Business Ethics Assignment

The other day, my freshman son at Millsaps interviewed me in connection with a paper that he had to write on ethics.  I rarely encounter ethical situations in which I do not have at least an idea of the right course to take.  I think the overwhelming majority would agree with me on that.  Ethics are simple until you bring money into the equation.  The Association of Certified Fraud Examiners has published an exhaustive survey on worldwide fraud entitled, "Report to the Nations."  See following link for access to the survey.2010 Report to the Nations.   It is estimated that a shocking 5% of top line revenue is lost annually to fraud ($2.9 trillion worldwide).  Now that is an ethical problem.

In the 1950s, criminologist Donald Cressey developed the "Fraud Triangle."  Cressey argued that three components are present in any fraud:  (1) opportunity, (2) pressure, and (3) rationalization.  Obviously, a perpetrator must have the opportunity or access to the asset to steal it.  Pressure can be as simple as, "Baby needs a new pair of shoes," or a loss of prestige after being passed over for a promotion.  Rationalization is what let's the perpetrator live with himself - e.g. it's only a loan, or I'm entitled to it based on years of faithful service.  These components are present in every fraud, from stealing from the cash register to the misstatement of WorldCom's financial statements.

Over the years, I have seen the gamut from large financial statement frauds to small cash lapping schemes.  The big frauds are generally motivated by the need to meet targets to pay out compensation or to preserve a loan facility.  Thefts of cash generally begin with a base need such as a medical bill or a car repair.  Although schemes may start small, they tend to grow over time if the perpetrator perceives that no one has noticed.

I consult with small businesses.  Small business frauds typically do not garner the headlines, even on the business pages.  However, due to their small accounting / bookkeeping staffs, these businesses are especially vulnerable because they cannot implement adequate checks and balances.  I give small business owners two pieces of advice to reduce their fraud risk - (1) receive and open your bank statement directly.  Make sure that the scanned checks that cleared make sense with respect to payee, amount, and timing.  (2) take out employee dishonesty insurance on your staff.  I know you think your staff is trustworthy; but unfettered opportunity will eventually run into pressure, and rationalization is not far away.  As Ronald Reagan would say, "Trust but verify."