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How the wrong company culture fosters employee fraud

When your company culture doesn’t work for your team, it can have a devastating financial impact on your business

A company’s culture can be termed as its DNA. It’s your ‘how we do things around here’. It’s the unique way your business operates and affects how both your customers and your colleagues think and feel about your company.

Poor culture demoralises a team, restricts the drive for business growth and (without realising it) fosters an environment increasing the prospect of insider fraud or dishonest conduct when an employee simply no longer cares to follow the rules.

When an employee feels stressed or pressurised as a direct result of their working environment – typically in circumstances where unattainable targets are set – they may begin to feel demotivated or undervalued. In the long term this not only fosters an unhealthy working environment but it can also prompt out-of-character behaviour.

One of two scenarios can develop: they either choose to leave (meaning your business loses valuable talent) or they become disenchanted with your business and their role. Employee disenchantment is a significant driving factor of employee fraud, as history has shown with the likes of Nick Leeson and Edward Snowden.

Leadership plays a significant role in the overall culture of your business. When employees believe in the leaders of their organisation they feel safe. If they don’t the possibility of betrayal increases.

The way leaders lead (or their management style) closely correlates with the risk of employees behaving badly. Leaders can be hard to categorise but, in our experience, there are three distinct leadership types that actively turn an otherwise conscientious culture toxic.

1. The autocratic leader

The autocratic leader has absolute power over their team. They are happiest when in full control.

The fifth habit (Stephen Covey’s The 7 Habits of Highly Effective People) suggests a good leader ‘seeks first to understand, then to be understood’. Autocratic leaders expect to be understood first, which can leave team members feeling resentful, misunderstood, ignored or undervalued. These feelings weaken the morale of any team and prompt the employee to seek the appreciation and value they ‘deserve’ through other means such as unethical behaviour or fraud.

2. The clock-watcher

The clock-watcher rigorously controls the standard working day expecting their team to ‘punch in and out’ on time. This leadership style breeds a lack of trust among a team and cramps its autonomy.

Tying success to when employees arrive and leave ignores the value of any productivity between these times or of work produced out of office hours. This attitude is out of step with model modern leaders who focus on what you put into the hours not the hours you put in.

The team behind the clock-watcher leader may begin to lose a sense of pride in their work – feeling that any work they are achieving isn’t valued. Disenchantment is not far away. This can encourage employees to believe leaders care about the wrong things and they wouldn’t notice if they rewarded themselves for the work they’re doing, potentially seeking monetary gain from elsewhere in the business.

3. The absent leader

Research (Aasland, Skogstad, Notelaers, Nielsen, and Einarsen, 2010) shows this is the most common form of incomplete leadership. Either physically or psychologically, the absent leader may be too busy to support and monitor their employees’ performance.

It can hamper employee motivation as there is no recognition given for work done, some of which may be above their existing pay grade. Again this lack of motivation can result in low morale across the team. If prolonged low morale is a key factor leading to increased risk of employee fraud.

Leadership and fraud: a case study

Tenet Compliance & Litigation’s experience with a nationally-recognised architects practice highlights how incomplete leadership can lead to employee fraud. The managing director of the practice demonstrated psychological absence from their leadership role as they were too busy to closely monitor the senior operations and HR manager’s performance.

An investigation revealed that the employee had diverted almost half a million pounds from the firm over a period of four years. They were dismissed for gross misconduct but the monies had been spent on a hidden lavish lifestyle. Detection came too late.

In this instance incomplete leadership and insufficient compliance and governance meant that the firm had given too much freedom to an employee who ultimately took advantage.

The fraud prevention balancing act

Developing the right company culture is about striking a balance between the different leadership styles. Leadership, as Simon Sinek says, is not about the number of people you are in charge of it’s about taking care of those in your charge, and recognising how not to lead.

The governance aspect of compliance shows employees should be monitored enough to review performance regularly but trusted enough to allow valuable and creative input. Get your company culture right and lots of other things fall into place; including the unknown benefits of the losses you may not know you managed to avoid.

Culture does take conscious effort before it’s effortless, but it’s worth it according to marketing guru Peter Drucker who famously said: ‘culture eats strategy for breakfast’.

Arun Chauhan is founder and managing director at Tenet Compliance & Litigation