The Right Stuff - Tone at the Top

Echoing the familiar adage that educators often acknowledge, “Parents are a child’s first teacher,” senior management’s directives and behaviors have the same impact on an organization in its efforts to mitigate fraud or unethical behavior. In fraud risk parlance, this impact is referred to as “tone at the top.”

There are some tools that can certainly assist senior management in assessing or setting the right tone in their organization, including the establishment of a formal code of ethics, use of an anonymous employee hotline for the reporting of unethical or illegal behavior, performance of background checks of prospective hires or those being considered for appointment to a position of trust and various reference materials/checklists that are readily available.

However, there are no silver bullets to establish the right tone at the top. As Howard Sklar, Vice President & Global Anti-Corruption Leader of American Express Company, succinctly described it, “Tone at the top is a visible willingness by senior management to let values drive decisions to prioritize those values above other factors – including financial results and to expect all others in the organization to do the same.”

Setting a true and right tone should result in the desired message and behaviors being woven into the fabric of a given organization. Therefore, it is important that senior management consists of qualified and courageous individuals, who have integrity and demonstrate these traits to their charges on a consistent basis.

As we have seen on numerous occasions, failure to effectively lead by example can help set the stage for employees to rationalize the commission of fraudulent acts. One recent example that we saw involved a private company owned by an individual who, as we discovered throughout our investigation, cheated on his taxes (and his wife), sought to take advantage of both customers and vendors whenever possible, used company funds for personal use and treated his employees in an abusive manner. The seeds that he sowed with his “tone” were a contributing factor to a mid-six-figure fraud perpetrated by his long-time controller. When the fraud was discovered, the controller cited several factors that helped lead to his decision to begin to commit the fraud (in addition to his money problems). These factors included the repeated examples of impropriety demonstrated and the alleged unfair and “nasty” treatment inflicted on him by the owner over course of more than a decade.

Even if management does set the right tone, there is still the possibility that fraud can occur in a company. As the old saying goes, “Bad things sometimes happen to good people (companies).” In order to further mitigate fraud risk, it could be worthwhile to consider the performance of a fraud risk assessment, where fraud risks, mitigating controls and control gaps are identified, so that appropriate actions can be taken before fraud occurs.

The professionals in Schneider Downs' Business Advisory Services practice have assisted numerous clients in performing fraud risk assessments and forensic investigations. Please contact Joel Rosenthal, Shareholder or Marc Brdar, Senior Manager at (412)-261-3644 if you would like to learn more about our capabilities.

Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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