Top Ten Fraud Prevention Tips for Small Businesses, Tip #4: Top-Down Corporate Ethics

As a small business owner or senior executive, it is your responsibility to promote integrity and ethical values to your employees and implement the proper controls and procedures to prevent fraud. In this series, we are highlighting ten basic fraud prevention steps you can take to keep your organization safe.

As accountants, we often witness instances where strong employee ethics have prevented fraud. As required by Statements on Auditing Standards No. 99 for financial statement audits, auditors interview and inquire of management and employees within the entity itself about the risks of fraud, effectiveness of controls in place in the organization, any known or suspected fraud, and other various topics relating to fraud. In many instances, personnel will enlighten us with one or more ways that they believe a person could commit fraud or steal from the organization. They may also explain shortcomings they see in the internal controls, some of which management had not yet considered. In these cases, strong ethics – and not proper controls – have prevented fraudulent acts.

However, the tone and character of a business starts at with top-level management. The most explicit way to communicate ethical standards is through a written code of conduct, explaining the values and beliefs by which the company expects its employees to abide. A written code of conduct serves as a resource for employees should they have any questions or need clarification; this code may explain how to react to a specific situation, such as bribery or witnessing an unethical act. Many employers also require their new hires to sign a statement signifying that they agree to abide by the company’s code.

While having a strong written code of conduct is important, the actions and behaviors of employees are not only influenced by the written rules. Top-level management must follow the same standards and principles that they expect of their employees. Management needs to clearly communicate to everyone in the organization the importance of strong ethical behavior for the success of the organization itself; employees must be made aware that fraud will not be tolerated.

So how do you model strong ethics? Leading by example can be difficult when it comes to ethical decision making, since it is an internal process. It may be easier to think of what is unethical behavior: if the top-management of an organization regularly deceives customers in order to try to make more money, the employees might be influenced by this attitude and justify stealing money back from the company. Another way to model and encourage ethical behavior is to educate your employees by encouraging them to take an ethics training course or even sponsoring your own in-house training.

Business leaders need to keep an open line of communication with their employees in regards to the expected ethical behavior. Share your experiences of ethical dilemmas, educate your employees, and make a conscious effort to engage your employees in situations as they occur. Lastly, let your employees know that you are willing to discuss any ethical situation that they may encounter.

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Alex Helfand, ENCE