A Toxic Culture and the Fraud Triangle: Part 1 | Thomas Fox – Compliance Evangelist


 

The fraud triangle is well-known to most compliance practitioners. It is pressure, opportunity and rationalization. When these three factors converge, there is danger of an ethical lapse which could lead to violation of law. Bribery and corruption under the Foreign Corrupt Practices Act (FCPA) are types of fraud where the employee or employees do not keep the direct proceeds of their conduct but enrich the company. Of course, if their collective bonuses are drawn from the fraudulent conduct, the cycle is complete around how the fraud triangle applies to the FCPA.

Yet 2022 has introduced another reason for compliance professionals to pay attention to the Fraud Triangle and it revolves around corporate culture. In an MIT Sloan Management Review article, entitled “Why Every Leader Needs to Worry About Toxic Culture”, authors Donald Sull, Charles Sull, William Cipolli, and Caio Brighenti wrote about how the elements of toxic culture in an organization can help leaders focus on addressing the issues that lead employees to disengage and quit, which could be one of the reasons for the Great Resignation. However, the issue of a toxic culture could lead one of the prongs of the Fraud Triangle, rationalization for stealing money from your organization to put together a pot of money to pay a bribe.

Attributes of a Toxic Culture

The authors posit that there are five attributes of a toxic culture; “disrespectful, non-inclusive, unethical, cutthroat, and abusive — that poison corporate culture in the eyes of employees.” An inclusive culture is one that encourages the representation of diverse groups of employees and sees they are treated fairly, made to feel welcome, and included in key decisions. Non-inclusiveness is seen as meeting these basic human decency standards. The authors found that “feeling disrespected at work has the largest negative impact on an employee’s overall rating of their corporate culture of any single topic and was the single strongest predictor of how employees as a whole rated the corporate culture.”

Unethical behavior captures refer to the general thoughts and feelings about integrity and ethics within an organization. Cut-throat is not simply non-cooperative teammates or the lack of coordination across organizational silos but when employees are “actively undermining one another.” Abusive management is more than simply having a co-worker or manager “who has a bad day and takes it out on” others but more as sustained hostile behavior toward other employees. Some examples of such behaviors are “bullying, yelling, or shouting at employees, belittling or demeaning subordinates, verbally abusing people, and condescending or talking down to employees.”

How do these lead to rationalization under the Fraud Triangle? A couple of ways come to mind. First, “disengaged employees are nearly 20% less productive than their engaged counterparts because they put in less effort and miss more days on the job. Nearly half of employees who felt disrespected at work admitted to decreasing their effort and time spent at work.” This could lead to the situation where the watchers really are not watching. Second, and directly in the compliance wheelhouse, is that the authors reported, “Among U.S. CEOs and CFOs surveyed, 85% agreed that an unhealthy corporate culture could lead to unethical or illegal behavior. For example, after fraudulent sales practices at Wells Fargo were exposed in 2016, the bank paid billions of dollars in fines and lawsuits and saw its corporate reputation suffer the largest single-year drop in Harris Poll history.”

The bottom line is that many employees might experience the culture as toxic. As the authors noted, “Women, underrepresented minorities, or older employees, for example, might have a much more negative view of the culture than other employees. In most large organizations, distinctive microcultures coexist within the same company, often across business units, functions, geographies, or acquired companies. Individual leaders also create subcultures within their extended team. Whatever their origin, microcultures can diverge from the broader corporate culture, which means that even the best cultures can contain pockets of cultural toxicity.” Does this mean they will be prone to engage in bribery and corruption? Not necessarily but it does mean they may have a propensity to rationalize away such conduct due to the toxicity of culture at their companies.

Bret Hood, writing in a Fraud Magazine article entitled “Twisted rationalization, said, “We might commonly assume that fraudsters choose to commit fraud by deploying rational cost-benefit analyses of potential rewards against the consequences of being caught. However, most fraud perpetrators completely ignore this calculation. Most of their decisions are automatic and unconscious. Sometimes, others massage circumstances so the fraudulent decision maker doesn’t comprehend the ethical implications.” That sounds suspiciously like someone who has been treated so poorly in a toxic culture they feel like they have nothing to lose.

David Schrieberg, writing in a Forbes.com article entitled “How Does Corporate Culture Fuel Fraud? Start With Volkswagen And Wells Fargo”, cited to Steve Morang who said of those entities and their scandals, “The brains behind the “strategic decisions that organizations make, whether Volkswagen or Walmart or Wells Fargo, don’t understand that those decisions, as they get implemented and trickle down the organization, could very much affect their fraud risk profile.” These comments were aimed at the culture of sales, but those same cultural morals created a toxic culture in both organizations.

In our next edition, we consider the Fraud Triangle and compliance.

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