Business and management
Corporate fraud
Appropriate behaviour
Nov 30th 2011, 10:01 by B.R.
THE lot of the middle manager is not always a happy one. Dumped on from above and resented from below, they are often first in the firing line when cuts are made. It is probably no surprise, then, that they also tend to be the quickest to steal from their companies when the chance arises.
According to a survey by PricewaterhouseCoopers, a consultancy and accounting firm, just over half of British firms said that they had uncovered high levels of fraud over the last year. Only Kenyan and South African ones found more (see chart), although it is likely that British companies are just better at spotting it.
Most fraud is carried out by outsiders, such as customers or vendors. But a firm’s employees still represent a big risk. A third of the companies questioned said that the biggest swindles over the last year were perpetrated by their own staff. Middle managers were by far the biggest culprits—and they are becoming more sticky-fingered. In 2007 32% of reported internal frauds at British companies were carried out by middle managers. By 2011 this had risen to 65%.
This is happening even as the overall level of internal fraud is falling. Middle managers are particularly keen on “asset misappropriation” (common theft to you or I), while the types of crimes more associated with the big cheeses, such as accounting fraud, have fallen—probably because firms, and regulators, have become more stringent after the credit crunch. But it might also be that internal fraud is now less likely to be detected. During a downturn, companies are tempted to do away with frontline defences, such as internal audits. This may have led to the under-reporting of some crimes.
When PwC asked firms to describe their typical fraudster, they identified him as a man in his 30s, who has been with the organisation for between three and five years. It sounds like a wild generalisation. But Tony Parton, an investigation partner at PwC, thinks it is not so far-fetched. In all likelihood, he says, it is describing a particular type of disgruntled manager, who has been passed over for promotion during straitened times. He might be driven to fraud by a sense of bitter entitlement, or it may be that he is feeling the economic pinch of sending his kids to private school or maintaining a second home.
Not every employee caught defrauding his company is sacked. Seventeen percent get to keep their jobs, while a quarter are not reported to the police. Many bosses decide that, even after being caught in the act, some managers are too valuable to lose. Better, they think, to shift them quietly to another department, with little more than a ticking off.
It is nigh on impossible for firms to quantify the cost of crimes such as theft. Many have concluded that the cost of a proper audit would outstrip the actual losses. The trouble with that approach, says Mr Parton, is that one also needs to consider the "collateral damage". Olympus, a Japanese maker of cameras and medical-imaging devices, may be an extreme example, but it lost 80% of its value after it sacked its new CEO, Michael Woodford, who had uncovered $1.3 billion in dodgy payments. And, of course, accounting frauds have brought down entire companies.
What is more, most firms are home to a vibrant grapevine. Knowing that your peers are stealing with impunity might lead you to think that you are the sucker for staying honest. Particularly if you promise yourself you will go straight once you get the promotion you deserve.
In this blog, our Schumpeter columnist and his colleagues provide commentary and analysis on the topics of business, finance and management. The blog takes its name from Joseph Schumpeter, an Austrian-American economist who likened capitalism to a "perennial gale of creative destruction"
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I once worked for a company that indulged in immoral and 'dubious' practices, some of which led to several outsiders getting seriously stung. So I had no second thoughts when I saw an opening for myself to 'sting' my unethical employer and escape with several thousand pounds of illicit booty. Fortunately I only did this a couple of times before I left, and the malpractice was never discovered.
Perhaps this is what is driving such high levels of fraud in the UK? If our employers indulge in it, why shouldn't we do the same? As they say, what goes around, comes around ... treat others as you would be treated yourself, etc.
Stealing is wrong no matter what level. If business try to sweep it under the carpet, essentially they are condoning such unethical practices.
How can one expect consumers to trust a company that engages in unethical organizational behaviors?
This is also relevant to Indian mid-sized companies, which are individual-driven, rather than systems and processes. In these companies, certain individuals, who enjoy the confidence of promoters/owners, are given unbridled freedom without any checks. More often, these individuals are found to be the culprits. So long as checks and balances are not in place, such instances of insider-driven frauds cannot be stopped.
My intuition leads me to believe that the current economic malaise, the "Great Stagnation," has changed us all in subtle ways. Maybe it's just the natural feeling that "things have never been like this," but there's a tolerance for outrageous behaviour in the public square, candidates who say and do peculiar things, and maybe this type of fraud.
On the other hand, the article is a little vague about what fraud means. Is it petty fraud we're talking about? Using the company car to drive to the store or taking post-its home? Or, are we talking about falsifying information to approve loans that shouldn't be approved? Or is it diverting cash to private bank accounts?
Whatever the mix, I suspect that it's a growing trend that relates to our tolerance for things that were previously unacceptable. http://reasonableviews.com/2011/11/05/exasperated-america/
For those of us who have been middle managers in the US, the need to be both experts technically, good at kissing booty and paying attention to all aspects of management of the function (people, processes, strategy, delivery and operations requires a delicate balance. It is common to see leaders hire under-skilled friends often more focused on kissing booty than delivering value or selecting vendors who offer better "incentives" - but these things are not reported or seen and auditors (perhaps even PwC) can keep a blind eye towards decision makers - as perhaps they don't want to lose their revenue stream. PwC may even have incentive to blame middle managers than the senior leaders of the firms they audit - oh my! This fine publication may even choose to offer middle managers as fodder for their readers rather than really look at major sources of fraud and shareholder value.
Any manager that does not take vacations is the first clue because they are always watching the shop and making sure no one uncovers their deception. I would not be surprised at more of this in the future because public perception is to "justify" whatever they want whenever they want. Ethic has gone to the wayside. Most are only centered on their own feeling of "social" or "economic" justice, which really means a way for those who do not contribute to take what you worked for. Yes, old fashioned honesty, integrity and beiing a person of your word has died a slow but continuous death. Welcome to the new world and it's not going to be good.
Perhaps they are just implementing a home-grown version of the fraud perpetrated by CEOs - large remuneration without adding value.
In line with the article, it must be said (I don't get tired of repeating it ofr the past few years of crisis) that the real crisis isn't economic but rather a lack of ethics in all fields. Governments that do not preach with the example have no force to demand from the citizens.