compliance programs.
New anti-fraud program objectives focused on prevention, rather than detection and response.
Implementation of an anti-corruption toolkit with tone at the top as the most important factor also included a new compliance organization, case tracking processes, ongoing monitoring and more.
Clear tone at the top was established by new CEO Peter Löscher.
Enhanced ethical policies and procedures were put into place.
Enhanced compliance and anti-corruption training that was customized for various types of fraud encountered by different teams.
Collective action and high standards between customers, government, society, competitors and NGOs helped rebuild its reputation.
Monitoring progress throughout the process included a survey sent to 89,000 employees worldwide.
“You have to be mindful of the people who are involved in the transformation process,” Dr. Ansari added. “What you permit in your organization, indirectly, that is what you are promoting.”
Crafting an Effective Anti-Fraud Strategy
Dr. Ansari posed a series of questions to attendees, which can be used to review anti-fraud strategies and measure effectiveness alongside the ACFE’s Anti-Fraud Playbook and similar resources.
Where are you and where do you want to be? Understand your base level to determine and assess the changes you need to make, including how to get there, by using an anti-fraud maturity model to identify gaps or blind spots.
Are you cultivating the right culture? When comparing the Fraud Triangle with the Integrity Triangle, consisting of responsibility, accountability and authority, you can understand the makeup of your anti-fraud culture.
Are you thinking like a fraudster? Considering fraud risk this way provides a framework for collusion planning, opportunity recognition and self-justification.
Are you trying to discover what you don’t know? Conducting a fraud risk assessment can help you find vulnerabilities, as well as show you opportunities to develop a new methodology to update your assessment.
Are you getting help from data analytics and AI tools? Find trusted partners, especially when there’s a shortage of resources, to improve your analysis.
Do you have enterprise-wide anti-fraud training? Crafting tailored content that connects to the day-to-day responsibilities for different roles embeds practical anti-fraud tactics that can be used regularly across the organization.
Have you laid the foundation for investigations? There are oftentimes gaps in these processes, so you need investigation protocol, response teams, documentation standards and legal considerations in place well before fraud occurs in order to reduce losses.
Are you monitoring and reporting on your progress? These include effectiveness evaluation, continuous improvement, communication and holistic analysis.
At the core of an effective anti-fraud culture is training. As Dr. Ansari discussed, effective training is people-centered and tailored to their roles, consistently reinforced, built using an interactive design with case studies and scenarios, and covers the entire organization and the many avenues through which fraud can occur. Assessing organizational needs, determining who is responsible for development and oversight, designing custom programs, measuring effectiveness and making periodic adjustments and updates supports strong, robust controls that combat fraud.
Maintaining a Fraud-Resistant Culture
“The success of an anti-fraud culture relies heavily on the symbiotic relationship between the tone at the top and the mood in the middle,” Dr. Ansari said. This unifying effort between company leadership and managers, directors and others at the middle of the organizational structure creates a strong foundation that consistently reinforces the culture and provides direct influence and employee perception to those at the bottom of the organizational structure.
Maintaining ethical culture also relies on due diligence in hiring, ongoing training, incentivizing ethical behavior, and regular monitoring and evaluation. Rewarding employees for speaking makes sure people are protected, and more importantly, feel protected.
“The culture in an organization that punishes truth-tellers is a breeding ground for fraud,” Dr. Ansari said. It’s challenging to create an ethical culture. Leadership must believe in what’s being done for it to be successful.
Actionable Next Steps
Designing effective awareness and anti-fraud programs includes providing knowledge and skills, ethical behavior expectations, a living code of conduct that changes when necessary, normalized perception of detection and a zero-tolerance emphasis for fraud.
“Humanizing” your anti-fraud program is making it a people’s program. Engage employees. Make them feel worthy for defending their anti-fraud program. Craft a cultural foundation with shared responsibility across the organization. This is a continuous process that’s regularly revisited. It requires a proactive mindset that is always looking to close gaps.
