This article is contributed by Kirby Zhang, former regional Human Resources Director of P&G ASEAN and APAC. He has been working as Head of HR for P&G Central Europe, and as COO for a big Chinese company. He has rich experience in managing business ethics and compliance issues across countries and industries. He developed and implemented a strategy in managing corporate fraud and corruption in P&G Greater China, successfully turned around the internal control and compliance situation, and has been reapplied globally.
When talking about corporate fraud and fraudsters, many can refer to different cases. The most significant cases like Enron, Theranos, Wirecard, Luckin Coffee, Barings Bank, some of those companies collapsed due to fraudulent activities, however, there are far more fraudulent cases happening every day, in almost every company, big or small. Some of the cases may not be so significant hence people even do not know it’s happening, but still the overall damage can be very severe.
According to Crowe, an accounting, tax, and audit consultancy firm, the total loss of companies due to fraud globally was up to 5% of total revenue in 2019, which is over US$ 5 Trillion – more than one-third of the top 500 companies total annual profit. Not only the financial losses but also the damage to the company culture has been very concerning as well. It is a global systemic problem – and the problem is so big and complex, that most big corporations have set up dedicated departments/teams, hiring fraud consultants, legal and internal control, and compliance people to tackle it.
The question is, why is it still happening and companies are having a tough time to manage it?
To answer this question, first, we need to understand the profile of the fraudsters, who are the people that commit fraud? This will help us understand why the traditional approach of relying solely on the Internal Control and legal team to handle fraud cases is not effective.
Who are the people that commit fraud?
It’s important to understand the profile of people who commit fraud, and the workplace dynamics surrounding this.
There are some shared common traits of fraudsters that were involved in many big fraud cases, they are usually:
- Very well educated, so they have a chance to rise to the top to make bigger decisions
- Experienced in the company (4+ years with the organization), so they know the system really well
- Smart, so they know how to navigate, manipulate and eventually get away from being caught
- Strong performers and very productive, they have the trust of upper-level people, hence have the delegation and trust from the company to make decisions. Also if the performance is not strong, the individual would have to deal with performance first, no extra capacity, or can be caught easily.
- High EQ, good relationship with colleagues, this helps the fraudster to get support and help from other people, and the others would not even know or suspect that there is something suspicious going on.
As you can see, the person might be a good father/mother, good friend, good neighbor, and most importantly good subordinate or good teammate. And because of these common traits of fraudsters, the naive managers are usually even trying to support and protect these individuals, as in general, they are the “super good employees”
In any workplace, even for those that have a culture where everyone is responsible to prevent fraud, the more entrenched human nature is “let’s better not be involved if it doesn’t concern me” culture. This is a rational decision for most people working in a company – they don’t want to get involved in an ambiguous, potentially nasty situation which and in the end it can also intimidate their position in the company, especially when a future star is involved.
[Caveat: Not all smart, effective and high EQ people will commit fraud, but most people that commit fraud have the traits above.]
So as you can see – fraud is essentially a human issue, and fraud prevention and handling is a cultural issue.
HR professionals play a critical role in championing the right culture and protecting companies from fraud.
Unfortunately, most of the HR professionals are so used to normal HR work – e.g. recruitment, employee benefit – and some may forget that they have a responsibility in a company to champion the right culture in order to protect the company by minimizing fraud. Let me elaborate a little bit more on what the HR professionals should do.
First, HR professionals who understand the company’s business and how the business process works can better help to detect fraud. Why? Good HR professionals usually are close to the organization, and they know “rumors or what’s hot” in the organization very well. Good understanding of business and business processes, combined with good judgment toward sensitive information will help HR professionals to be more agile with better sense in making judgment calls when “allegations/rumors” flying around, hence better helping the investigation and identifying people behind it.
Second, people who do commit fraud are usually good performers with strong potential in the company. Even when there is evidence, managers will again try to find excuses for their star performers. And in some instances, the internal control and audit team can only present facts, the Legal team can present legal risk in managing people, while an informed HR has to present judgment calls to the management – by putting everything together, balancing legal risks and damage to business/culture, especially when the situation of “we have enough evidence to not trust the person from a business standpoint but do not have enough evidence to fire the person from a legal standpoint” arose. HR should stand up and help the management to make the right calls.
And finally, HR needs to work closely with other departments to set clear guidelines, expectations and strong deterrents (punitive management) to prevent, detect and handle fraud cases.
There is a saying “You will get what you measure”. When companies’ KPI focus on audit scores, you will get better scores but not necessarily better control, as business leaders rather spend time to negotiate scores, cover-up potential issues, and even push back internal control and compliance investigations. . HR professionals play an important role in the company is helping build the right people systems, culture and talent evaluation process, and criteria. For example, no matter how good your control system is, there are always people who cannot resist temptation and commit to fraud, when we measure business leaders, we not only measure the audit scores, and the number of cases in his/her organization, but also the way he/she handled the cases. This is where HR can contribute very significantly by putting in place the right measurement and eventually building the right culture to protect the company.
To summarize, HR plays a very important role to help companies to reinforce expectations and education so people WILL NOT violate, strengthen systems and processes so people CAN NOT violate, and last but not least, punitive management so people DARE NOT violate.
In my experience, it is always very tough to remove smart, effective, and personable people who have committed fraud. The backlash can be huge, but on a larger scale – when we do it right, the company will be in a much better place.
After all, we are talking about 5% or more of a company’s total revenue, if you do it right, it’s your profit, if you don’t do it right, it’s your loss! This is where we can, as HR professionals, create huge value for our companies!