May 22, 2017

I recently heard a fable involving an elderly Native American warrior teaching a life lesson to his grandson. He said, “A fight is going on inside me.  It is a terrible fight and it is between two wolves. One is evil – he is anger, envy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, superiority, and ego.” He continued, “The other is good – he is joy, peace, love, hope, serenity, humility, kindness, benevolence, empathy, generosity, truth, compassion, and faith. The same fight is going on inside you – and inside every other person, too.” The grandson thought about it for a minute and then asked his grandfather, “Which wolf will win?”  The warrior replied, “The one you feed.”

Being a student of fraud risk management and internal controls, the concept of tone at the top came to mind.  If an executive team feeds positive cultural elements to its team and leads by example, that team will emulate their leaders’ behavior and replicate those elements.

However, if an executive team feeds negative cultural elements to its team, chances are greater that their team will project those attitudes into their daily work, which at a minimum can result in Fraud Trianglestrained relationships with co-workers, key suppliers, and customers, and at worst can lead to fraud. I also started to think of one of the cornerstones of occupational fraud – rationalization – and if you feed the “bad wolf” how rationalization can begin to creep in and then completely infect an organization. Executives are in a critical position to curb the tendency to rationalize behavior by creating and committing to influential messaging. They have the ear of the entire organization and their messages will be heard and followed –  positive or negative.

The recent scandal involving Volkswagen is a perfect illustration of tone at the top and rationalization. The Association of Certified Fraud Examiners recently published an article about the Volkswagen case  that overlays the fraud triangle into the case fact pattern. The troubling thing about this scandal, apart from the fact that it happened at all, is that the attitude of certain key management members condoned the behavior that ultimately led to the “defeat device” being installed.

It wasn’t a rogue operational employee who developed this work-around on their own. The decision came directly or indirectly, from the top and made its way down several levels of the organization. If teams or individual employees in the finance and accounting departments observed this behavior, you can see how they could rationalize their way into believing that committing fraud against the company, or against one of its customers or vendors, is perfectly acceptable.

The ACFE article makes an excellent point about tone at the top:  “Is it difficult to create ethical cultures? Yes, it’s a huge challenge for any organization. However, it should be a goal worth achieving. If you’re serious about ethical behavior, then make it your No. 1 priority. Not in the top 10. Not even No. 2 or 3.”  They go on to say “make your success, and that of your organization, dependent on reaching a level of ethical decision-making that makes you proud to be associated with your organization and reflects the basic moral values that we as human beings strive to achieve. Once you do that, the program comes as second nature and will become an inseparable part of the organization’s DNA.”

Tone at the top really comes from not only the top people in the organization, but the top objectives of the organization as well.  Make ethics and integrity a cornerstone of your mission and vision. Incorporate it into the objectives of key departments and the charters of governing committees. If the wolf represents your company, let ethical behavior and strong integrity be the meal that feeds it. That wolf will win…and so will your company.

© Clark Nuber PS and Focus on Fraud, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.