Companies that take a no-nonsense approach to ethical guidelines and enforcing compliance with them suffer fewer economic crimes than other companies, a new survey suggests.
The “Global Economic Crime Survey,” published by PricewaterhouseCoopers and encompassing 5,400 companies in 40 nations, showed that such programs had a significant effect on a company’s vulnerability in all areas of crime, including theft of assets, accounting fraud, corruption, and money laundering.
The report further revealed that of those respondents, an estimated 2,700 reported suffering one or more instances of economic crime, losing an average of $2.4 million. Companies with less-sophisticated control systems experienced even higher losses, totaling $5.7 billion for all.
How effective a company’s control system is depends on how well the company places its ethics and compliance programs within the context of its domestic and global operations, says Sandra Birkensleigh, a partner in PwC’s governance, risk, and compliance practice. “You can’t take a blanket program from head office and just roll it out to the globe and assume that what happens in one country will happen in another country, because it won’t,” she says.
For example, while most U.S. businesses have compliance and ethics programs, companies in less-developed countries may have compliance programs in place but lack a clearly defined set of ethical guidelines; companies in emerging countries may not practice such principles at all, Birkensleigh says. Offering bribes to get contracts for work, say, is standard practice in some places.
Birkensleigh
“It’s a very different culture from a country where the thought of that would be quite abhorrent,” says Birkensleigh.
Senior executives must also consider the different skill levels and management operations of each organization. “All of those sorts of things increase your risk profile for the organization as a whole,” she says.
Ethics vs. Compliance
Developing a risk-averse culture “requires leadership to not only define risk appetite and ethical business standards, but to encourage employees to do the right thing through clear communication of objectives and risk appetite,” the report says. And as Birkensleigh puts it: “It’s really important to understand that an organization only has one culture.”
Such a program includes the establishment of ethical guidelines, which the PwC report defined as a set of clear communication channels for employees to follow when they are confronted with ethical dilemmas. Such communication channels include things like ethics hotlines and whistle-blowing systems.
“Most people who have a whistle-blowing system give it pretty high marks for effectiveness,” says Steve Skalak, global leader of PwC’s Corporate Investigations practice. According to the survey, 43 percent of all economic crime experienced was discovered through either a whistle-blowing system or an internal or external tip-off.
Skalak
But while internal controls are “consistently the single most effective control measure a corporation can take” in reducing its risk of economic crime, they are not effective enough controls on their own, Skalak says. That’s where an effective compliance program comes into play.
Birkensleigh describes a compliance program as a systematic way to understand what an organization’s compliance objectives and obligations are and how to monitor and report unethical behavior to senior management and the board.
Tone at the Top
Despite the crucial role of upper management to create and transmit an ethical code of conduct and responsible behavior, organizations often create a disconnect between signals and messages, when management says one thing, but acts another way, Birkensleigh says.
Evidence of that is seen in the report, which found that 26 percent of economic crime involved members of senior management—a “pretty high and disturbing percentage,” Skalak says.
No matter where on the chain of command an employee is, proper penalties should be in place for adverse behavior, Birkensleigh says. Failure to discipline an employee who commits some ethical or compliance infraction telegraphs to other employees that such misconduct is condoned, and “What message does that send to the rest of the organization?” she asks.
Birkensleigh likens the idea to disciplining a child: “If you don’t tell them exclusively what to do, they’re not mind readers, so they’ll just do what pleases them.” In the end, the more often senior management clearly articulates what is expected of employees and integrates that into the company’s risk appetite, the better off a company will be.
“Have all the wonderful programs in the world that you want, but if you don’t get that linkage then don’t expect to be successful,” Birkensleigh says.
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