Introduction
The ultimate goal of every business function is to maximize shareholders’ value. This objective is achieved when a company records increased profits. Chief executive officers (CEOs) and leaders who want to make their companies profitable and sustainable must implement evidence-based strategies, values, and cultures that resonate with the intended aims. Business organizations associated with positive leadership styles will record desirable gains within a short period.
Such companies will also be keen to implement and support admirable corporate social responsibility (CSR) programs or policies. Consequently, firms that promote appropriate CSR policies will attract more customers and remain profitable in their respective market segments. Unfortunately, the challenge of corporate fraud continues to haunt many companies across the globe. Organizational scholars and researchers have been keen to study the relationship between organizational culture, corporate fraud, and CSR. Using the works of different scholars and theorists, this research paper seeks to explain why corporate fraud is usually a product of an ineffective organizational culture.
Understanding Corporate Fraud
The complexity and nature of corporate fraud is something that has captured the attention of many scholars within the past eight decades. Whenever this form of dishonesty surfaces in big companies, their images and performances are disoriented (Morgan 2014). Some of the common forms of fraud include overstated assets, expenses, profits, and sales. Rahman and Bremer (2016) acknowledge that some leaders in a given company might decide to use deceptive financial or accounting practices.
The purpose of such approaches is to ensure that the wrong performance message is communicated to different stakeholders. With this kind of understanding, it becomes clear that corporate fraud is an intentional act aimed at misleading members of the public (Morgan 2014). The targeted consumers of the information will believe that the company is making adequate (or huge) profits.
Zack (2015) indicates that cases of corporate dishonesty and financial fraud tend to be complex. Those involved use a wide range of accounting malpractices to ensure that their wrongdoings are never unearthed. Individuals behind every form of corporate fraud are usually secretive. Such malpractices are usually shocking to different members of the public since they involve tax evasions, economic scandals, and neglected financial roles or responsibilities.
Past studies have revealed that many financial or corporate fraud cases begin as a joke or small (Zack 2015). This fact explains why it is usually hard to detect any form of corporate dishonesty during its initial stages. Consequently, many frauds go unnoticed for several years. The implications of various corporate fraud cases are usually mindboggling. For instance, any form of fraud in a big organization will result in massive financial losses.
The affected corporation will be affected since members of the public will no longer have trust in its operations. This outcome can affect the company’s business model, partnerships, or operations. Organizations that are affected by any form of financial fraud will record a negative culture (Omar, Johari & Hasnan 2015). The morale of different workers will decrease significantly, thereby resulting in increased turnover.
Governments use laws and policies to prevent or deal with corporate fraud. There are also powerful frameworks designed to empower law enforcers and make it easier for them to detect any form of the corporate scheme (Morgan 2014). Whenever a given fraud is detected, thorough investigations and auditing procedures are initiated in an attempt to identify its magnitude and punish those who are involved. The seriousness of corporate fraud explains why different agencies should collaborate to detect and prevent any kind of dishonesty.
Corporate Fraud: Corporate Social Responsibility Policies and Corporate Culture
The term “corporate social responsibility” refers to a powerful concept that is implemented by a company as part of its business model to regulate, monitor, and improve its corporate functions (Morgan 2014). The tool is usually expanded to include different practices that can result in sustainable development. The main objective is to deliver environmental, social, and/or economic gains to different stakeholders (Kassem & Higson 2016). Companies associated with appropriate CSR policies usually have competent employees who comply with outlined ethical standards and legal frameworks.
Zack (2015) argues that CSR is implemented in companies that want to monitor the impact of their business operations on their surrounding social, physical, and political environments. The concept is also expanded in such a way that such corporations go beyond every ethical and legal requirement. This notion explains why many people believe that the existence of powerful CSR policies in business organizations can discourage leaders, employees, and managers from engaging in unethical business practices (Morgan 2014). Many theorists believe that the use of an effective CSR policy can facilitate a positive culture whereby different stakeholders and employees engage in desirable behaviors.
The above benefits and attributes of CSR reveal that such policies have the potential to discourage individuals from engaging in any form of dishonesty. This means that companies that have managed to implement powerful CSR policies will be associated with the best business practices, environmental campaigns or programs, and positive accounting procedures. Although this belief has been held by many organizational theorists and scholars, the undeniable fact is that effective CSR policies might deter fraudulent activities (Rahman & Bremer 2016). This kind of observation is something that has compelled many researchers to study and analyze how the absence of an effective corporate culture is a key determining factor in most corporate scandals.
According to Omar, Johari, and Hasnan (2015), financial statements are manipulated by individuals or leaders who want ‘to meet their own greed’ (p. 367). This kind of malpractice is usually precipitated by the nature of organizational culture supported or existing in a given firm. Giles (2015) defines “corporate culture” as a pattern of actions, norms, and behaviors that influence the position and character of a business organization. More often than not, a company’s culture will dictate how its employees pursue their objectives, support the existing business model, focus on every outlined goal, solve problems, and communicate with one another. A positive culture will discourage employees from engaging in malpractices that can disorient their company’s performance.
A powerful organizational culture will operate systematically across different levels of a company. For instance, an effective culture will ensure that individual employees are empowered, guided, and encouraged to pursue every outlined goal. Interpersonal relations within the company will improve, thereby empowering employees and leaders to share their ideas. The concept of socialization will emerge whereby employees can join teams to pursue their goals.
The presence of desirable team attributes or conditions empowers managers to guide their followers. The approach results in groups that are empowered, safe, and secure. Such developments will ensure that every group becomes more ethical, successful, and creative (Rahman & Bremer 2016). When such attributes are exhibited in a given organization, it becomes easier for its employees and managers to report any inappropriate event, dishonesty, or fraud. On the other hand, the absence of these aspects of a reputable organizational culture will encourage more individuals to engage in fraud and pursue their aims.
Outstanding Case Studies
A powerful culture should be supported by every stakeholder, manager, and employee. The approach can make it easier for different people to support the goals of their respective companies. Several case studies reveal that the nature of corporate culture existing in a given company can be a determining factor for fraud or financial dishonesty. The Enron Corporation used to be a reputable company operating in the energy, commodities, and services industry.
By 2000, Enron had been listed as one of the most innovative corporations in the United States. However, the corporation collapsed in 2001 and filed for bankruptcy. Giles (2015) argues that a toxic or inappropriate culture at Enron must have created the best environment for one of the greatest corporate frauds in the country’s history. The leaders at the company supported malpractices such as deception, dishonesty, greed, and corruption. The managers also failed to come up with an effective communication model for every stakeholder.
This malpractice reduced the level of trust between the workers and the executives. The managers also failed to promote an open relationship to ensure that different stakeholders and employees shared their ideas and reported any form of fraud. Giles (2015) indicates that the leaders at the corporation were keen to enrich themselves without caring about the needs of their followers. At Enron, ethics was disregarded since the top management did not share the vision with their workers. The established culture was observed to support greed and corruption. Although the company had developed a code of ethics to dictate and guide the performance of different employees, its leaders did not empower and encourage their followers to comply with it.
The second fraud case is that of the National Australia Bank (NAB) of 2004. Despite being one of the country’s admirable and profitable banks, NAB recorded losses amounting to over 360 million Australian dollars in 2004. This was due to illegal foreign currency transactions executed by four of its workers. These employees continued to incur and conceal such losses. After the issues were reported, studies were undertaken immediately in an attempt to understand what was wrong at the bank (Giles 2015).
Reports indicated that the leaders at the company had failed to implement adequate risk management procedures and policies. This malpractice made it impossible for the other employees at the bank to unearth or report such malpractices. The managers had also created a profit-driven culture. Consequently, this form of culture impacted the corporation’s foreign exchange business or trading activities negatively.
The latest scandal at Toshiba cannot go unmentioned. In 2015, the CEO of Toshiba announced that he was going to step down as the company’s leader. This event was catalyzed by an investigation report that indicated that the corporation had been overstating its operating profits for seven years. Such profits were overstated by over 1.9 billion US dollars. The final investigations report revealed that the company’s top management had implemented a corporate culture that discouraged followers from questioning their bosses (Giles 2015). The leaders decided to misrepresent the company’s profits in an attempt to pursue their interests.
This kind of culture discouraged different followers and employees from reporting such fraudulent activities. This happened to be the case despite the existence of adequate CSR policies and programs that appeared to affirm the company’s corporate image.
Another interesting case is that of Olympus Corporation. The accounting fraud recorded at this company was as a result of an effective organizational culture. Giles (2015) indicates that most of the leaders and the Board of Directors at the company were aware of the ongoing fraud. The appointment of a new CEO from a different country, Michael Woodford, led to a new culture whereby employees were empowered and encouraged to report any form of malpractice.
This case study is also interesting since it links national culture to corporate fraud. Japanese culture is known to value loyalty and harmony. Such attributes were observed to discourage different employees at the company from reporting the financial fraud that was being undertaken at the company. These case studies can, therefore, be used to inform the actions and leadership approaches that should be embraced by organizational managers in an attempt to deal with fraud.
Conclusion and Recommendations
The above case studies show clearly that a determining factor in most corporate scandals is not the lack of corporate social responsibility policies. The discussion reveals that the absence of an appropriate organizational culture is a crucial risk factor for corporate fraud. Organizational leaders should be on the frontline to develop appropriate corporate cultures and encourage their employees to support them. The use of powerful codes of ethics, values, norms, and behaviors can encourage more employees to embrace the power of whistle-blowing. Boards of Directors should also be keen to hold CEOs accountable for their actions. Additionally, positive corporate cultures should be supported by evidence-based CSR policies.
Reference List
Giles, S 2015, The business ethics twin-track: combining controls and culture to minimise reputational risk, Wiley, Cornwall.
Kassem, R & Higson, AW 2016, ‘External auditors and corporate corruption: implications for external audit regulators’, Current Issues in Auditing, vol. 10, no. 1, pp. 1-10.
Morgan, AR 2014, ‘Olympus Corporation financial statement fraud case study: the role that national culture plays on detecting and deterring fraud’, Journal of Business Case Studies, vol. 10, no. 2, pp. 175-184.
Omar, N, Johari, ZA & Hasnan, S 2015, ‘Corporate culture and the occurrence of financial statement fraud: a review of literature’, Procedia Economics and Finance, vol. 31, no. 1, pp. 367-372.
Rahman, KM & Bremer, M 2016, ‘Effective corporate governance and financial reporting in Japan’, Asian Academy of Management Journal of Accounting and Finance, vol. 12, no. 1, pp. 93-122.
Zack, G 2015, ‘The link between corporate culture and fraud’, Fraud Magazine. Web.