Culture of Honesty and High Ethics

It is the organization’s responsibility to create a culture of honesty and high ethics and to communicate clearly acceptable behavior and expectations for each employee. Creating a culture of honesty and high ethics should include the following:

1. Setting the Tone at the Top Directors and officers of corporations set the “tone at the top” for ethical behavior within any organization. Research in moral development strongly suggests that honesty can best be reinforced when a proper example is set (the tone at the top). The management of an entity cannot act one way and expect others in the entity to behave differently.

2. Creating a Positive Workplace Environment Research indicates that less wrongdoing occurs when employees have positive feelings about work. Factors that detract from a positive work environment and that may increase the risk of fraud include the following:

• Top management that does not seem to care about or wish to reward appropriate behavior
• Negative feedback and lack of recognition for job performance
• Perceived inequities in the organization
• Autocratic rather than participative management
• Low organizational loyalty or feelings of ownership
• Unreasonable budget expectations or other financial targets
• Fear of delivering “bad news” to supervisors and/or management
• Less-than-competitive compensation
• Poor training and promotion opportunities
• Lack of clear organizational responsibilities
• Poor communication practices or methods within the organization

3. Hiring and Promoting Appropriate Employees The threshold at which dishonest behavior starts will vary among individuals. If an entity is to be successful in preventing fraud, it must have effective policies that minimize the chance of hiring or promoting individuals with low levels of honesty, especially for positions of trust.

4. Training New employees should be given training at the time of hiring covering the entity’s values and its code of conduct. This training should explicitly cover expectations of all employees regarding (1) their duty to communicate certain matters; (2) a list of the types of matters, including actual or suspected fraud, to be communicated along with specific examples; and (3) information on how to communicate those matters. Such training should include an element of “fraud awareness,” the tone of which should be positive but nonetheless stress that fraud can be costly (and detrimental in other ways) to the entity and its employees. In addition to training at the time of hiring, employees should receive refresher training periodically thereafter.

5. Confirmation Management needs to articulate clearly that all employees will be held accountable to act within the entity’s code of conduct. All employees within senior management and the finance function, as well as other employees in areas that might be exposed to unethical behavior (for example, procurement, sales, and marketing) should be required to sign a code of conduct statement annually, at a minimum.

6. Discipline The way an entity reacts to incidents of alleged or suspected fraud sends a strong deterrent message throughout the entity, helping to reduce the number of future occurrences. The following actions should be taken in response to an alleged incident of fraud:

• A thorough investigation of the incident should be conducted.
• Appropriate and consistent actions should be taken against violators.
• Relevant controls should be assessed and improved.
• Communication and training should occur to reinforce the entity’s values, code of conduct, and expectations.

Expectations about the consequences of committing fraud must be clearly communicated throughout the entity. If a violation occurs and an employee is disciplined, it can be helpful to communicate that fact, on a no-name basis. Seeing that other people have been disciplined for wrongdoing can be an effective deterrent, increasing the perceived likelihood of violators being caught and punished. It can also demonstrate that the entity is committed to an environment of high ethical standards and integrity.