Reputational Risks in Your Organization - Part 4

Copyright (c) 2010 Peg Jackson

FRAUD

Fraud can be one of the most destructive sources of reputational damage. Fraud and fraudulent activities do not simply happen overnight and can seriously injure your organization's reputation because the fraud points to defective internal controls. Fraudulent activities can attract the attention of the media, law enforcement and regulators. Potential clients, shareholders and associates read these reports and could become disenchanted with your organization. Depending on the scale of the fraud, the resulting damage could seriously affect the financial integrity of the organization as well as leave it open to criminal charges.

An instance of serious fraud could destroy the organization's ability to obtain insurance coverage or secure another round of venture capital funding. Fraudulent activities might not be reimbursed unless the organization has secured the appropriate insurance coverage. However, even if the organization has proper insurance coverage. that does not guarantee that the insurance company would be willing to pay out on multiple claims.

Here are some examples of the reasons that fraudulent activities take place within companies, nonprofits and academic institutions:

- The organization's culture.

If the company, nonprofit or university denies the possibility of their employees committing fraud, or even more dangerous, transforms employees into martyrs, the potential for fraud increases. How many times have you heard people in nonprofits or academic institutions say, We work so hard here for so little money. That should be a red flag! This is not to say that businesses are immune to fraud - far from it. However, the risk for fraud grows exponentially when the organization's culture suggests that management is clueless.

- A business owner and/or management team that are asleep at the wheel.

How often do we hear stories about fraud committed at an organization only to learn that the owner and senior management knew nothing about it and suspected nothing. That is one of the most important reasons why senior management needs to lead the way in talking about fraud and in instituting and enforcing anti-fraud measures.

- Management assertion that It is not a problem; we have insurance.

In a number of cases of fraud reported in the media, the organization's Designated Spokesperson's only comment was we have insurance. They did not indicate that internal controls were going to be strengthened, or that all systems related to finance, operations or the like would be examined. They clearly do not think that there is any need for examination or modification - they have insurance! Of course one might like to be a fly on the wall when they receive their next bill for their insurance premiums - or the cancellation/ non-renewal notice.

- Lack of consequences.

Individuals who engage in fraudulent activities want to steal and either do not believe they will be caught or believe that there will be few if any consequences for their behavior. If they work for an organization that believes that employees are not capable of fraud, or that employees are martyrs, or there is no need to worry because the organization has insurance...then these potential fraudsters have no need to fear.

- The opportunity for fraud to take place.

In other words, there are weak or nonexistent internal controls which provide the opportunity to engage in fraudulent activities. Other occasions can include access to petty cash or other assets that are quickly converted to cash.

- Weak or nonexistent internal controls.

It is easier to cover ones tracks when there are no protocols or records kept.

- Unrestricted access to electronic databases and online checking.

Often electronic records will need to be altered to cover the fraud. Individuals who have access to sensitive databases are in a position to set up sham accounts and issue checks to themselves.