Set the Example for Ethical Employee Behavior

Fraud doesn’t happen in a vacuum. It thrives in environments where cutting corners, bending rules or looking the other way has become the norm. While internal controls, audits and compliance programs are essential, one of the most powerful tools for preventing fraud is often overlooked: the behavior of executives and senior leaders.

Employees pay close attention to how their leaders act. When executives take compliance seriously, follow policies and demonstrate integrity in daily decisions, employees are far more likely to do the same. Conversely, if leadership disregards rules, manipulates numbers or rationalizes questionable practices, it sends a message that fraud, or at least dishonesty, is tolerated.

Research by the Association of Certified Fraud Examiners (ACFE) consistently shows that “tone at the top” is one of the strongest predictors of whether fraud risk will be high or low in an organization.

It can be easy for management to set the proper tone. For example, effective leaders can model ethical behavior by:

• • Following the same rules as everyone else
  • Treating employees equally
  • Being transparent in decision-making
  • Encouraging employees to speak up
  • Acknowledging mistakes honestly
  • Demonstrating ethical decision-making under pressure

It is management’s responsibility to communicate to employees what is expected of them and to reward integrity. An open-door policy, where employees are allowed to freely come in and communicate their concerns (such as potential embezzlement), should be second nature.

Most employees want to do the right thing. However, they are less inclined to act ethically when pressured to meet a sales or profitability goal, or when they have a personal financial incentive tied to a sales or income number, or to a percentage that they can potentially fraudulently manipulate.

Management should want their employees to be an integral part of the business. Some of the best suggestions for sales ideas and cost reduction originate from the very employees the executive leads. Making them feel a part of the team goes a long way in building a solid relationship.

If that employee thinks the world of you and your company, there is a high probability they will want to advise you if they see anyone attempting to steal from the business. Because they hold the company in such high regard, these loyal individuals will take those actions personally and be more likely to report them to you.

The workforce today is woven from a different fabric than the baby boom generation. Research suggests that only about one-half of employees would report fraud if they were aware of it. Fewer employees today will report financial misconduct than did employees 15 years ago, and those under age 30 are the least likely to report at all. This makes leadership modeling even more critical.

Good behavior at the top doesn’t just prevent fraud, it strengthens company culture, protects brand reputation and fosters trust among employees, customers and stakeholders. When integrity is modeled daily, employees are far less likely to rationalize unethical behavior.

In the end, fraud prevention isn’t just about controls, policies and checklists. It’s about leaders demonstrating that honesty and accountability are woven into the fabric of the organization. By modeling good behavior, executives don’t just set the tone—they set the standard.

Contributing author: Kaitlyn H. Axenfeld, CPA/CFF, CFE, has extensive experience providing audit, review, compilation and advisory services to a wide variety of clients with a focus on the construction, architecture/engineering and manufacturing industries. Kaitlyn also specializes in forensic accounting and consulting services, including litigation support to law firms and privately held companies in fraud detection, damage calculations and prevention matters. If you have any questions or need any assistance, please contact Kaitlyn at kaxenfeld@dmcpas.com.