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Business Problems: Corporate Fraud

Executive summary

Corporate fraud is a major challenge that has persisted in the business environment for the past decades. Despite the numerous efforts made to curb this problem, some of the approaches are reactive, while others have been counterproductive. This report identifies the trend of the occurrence of corporate fraud through a brief problem history. A brief discussion of the possible solutions that organizations should adopt is outlined. Some of the propositions made include the formation of effective organizational management teams and boards of directors coupled with the adoption of effective risk management practices and reward management. The advantages and drawbacks associated with each of the three solutions are evaluated. Finally, the report recommends the formation of an effective management team and a board of directors as the most feasible solution in dealing with corporate fraud.

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Corporate fraud is one of the major problems facing organizations. Fraud is the misrepresentation or deception committed by an entity or individual in pursuit for unauthorized gains by the entity, individual, or another party. This report entails an analysis of corporate fraud as one of the business problems that have persisted over the past decades. A brief history of the problem is provided in order to illustrate its impact on businesses’ long-term operations. Additionally, the report evaluates the significance of the problem, and hence the need to manage it.

This goal is achieved through the proposition of various solutions that organizational leaders should adopt in their strategic management practices. Some of the propositions evaluated include the formation of an effective management team and a board of directors, implementation of an effective reward management scheme, and risk management practices. Finally, a recommendation on the most feasible solution that organizational leaders should consider is illustrated.

Problem history

All organizations are subject to fraud irrespective of their type and size. In most cases, fraud employs unethical and illegal practices. Insiders such as employees are the main perpetrators of corporate fraud. Fraud has adverse effects on an organization’s corporate reputation and image. Moreover, fraud undermines an organization’s financial strength due to the losses incurred. Corporate fraud has increased remarkably over the past one year.

It is estimated that in 2012/2013, over 70% of companies in different sectors encountered different types of fraud, which is an increment from the 61% level (Maurer par. 1). The high rate of globalization is one of the factors that are exposing businesses to fraud. Most organizations pursuing growth objective through internationalization have not implemented effective strategies to prevent risk (Maurer par. 3).

Numerous attempts to eliminate fraud have been made, but some of the initiatives that organizations have adopted are reactive, hence tripling its adverse impact. For example, some organizations invest a substantial amount of money in investigating the cause of fraud. Alternatively, some firms adopt legal procedures through court cases, thus leading to reputational damage. Maurer (par. 3) identifies corporate policy and budget constraints as some of the major hindrances in fighting corporate fraud.

Discussion of solution

Despite the increased exposure of businesses to fraud due to the high rate of globalization, available literature shows that the practice is mainly an inside job. This assertion means that employees in different levels of management commit most incidences of fraud. Therefore, it is possible for organizations to deal with fraud internally through the implementation of effective corporate governance practices. Bhasin (26) asserts that corporate governance entails the internal mechanism adopted and controlled by an organization. The mechanisms aim at nurturing accountability, transparency, and promoting corporate fairness. Bhasin (26) further argues that corporate governance is paramount due to the agency relationship between organizational owners and managers.

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Organizational leaders should consider a number of issues in order to fight corporate fraud through corporate governance. First, they should form a strong management team and a board of directors, which should focus on fostering a culture of corporate integrity. Secondly, firms should adopt effective risk management practices. Thirdly, firms should formulate an attractive reward scheme in order to minimize the likelihood of employees engaging in corporate fraud.

Developing an effective management team and board of directors

Firms should seek to strengthen their corporate governance structures by constituting a strong team. The team should be comprised of managers and board of directors. A number of issues should be considered during the formation of the management team and board of directors. First, the board of directors should be comprised of internal and external parties. Kovacich (76) asserts that a board of directors comprised of outsiders is more likely to be firm in entrenching corporate governance measures as compared to team comprised of insiders. This aspect means that integrating outsiders into the board of directors reduces complacency in implementing the formulated anti-fraud policies.

Complacency is one of the major hindrances in organizations’ quest to fight fraud (Maurer par. 5). Tunley (68) further corroborates that complacency amongst senior managers due to failure to understand the effect of fraud is one of the major hindrances in fighting corporate fraud. Furthermore, the team should be relatively small in order to eliminate the free-rider problem, which mainly occurs when the directors are dispersed, hence limiting decision making. A lean board of directors can make decisions. Additionally, the burden of responsibility is relatively high in a board of directors comprised of a few individuals.

In addition to the above elements, the board of directors and management team should develop an extensive understanding of the organization’s mission in order to enhance integrity. The process of selecting the board of directors and the management team should consider a number of elements such as the individuals’ personality, integrity, and performance. Furthermore, the shareholders should evaluate the management team and board of directors’ leadership skills. The significance of assessing the leadership skills arises from the need to nurture a positive organizational culture that transcends the industry expectations.

Risk management practices

The objective of corporate governance is to reduce or eliminate risk. Thus, corporate governance and risk management are correlated positively. In the quest to manage fraud risk, it is imperative for organizational leaders to formulate an effective risk management framework that enables the identification, analysis, evaluation, assessment, and management fraud risks. However, the framework should be designed in accordance with an organization’s exposure to fraud risk. Vallabhaneni proposes that using “structured and systematic risk management methodologies can assist an organization to assess the level and nature of its exposure to internal and external fraud threats” (60). Moreover, an organization can determine its fraud risk profile.

Considering the intricate nature of organizational risk due to the diverse types of risks such as audit, business, security, and enterprise risks, it is essential for organizational leaders to assess the risk based on the overall strategic planning process. For example, the control measures implemented to manage security risk may also serve as fraud control mechanisms.

The risk management process, viz. establishing the context of risk, identification, examination, evaluation, and assessment should guide organizational leaders in developing a fraud control program, which should be comprised of a number of issues. First, it should state clearly the organization’s attitude and approach to fraud. Secondly, the plan should integrate all the internal stakeholders such as employees to ensure that they are adequately informed of the existence of fraud.

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Furthermore, involving employees would lead to the development of a strong organizational culture. The risk control actions and the timeline within which they should be implemented should be outlined clearly. However, a poorly developed fraud-risk control plan can increase the likelihood of fraud occurring due to ineffective risk identification. Thus, organizations’ board of directors and managers should ensure that the risk control plan is reviewed continuously to improve its effectiveness.

Reward management

The perpetrators of some of the most famous cases of fraud such as the Enron case are motivated by monetary gains. In order to minimize such risks of fraud, it is imperative for organizations to adopt effective strategic human resource management practices. One of the aspects that firms should focus on entails reward management. Firms should ensure that the benefits received by employees commensurate their efforts.

The reward system adopted should include intrinsic and extrinsic forms of rewards. With reference to extrinsic rewards, organizational leaders should ensure that employees are compensated fairly and equitably through salaries and wages. Other monetary benefits that firms should consider include offering employees rights options, health and insurance schemes, and bonuses.

Conversely, it is crucial for organizations to integrate diverse intrinsic rewards such as employee recognition, job promotion, and establishing a collaborative working environment. Alternatively, organizations should contribute towards their employees’ career progression through the provision of training and development programs. Integrating an effective reward management scheme plays a fundamental role in minimizing the likelihood of unethical practices amongst insiders such as employees. Furthermore, reward management is a fundamental element in nurturing a strong degree of organizational identification amongst its workforce, which leads to goal congruence between employees and the organization.

Despite the effectiveness of reward management, strong personal interests might motivate some employees. Thus, the implemented reward system might not be successful in establishing a culture of integrity and accountability.

Conclusion and recommendation

Corporate fraud is a major business problem that has persisted over the years. Despite this aspect, organizations have an obligation to eliminate this problem in order to attain business excellence and long-term survival. The different suggestions illustrated in this report are feasible in dealing with this problem. However, developing an effective management team and board of directors is the most effective solution in fighting corporate fraud.

The choice of this solution is informed by the view that an effective management team and board of directors will aid in establishing a strong organizational culture. For example, the management team will ensure that employees in different managerial levels understand the organization’s mission, vision, objectives, and goals. Consequently, this aspect will aid in minimizing the prevalence of personal interests over the overall organizational goal.

Additionally, an effective management team will foster the establishment of a good working environment, hence increasing job satisfaction. This goal will be achieved through balancing of various human resource management practices. On the other hand, integrating internal and external parties in the board of directors will play an essential role in entrenching corporate governance structures such as risk management practices. Implementing an effective management and board of directors will also influence the leadership style adopted by an organization. Therefore, the likelihood of succeeding in curbing corporate fraud is high.

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Works Cited

Bhasin, Madan. “Corporate accounting fraud; a case study of Satyam computers Limited”. Open Journal of Accounting 2.1 (2013): 26-38. Print.

Kovacich, Gerald. Fighting fraud; how to establish and manage an anti-fraud Program, Amsterdam: Butterworth-Heinemann, 2008. Print.

Maurer, Roy. Corporate fraud on the rise worldwide 2013. Web.

Tunley, Martin. Mandating the measurement of fraud; legislating against loss, Basingstoke: Palgrave Macmillan, 2014. Print.

Vallabhaneni, Rao. Corporate management, governance and ethics best practices, Hoboken: Wiley, 2008. Print.

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