Published: 19 November 2007.

By Nick Tate of Archer Gowland

Major risk of business mediocrity and / or failure rests not only with factors external to business but with issues that managers & business owners have direct control.

Often deficient attitudes, systems & procedures put in place by management act as motivators for employees to engage in fraudulent activities.

In their recent newsletter, Worrells (Solvency & Forensic Accountants) discuss the importance of management style and employee policies. The issues discussed relate to businesses of any size. An extract from that article follows:

Management Style

The more ethical and responsible the management style, the more likely the employees will respond to that style and develop and behave in an ethical and responsible manner. Organisations are lead from the top down. Ethics and philosophy (or lack thereof) will be passed from management to employees. If the management shows little concern for honest and ethical behavior, the employees will naturally follow that lead.

If management is willing to bend the rules, hide the facts and achieve results regardless of the means, those attributes will be reflected in the environment of the business and in the behavior of individual employees – negative attributes that will eventually turn against the business. Management should preach and teach ethical behavior – a positive attribute.

Employee Policies

Employees are the heart of any organisation, but before you start discussing what they should be doing in relation to controls, you need to look at how management deals with them. Remember that they will follow the example set for them by their supervisors. They must be given guidelines for what they should and should not do.

Considering that most fraud is committed by employees of the victim (occupational fraud), employees become a large centre in control activities and are the greatest risk centres. A good control environment will cover the following areas:

Hiring
Make sure that employees are screened properly and that, where possible, complete background checks are carried out.

Firing
Firing someone is difficult at the best of times. It is important that they are removed from sensitive areas immediately.

Training
Employee training is important to any business but should include training areas outside their daily operations. Employees should be educated in areas such as security measures of the business; fraud awareness and what to look out for; ethical standards; and the consequences of unethical or inappropriate behavior.

Management must also be prepared to lead by example and live up to the conditions imposed on employees. Consistency should be the basis of this environment.

Controls & Cross Checks
One of the most effective controls against fraud is termed the perception of detection.

Thinking back to our own circumstances & our own businesses we can see simple but effective measures can be implemented to improve management and therefore ongoing business performance.

Nick Tate
Archer Gowland
Chartered Accountants & Business Advisors

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