Absence of Checks and Balances: A Fatal Mistake of International Business
PRA GLOBAL │WHITE PAPER NOVEMBER 2020
Companies often increase their susceptibility to fraud when setting up operations overseas. They underestimate the importance of understanding the new operations, adapting to different norms, and taking the time to build trust and monitoring systems into overseas teams. All these oversights create an environment that lacks the checks and balances needed to discourage theft while keeping your assets and your business safe.
Areas of High Vulnerability
This white paper will illustrate how these common root causes can affect the outcome of your international partnership, provide lessons learned from the failures of other companies, and outline practical steps to set your IJV up for success.
Why do people commit corporate theft?
If you can NEVER think of an instance where it might be okay to commit corporate fraud, then you are fortunate. Perhaps you have never been in dire financial stress and/or you have a solid moral compass that mitigates the temptation of theft or collusion. Yet, unfortunately, it is not uncommon for people to succumb to stress and temptation. In developing nations where hardship is widespread, sociologists have concluded that poverty is the primary source of crime (Begus, 1976). Ethical standards differ from one country to the next, and employees’ attitudes toward authority, rule following, risk, and loyalty vary greatly from one culture to the next. That is why it is imperative that you work to understand where your employees are coming from, what motivates them, how to create loyalty and trust, and how to create systems of checks and balances that erodes the temptation for corporate fraud.
So why do people commit fraud? Below are the top 3 reasons according to the Association of Certified Fraud Examiners (Report to the Nations, 2018). Understanding them is the first step to prevention. When you are able to hire, lead, and manage from a place of empathy and awareness, your international ventures will have a much higher chance of success.
Financial Difficulties – Need is one reason individuals steal from their employers, and while a need might be based on some particular hardship or change in income, in collectivist cultures, family hardships may also be a driving force for theft. Sometimes, employees having financial difficulties will think stealing from their place of work will solve their problems.
Disgruntled Employees – Many times corporate fraud is caused by disgruntled employees who feel they are being overworked, underpaid, or feel their employers are taken advantage of them. It is proven that companies with high morale have fewer instances of employee theft, and in some cultures, interpersonal relationships and feelings of mutual respect are greater deterrents of fraud than others.
It’s Too Easy – In recent surveys, 24% of people who think it’s okay to steal from work state the reason is because the company won’t notice anything missing (Gillis & Simpson, 2020). For instance, employees who know their employer doesn’t monitor inventory won’t likely feel at risk for being caught stealing, and many in-house bookkeepers with little or no supervision have opportunities to cook the books. Employees who have no criminal background and who are not necessarily prone to stealing are more enticed to steal if the opportunity is present and the consequences set in place by the employer for theft are minimal or are not enforced.
How to create a system of checks and balances in your international operations
So now that we have a better idea of some of the common underlying reasons behind corporate fraud, how do we prevent this in your international business ventures? How do you create a checks and balances system that not only prevents fraudulent activities and allows quick and easy detection, but more importantly, creates an environment that reduces the temptation to steal?
There is no easy recipe to essentially “trust but verify”, but the tips above should get you on the right path. It is also important to note that your checks and balances efforts must be ongoing. Not only do you need to establish these practices, but you also will need to remain vigilant in your monitoring and enforcement.
Begus, Otto R. (1976) “Crime and Survival: Some Basic Reflections,” University of Baltimore Law Forum: Vol. 6 : No. 3 , Article 8.
ACFE. (2018) “Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse”.
Gillis & Simpson. (2020) “Petty Theft at Work”. www.theinterviewguys.com/petty-theft-at-work/
Law Firm Newswire. (2013) “Employee Theft No Longer An If – Now It is How Much”. www.lawfirmnewswire.com/2013/04/employee-theft-no-longer-an-if-now-it-is-how-much/