Strategic Management To Counter Framework and Corruption iIn The Organization
Name
Institutional Affiliation
Word Count: 3413
Executive Summary
Every organization in the business environment is prone to the risk of fraud and corruption. These risks have led to the downfall of entire organizations among other negative impacts. The Board of Management to the large Retailer has identified some challenges related to fraud and corruption which the organization needs to deal with. The Board acknowledges that proper risk management strategies are required to mitigate the challenges while considering the present infrastructure and resources. In this case, a comprehensive risk management approach in respect to fraud and corruption is proposed as it will work towards their prevention, detection and response accordingly.
Introduction
Every organization in the business environment is prone to the risk of fraud and corruption. These risks have led to the downfall of entire organizations among other negative impacts such as the loss of investments, costly legal fees, incarceration of some individuals, and confidence towards capital markets being eroded substantially. The reputation, brand and images of organizations that have been linked to fraudulent behaviors have also been negatively affected since they have lost credibility in the eyes of their present and potential clients, business partners and other fundamental stakeholders (Johnson, 2015). Therefore, fraud and corruption need to be a high priority risk in all organizations promoting the implementation of risk management strategies that will prevent its occurrence or mitigate its impact remarkably in the event it occurs.
The damaging effect of fraud and corruption would see countries such as the United States to implement several respective regulations on the issue. These include the U.S. Foreign Corrupt Practices of 1977 (FCPA), the Organization for Economic Cooperation and Development Anti-bribery Convention of 1997 and the Federal Sentencing Guidelines are all regulations governing the matter. In the UK, the Foreign and Corrupt Practices Act (FCPA) and the United Kingdom Bribery Act (2010) are some fundamental laws for fighting anti-corruption. The United Nations has incorporated the multilateral treaty known as the United Nations Convention Against Corruption (UNCAC) which is the legally binding global anti-corruption agreement. The treaty expects the member states to have several measures to deal with corruption. These measures are to cover five fundamental areas: prevention, law enforcement, global cooperation, recovery of assets, technical assistance and exchange of information.
Across the globe, there has been a general increase in legislations and other enforcement actions that require management to respective organizations to ensure sufficient fraud risk management within their environments. Failure to deal with fraud and corruption in their environments is putting the organization at risk of facing penalties unsettling the enforcement actions.
Fraud and Corruption
It is typical to find parties use the words fraud and corruption together in describing particular negative incidents, or they could use them interchangeably. Different organizations regardless whether they belong to the private and public sector will have different definitions of fraud. For instance the United States utilizes the “fraudulent acts” term to refer to both fraud and corruption. While there is no official established definition, the United Nations Secretariat has described the fraudulent acts as the activities whose intentions include both fraud and corruption (Ameresekere, 2011). In This case, fraud is defined as the action or omission done by an individual party or entity while fully knowing that they are misrepresenting or concealing a material fact so that they could get an undue benefit from themselves or a third party. Fraud could also be intended to cause another party to act in a manner that will be to their detriment.
Conversely, corruption involves an act or omission which misuses official authority or intends to influence the misuse of their official authority to gain an undue benefit for oneself or a third party. Examples of corruption schemes include bribery, kickbacks, unlawful gratuities, extortion some economically and the undisclosed conflicts of interest.
Background Information On the Organization
As every organization in the present business environment, this large retailer is susceptible to fraud and corruption in various ways. Currently, the company has an £800 million turnover and employs around 1000 staff. Also, the company has recently launched an online store and a small call center to handle the numerous orders to the company. Nonetheless, the Board of Management has identified some challenges related to fraud and corruption which the organization needs to deal with. The Board acknowledges that proper risk management strategies are required to mitigate the challenges while considering the present infrastructure and resources.
Present Fraudulent Challenges Faced By The Retailer
The company deals with various instances of fraud and corruption that are apparent in various departments. One of them is asset misappropriation which involves the theft of company assets by employees or insiders for their own individual benefit without the authority of the organization. This has been demonstrated by some customers complaining of identity theft which would be investigated and the findings included the fact that one staff member sold company information to a group of criminal individuals for them to engage in fraud. The staff member was found to have a gambling problem. The actions of these individuals have led to the company suffering bad publicity. It would be discovered that the person had been sacked from their previous employment due to theft and had several country court judgments related to bad debts.
The procurement departments have also demonstrated to be engaged in fraud due to the overpayments. There have been instances of contractors being paid double for the same work and the lack of sufficient records to prove the delivery of services that had actually been paid for. Also, there have been three other large staff frauds in Human Resources and Finance which were dealt with internally, but which together amounted to over £1.2 million in the last year. Three other large staff frauds in Human Resources and Finance have been internally handled but which together amounted to over £1.2 million in the last year. None of the amounts lost during the fraud were recovered nor was the board informed until this scandal erupted. Anecdotal evidence has also been found to indicate that there is extensive fraud and corruption at the lower levels
Apart from the evident fraudulent activities that have happened, the organization is demonstrating challenges in relation to its operation management strategies related to the issue. First, the audit department has been given the mandate of countering fraud and corruption in the organization yet one of its staff members has been mentioned severally to be part of the fraudulent activities. The company has an anti-bribery policy, this statement has not to be tailored for the organization as it was bought ‘off the shelf’ not staff members have any information on what the policy states nor is there any proof to indicate that the policy is being used in reality. The security within the call center has been determined to be very lax that several measures are required to enhance control. At the moment the company has no counter-fraud strategy with the present security strategy having very few guidelines to deal with staff theft. The corporate security function comprises three staff members mainly focussed on physical security of the stores and work sites, management of the contract guard force and the prevention and handling of crimes such as theft done by customers, staff at lower ranks and contractors.
The challenges demonstrate that the organization lacks proper strategy in terms of who is handling fraud and corruption cases in the organization and the right protocols to be followed. The company has no systematic prevention strategies for fraud and corruption which also includes measures to detect them early to mitigate their negative impacts.
Proposed Strategy and Structure To deal with the Fraud and Corruption Challenges in The Organization
In This case, a risk management approach is preferred to deal with fraud and corruption. The primary objectives of the approach will be to prevent the instances of fraud and corruption from happening in the first place, detecting the instances of fraud and corruption when they have happened and respond properly to the occurrences by taking corrective actions when the breakdown in integrity comes up (The Institute of Internal Auditors, 2008). Notably, the development of this approach acknowledges the fact that they will face several challenges concerning the focus is to have a comprehensive strategy. One of them is an understanding of the different regulatory and evaluation frameworks applicable to the organizations also, making sure that the controls such as risk assessments, codes of conduct and whistleblowing have been implemented accordingly in conjunction with support from the management. The final fundamental challenges is the creation of a wide-ranging ethics and compliance program that will manage and integrate the prevention, detection and response efforts focussed in the fraudulent activities (The Institute of Internal Auditors, 2008). Therefore, the risk management approach considered is one that will focus on attaining the key objectives and dealing with the possible challenges.
The Risk Management Strategy:
1. The Prevention Controls
These controls will be designed to mitigate the risk of fraud and corruption from happening in the first place. The effectiveness of these controls will highly depend on the efforts of the Board and Senior Management. The organization board was expected to play a fundamental; role of conducting oversight of programs to mitigate the risk. Hence, they will work together with the top of the management to provide the institutional support for the ethical and responsible business operations at the organization’s highest levels. The first important step of the organization’s board is to develop another audit committee whose responsibility is to conduct principal oversight matters in the organization. A new committee of individuals that have not been entangled into the activities is necessary as the previous one had proven non-effective.
The audit committee comprising new officers will be responsible for reviewing and evaluating the different issues raised within the entity related to fraud and corruption, review both the internal and external findings who had looked into the fraudulent activities in the company and establish the procedures for receiving and treating concerns related to questionable conduct that could lead to fraud and corruption.
Apart from the audit committee, senior management oversight is also required to ensure that the controls are effective constantly and aligned with the regulative and evaluative criteria. In this case, the organization should look into having a Chief Compliance/ Risk Officer who will also directly report to the matters related to preventing, detecting and responding to the fraudulent activities. The officer selected should be one with the knowledge and expertise on the matters and could coordinate the approach taken to handle the issues while optimally using available resources. The officer is to work together with the compliance employers and designated experts in distinct fields such as the head of departments, legal experts and the audit committee (Bhimani, 2009). His role is coordinating the risk assessment efforts, establishing policies, procedures and standards of acceptable business practices, conducting oversight in the design and implementation of anti-fraud programs and controls and also reporting to both the board and audit committee of fraud risk management activities.
The leadership in dealing with anti-fraud and anti corruption procedures will need to enforce initiatives to ensure that the junior employees actually understand what is expected of them. This will include development and enforcement of an Anti-fraud and Anti-corruption Policy. The policy should be developed from scratch in considering the present business environment. Then it should be communicated to each internal and external stakeholder of the organization. In ensuring compliance, each employee including top management will undertake a comprehensive training program that encompasses both theory and real practices (Vollmer, 2013). A comprehensive policy will provide guidelines on matters such as its particular objectives, the particular events handled including embezzlement, corruption, accounting frauds, money laundering and the infringement of rights.
❖ The policy will also have a framework of action that is to contain three fundamental structural elements:
● The Ethics Culture developed by the enforcement of an Ethics Code and Corporate Conduct Policy, Supply Policy, Contracting Policy and Bylaws, and an established Audit Manual (The Institute of Internal Auditors, 2008).
● The Commitment Statement from Top Management and the Employees
● The periodic evaluations for identifying, documenting, managing and mitigating the fraud and corruption risks via the controls implemented for distinct processes and projects.
● Increased awareness in fraudulent activities related to the organization continually among the managers, supervisor and employee.
❖ Notably the risk assessment procedure to be implemented will have four fundamental steps:\
1. An identification of the organization’s units, locations and processes that need to be assessed.
2. Identify the inventory and different groups of fraud and corruption risks susceptible to the organizations.
3. Prioritization of risks depending on their occurrence likelihood and significance of their impact. In this organization, it is evident that misappropriation of assets such as company information and finances takes top priority hence needs to take priority in having the right prevention strategies.
4. Implementation of remedy risks via control optimization. For the asset misappropriation, the next strategy is the enforcement of protocols to monitor the utilization of assets which will include top management officers (The Institute of Internal Auditors, 2008).
❖ Employee and third-party due diligence: In preventing fraud and corruption in the organization, an exercise of due diligence is fundamental in the practices of hiring, retention and promoting employees and either relevant third parties, the due diligence will ensure that the organization brings in employees that understand the importance of not engaging in fraudulent activities and have the knowledge and skills to handle the respective conflicts of interests that could arise in their normal activities (UNODC, 2020). The due diligence needs to be done from the point at which the employment moment or business relationship began and throughout the entire duration of the relationship.
❖ Communication and training: A comprehensive training and communications initiative is required to ensure all employees do understand their obligations in preventing and mitigating the risks of fraud and corruption. Notably, the initiative will be based on the findings of fraud and corruption, customized as per the needs of individual job functions, integrated with other efforts of training, effectiveness in different settings and should be done frequently.
2. The Detection Controls:
❖ The detection controls are focussed on uncovering the fraud and corruption activities when they happen. One of them is to have an effective mechanism that will allow users to seek guidance and report any fraudulent activity that could potentially happen or it has already happened (The Institute of Internal Auditors, 2008). In this case, a hotline could ensure these communications are received and sent. The hotlines are normally important especially when the normal communication channels are impractical or ineffective. Anonymity, confidentiality, follow up with no form or retaliation, availability and real-time assistance are some fundamental elements in any mechanism implemented for reporting purposes.
❖ Auditing and monitoring systems are required in determining the feasibility of the organization’s controls. The process will also facilitate an effective governance process that will also allow the evaluation of different characteristics such as ethics, performance management, the assessment and communication of risk. Considering that it is impossible to audit each risk related to fraudulent activities, a comprehensive auditing and monitoring process needs to be developed in relation to the nature and degree of involved risk.
3. Response Controls.
❖ The implementation of a well-designed investigative procedure that will gather facts leading to a particular objective and provide a credible assessment on the targeted isolation. This will subsequently allow the management to come up with the right measures to deal with the violation (The Institute of Internal Auditors, 2008). The attributes of a comprehensive process include incorporating the oversight done by the audit committee and the Chief Compliance Officer, involve activities identify by the investigators in relation to their legal dimensions and potential risks on the issue, no employee nor top official will obscure the collection and analysis of facts relating to the investigations and proper reporting protocols that provide the right stakeholders with relevant information on the findings of the investigation under the spirit of full cooperation, self-disclosure and transparency.
❖ The establishment and enforcement of a disciplinary system that is consistent and credible is fundamental to deter fraud and corruption (Johnson, 2015). Through meaningful and progressive sanctions and applying them uniformly and consistently, the protocol should manage fraud and corruption since employees and other parties will have an understanding of the consequences of engaging in them (Vollmer, 2013).
❖ Notably, managers need to be held accountable for their actions and lack of since the lower level employees will be emulating what the former are doing. To this effect, the managers need to be disciplined for directing or pressuring others to violate the standards of the organization in order to attain business targets, failing to ensuring employees have received sufficient training and resources, failing to be a positive role model who acts with integrity or even having a past characterized of missing allowing violations and finally enforcing the company’s standards inconsistently or retaliated against others who had reporting concerns.
Proof For the Feasibility of the Risk Management Approach In Dealing with Fraud and Corruption
In Colombia, the Secretariat of Transparency and the Ministry of Public Administration have collaborated on having a corruption risk management approach for dealing with fraud and corruption within its public organizations. The public organizations have been mandated to have risk management strategies which has helped in increasing awareness on the matter among the senior executives and employees on the importance of having anti-corruption policies (OECD, 2017). Also, these organizations have streamlined their operations including the mainstream, managerial operations, financial control activities and mitigating the respective risks of fraud and corruption in their organizations. The consistent application of these approaches would see public officials indicate that their operations specifically public finance management has consistently improved (Gutiérrez, 2013). Budget planning and execution has steadily reduced to being influenced by political links and pressures together with the exchange of favors. Therefore, the public organizations have constantly ensured that the risk management approaches are working optimally to mitigate the fraud and corruption risks.
The United States and New Zealand have also been using audit committees or boards within the public organizations who focus on internal control and risk management. There has been strong evidence to prove that the audit committees especially those with independent members have ensured that the audit activities are effectively done without any form of political influence. The committees have ensured that the internal and external stakeholders acknowledge the impact of their activities and processes in their entities, link the activities to the attainment of the entity’s objectives and motivate all employees and management to be encouraged to undertake their respective roles in preventing fraud and corruption.
The Audit Director top the Large Financial Services Institution Indicated that there is currently no way a company-wide fraud risk management program. It normally takes a number of people across the organization who handle the complaints or investigations that could lead to fraud and corruption (Utica College, 2016). These Individuals will look into the anti-money laundering and fraud investigations through designated teams. There will also be no centralized system or having reporting in relation to the several decentralized fraud risk management operations. Therefore, when an organization is looking into managing fraudulent activities happening in the company, it will take wholesome efforts from every individual. The company will need to develop a culture that does not tolerate any form of fraud and corruption (Utica College, 2016). Also, activities will be done transparently and as per the developed one of conduct to ensure that the activities are not happening in their organization.
Conclusion
Generally, fraud and corruption are activities that could occur to any private and public organization. It takes every organization assessing their individual environments in relation to potential risks and adopt the appropriate measures to prevent their occurrence. In this case, the retailer does require a comprehensive risk management approach that will prevent, detect and respond adequately to all risks of fraud and corruption. Considering the fraudulent activities that have happened at the retailers, these were issues that are preventable through better prevention mechanisms, detection operations and effective response strategies. For instance, if the scandal that happened in the previous year was properly responded by ensuring the perpetrators are held accountable and the losses recovered, other employees would be deterred from engaging. Preventable measures would ensure that an independent audit committee is working to detect any potential fraudulent activities happening. This approach will save the organization a lot of resources and ensure its reputation remains intact in the business environment.
References
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Bhimani, A. (2009). Risk management, corporate governance and management accounting: Emerging interdependencies.
Gutiérrez, H. (2013). Colombia: Overview of corruption and anti-corruption. U4 Expert Answer, 10.
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OECD. (2017). 6. STRENGTHENING THE LINES OF DEFENCE AGAINST CORRUPTION: RISK MANAGEMENT, INTERNAL CONTROL AND AUDIT – 153. OECD INTEGRITY REVIEW OF MEXICO: TAKING A STRONGER STANCE AGAINST CORRUPTION © OECD 2017
The Institute of Internal Auditors. (2008). Managing the Business Risk of Fraud: A Practical Guide. Retrieved from https://na.theiia.org/standards-guidance/Public%20Documents/fraud%20paper.pdf
UNODC. (2020). Anti-Corruption Module 5 Key Issues: Preventing Private Sector Corruption. Retrieved 8 December 2020, from https://www.unodc.org/e4j/en/anti-corruption/module-5/key-issues/preventing-private-sector-corruption.html
Utica College. (2016). Taking the Best Route To Managing Fraud and Corruption Risks. Retrieved from https://www.protiviti.com/sites/default/files/united_states/insights/white-collar-crime-fraud-corruption-risks-survey-utica-college-protiviti.pdf
Vollmer, S. (2013). Six best practices for combating fraud and corruption. Retrieved 8 December 2020, from https://www.fm-magazine.com/news/2013/may/20137962.html
