In the 1999 movie "Office Space," a trio of workers creates a software worm that diverts company funds into their personal accounts. Although the satire exaggerates the vulnerability of companies to corporate fraud, it does showcase such crimes as an existing threat to organisations. According to Alan Luk, Audit Director, Canon Singapore, white-collar crime is very much a reality. "It's a growing business risk," he says.
While there have been several high-profile cases in the US and Europe, Luk says similar espionage may go undetected in Asia, particularly in developing countries which practice weaker corporate governance. "Under this environment, many companies compromise business ethics for survival."
Jane Niven, Regional General Counsel, Jones Lang LaSalle agrees. A lack of regulatory direction throws roadblocks in the way of companies trying to do the right thing. "If you don't see governments prepared to implement anti-corruption laws, it is difficult to turn things around," she says. For instance, she says Indonesia's anti-corruption bodies don't set standards high enough to prevent white collar crimes. In Hong Kong and Singapore on the other hand, there is jurisdiction to support fraud protection, and the consequences are higher for those caught with their hands in the till.
But local HR professionals cannot afford to breathe easy. Fraudulent activity takes place in Singapore but it often goes under the radar. Niven says small-ticket frauds can quickly add up against an organisation's bottom line. One example she offers is where staff "siphon" off products; whereby counterfeit products are brought in through the back door of an organisation and sold on as normal.
According to Luk, asset misappropriation, also known as "skimming", is one of the more common forms of fraud in Singapore. This involves taking out cash from a victim company before the transaction is entered into the accounting system.
Supplier rebate schemes are also common in this region. This form of fraud involves managers creating fake documentation to cover up improper accounting for supplier rebates. Those suppliers then reward the fraudsters with kickback payments.
Fraud of any nature and scale has significant implications for the organisations involved. Concealed crimes often flow into corporate accounts, leaving financial data incorrect and falsely disclosed to investment markets. That can lead to further regulatory problems for the organisation. "In the short term, shareholders may be misled by financial statements and inject funds or approve bank loans," says Luk.
Niven says while financial losses are upsetting, recovery is still possible. Long-term damages, however, are much more difficult to fix. A company's future and reputation is at stake when fraud becomes prevalent. The loss of confidence extends to shareholders; a dramatic fall of share prices can result and lead on to the organisation's collapse.
The withdrawal of trust from clients and suppliers creates an impact which is especially harmful in Asia. "Reputation is everything here," says Niven. "If you're seen to be corrupt, the multinational environment doesn't trust you, and others will see you as an easy target." There are also the internal problems to consider. Employee morale and performance declines when staff begin to perceive their company as vulnerable or insecure.
Fraud-free culture
It should come as no surprise that organisations with fewer controls are the most likely victims of internal fraud. But most employers underestimate the role that organisational culture plays in determining a company's susceptibility to thefts and scams.
Some experts believe culture matters more than codes or processes when it comes to an organisation protecting itself from internal fraud. This is because culture sets the tone for work relationships and behaviours. If breaches of trust are known to be tolerated within a company, that organisation can become a target for much larger fraud.
Luk describes corporate governance structures as the "hardware" of a company's fraud prevention tactics. The "software" is what he calls the "corporate soul." When unethical elements like greed and dishonesty are seen, especially within the top management roles, they have the potential to pervade and weaken the "soul" of the organisation.
An example was seen in the Enron insider trading scandal several years ago. Analyses of the company's business ethics background and leadership mechanisms show that a general acceptance of dishonesty had a profound effect on employee ethics. In a court hearing, one ex-Enron employee attributed the lead-up to the company's downfall to "the atmosphere of breaking the rules."
In such companies, certain acts become so common that they are either dismissed or deemed marginally acceptable. An even bigger challenge arises when the organisation operates in a country where unethical behaviors are considered part of the traditional business culture. In China, for example, it is widely-known that relaxed expense protocols make it easy for people to inflate claims.
In order to claim an invoice, you need a government-mandated receipt. But employees can sometimes request higher value receipts, in order to claim expenses in excess of what they spent - with a view to pocketing the margin. "Say dinner costs 800 RMB," Niven says. "They ask the restaurant to state that it cost 1000 RMB."
Employees are rarely questioned or caught, and so the assumption remains that there is nothing wrong with the small-scale fraud.
Combating this problem requires a very precise and structured expenses protocol. Accountability is key. The reason companies don't already do this is because it takes too much time and they have to hire more finance staff. But Niven says the financial losses resulting from fraud could be offset by hiring a professional to deal with invoices.
However, other business practices which are rooted in a country's culture cannot be so easily resolved. In multinational companies, policies often don't take cultural nuances into account.
One example is the issue of gift-giving. While in the West, the practice of handing over high-value goods or services is strictly prohibited, gift-giving around the holiday season is part of doing business in Asia. What may be seen in one business culture as a form of bribery, is seen as proper etiquette in another.
Niven's suggested solution is to establish an understanding of the balance between global corporate policies and cultural dictates of the environment. Company branches on both sides of the world can agree upon parameters within which people can practice the exchanges.
HR's prevention tactics
HR's role in preventing corporate fraud is vital. Values of integrity, honesty, fairness and transparency do not implement themselves - a concerted effort must be made to ensure opportunities to commit fraud are kept to a minimum.
Regular training is one possible solution. Management and HR should work together to show staff they are their advocate, not the enemy. When a bridge of trust is built, and opportunistic dishonesty is often reduced. It is also necessary to establish and reinforce related policies and procedures, such as codes of conduct and business ethics.
For corporate fraud identification, Luk advises HR to encourage staff awareness. "A whistle-blowing system provides all employees with an opportunity to voice their opinion when wrong-doing is discovered," he explains.
However, the drawback is that employees who identify fraud may worry about their protection and confidentiality. If there is a lack of trust in management, employees will not feel secure that reports are being kept confidential. "This system may not be popular in Asia," admits Luk. "Employees may not understand its benefits - they might relate whistle-blowing with retaliation, or even unemployment."
One way to abate such fears is to create a confidential channel for whistle-blowing. Online reporting is one effective medium. It provides the benefit of clear communication. Luk says HR should also go clearly explain the ways in which employees' confidentiality will be maintained. "HR could work together with the internal audit or legal department to set up this system," he suggests.
To further ensure staff are fairly-treated, whistle-blowing reports should not be investigated solely by HR. Assistance from external consultants, or from internal staff, should be sought.
Niven believes HR needs to change the perception that staff often have of it. She finds it surprising that it is finance staff, not HR, that conduct ethical training. Staff often have a view of the finance and legal departments as the "policemen", whereas HR is considered the people's advocate, she says.
HR must make it clear that it is every bit as concerned and observant of policies as other departments. "HR is the one who sets the conditions of employment after all," Niven reminds employers. "One of its main responsibilities is to comply with ethical standards."
It is crucial for HR to educate staff about the applicability of new policies to combatting corporate fraud. When fewer gaps in understanding exist, staff will be quick to grasp the ramifications of dishonest behavior in the workplace.
Fraud in the downturn
Is the current financial crisis exacerbating corporate fraud?
A survey from KPMG says that is the case in New Zealand and Australia. Reports of fraud there have climbed recently, with gambling seen as the most common incentive for employees to steal from their employers. 45% of survey respondents acknowledged at least one case of fraud over the previous two years.
So far this year, the Federal Bureau of Investigation has investigated 530 cases of corporate fraud in the United States. It found that 38 could be tied directly to the downturn.
Jane Niven, Regional General Counsel, Jones Lang LaSalle, says there is an increase in allegations of unethical behavior in Asia. "They are indicative of the economic climate."