Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Corporate culture and the occurrence of fraud

corporate fraud, fraud prevention, employee theft“Tone at the Top” is an often used term when talking about corporate fraud and how to prevent it. Essentially “tone at the top” refers to the ethical and cultural atmosphere created in the workplace by leadership. If an organization’s leadership displays integrity, the employees are inclined to follow their lead. If however, employees believe their leadership is less than forthcoming or ethical, the employees may be more than likely to behave in a less than acceptable manner.

A new report entitled “Corporate Culture and Financial Reporting Risk: Looking Through the Glassdoor” summarizes a study conducted by researchers from George Washington University – School of Business. The report indicates that the employees’ view of corporate climate is directly related to fraudulent behavior. The corporate climate included the culture and values of the company and senior leadership – in other words the “tone at the top”.

The study used data from the website Glassdoor which has employees rate the Company as a whole as well as the work environment and the quality of executive management anonymously. Ratings made between 2008 and 2015 were cross referenced with SEC fraud enforcement actions and securities class action lawsuits. Correlations were found indicating that companies with higher ratings in senior leadership and culture and values were less likely to be involved in some sort of corporate fraud action. High job satisfaction also correlated with lower fraud actions.

Senior leadership needs to set the right tone for an organization. Employees will look to the leadership’s behavior in all aspects of the corporate culture. A happy employee who trusts and respects management is less likely to be tempted to commit fraud than one who is disgruntled and observing management’s indiscretions.

Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV