BucharestFebruary 7, 2012

1st Romanian Compliance Conference

Why Should a Company Develop an Ethics & Compliance Management

System? Preventing Internal Fraud

Cristian DUCU, PhD cand.Centre for Advanced Research in Management and Applied Ethics

Smart Solutions & Support, RomaniaResearch Centre in Applied Ethics, Faculty of Philosophy, University of Bucharest

Main Argument

Mere compliance cannot serve the corporate interest – securing the company and its capitals (financial, reputational, human etc.) – nor the public interest (more integrity in the business sector).

Business INTEGRITY is first and foremost an ethical issue, and involves

not only observing the law and technical standards.

Why Great Companies Fail?

1

In most notorious cases of unethical behavior in the business sector, the top management was responsible for capital loss.

The lack of integrity reflects not only on the company involved in the ‘scandal’, but also on the whole industry (e.g., Madoff).

ENRON was covered by plenty of compliance policies and

procedures, and still left plenty of space for managers to

play with the financial reports.

In most cases, internal fraud is complicate to execute and

involves complicity of other employees or third parties.

ENRON fall was initiated by someone who discovered this

complicity and felt it is her moral duty to report the fraud.

A functional moral compass cannot exist a priori nor by

introducing static policies and procedures. Companies

lack this mentality of providing their employees with a

strong moral compass.

August 2010

The manager of the Credit Department from a local bank has been arrested by DIICOT for a 1.5 mil Euro fraud involving unauthorized operations with clients’ accounts.

The manager of OPC Brasov claimed that bank representatives have tried to influence the authorities in order to cover up the fraud.

Source: Adevarul

December 2011

A branch manager of a bank from Prahova county is under inquest for misappropriation and destruction, being accused that she entered without authorization in the treasury chamber and stole 150.000 Euro.

Another 400.000 Euro was destroyed in the fire.

Source: Mediafax

The use of company cars or facilities for personal gains is affecting directly the organization by increasing the maintenance costs for those cars and facilities.

Though not making the headlines, these costs are affecting in higher percentages the company profits and are almost never measured.

Employee use of the company phones and stationaries in order to close personal deals it happens more frequently than most top managers want to admit or are willingly to do something about. Especially when the company doesn’t have any kind of control mechanism for this or when the company deals with a ‘savage market’.

Mere compliance is a way of pretending of doing something for company protection but only for the sake of all legal obligations.

What Does It Mean Internal Fraud Prevention?

2

What is Internal Fraud?

credit - Obtain financing without the promise to return it

The Common Internal Fraudsin Romanian Banking System (2008)

- Obtain information for selling (or illegal use)data

theft - Misappropriation of money or company assets

Source: MECOPP project

123

How Companies Learn about Internal Fraud

How Companies Learn about Internal Fraud

Ethical Culture* Tone at the Top!!!

* Ethics Training Programs

* Code of Ethics & Professional Conduct

* Ethics Hotline/Helpine

* Internal Ethics Communication Programs

* Ethics & Compliance Audits

* Public Commitment towards integrity in business

Internal fraud prevention means to focus the organizational strategy on fostering an ethical culture and improving ethical

climate, doing fine tuning throughout the organization.

Change behaviors –

individual & organizational –

through conditioning and

rewards/sanctions

BEHAVIORAL APPROACH

Design and develop internal

Ethics & Compliance

Management Systems based

on educating and informing

employees

OPERATIONAL APPROACHLead by example, from top

manager to team leaders,

counseling employees and

involving them in building

their own community

LEADERSHIP APPROACH

Why ECMS?3

DECREASING OPERATIONAL COSTS

Decreasing costs with cars and company property in general

Decreasing levels of employee absenteeism and late arrivals

Less incidents with suppliers / costumers / business partners

Higher efficiency, less errors

Lower risks coming from third party alluring of employees

Better Health & Security levels in work environment

1 2 3 4 5 6 7 8 9 103.00

3.50

4.00

4.50

5.00

4.51 4.45 4.394.29

4.56

4.354.45 4.46

4.574.49

June 2011

1-punctualitate

2-cunoastere/aplicare reguli

3-indeplinirea sarcinilor

4-respectul pentru colegi

5-comportamente neetice

6-tratarea sesizarilor

7-corectitudinea sefului8-aplicarea deciziilor

9-urmarirea deciziilor

10-perceptia disciplineiAplicanti 2943(66.33%)

Media ponderata 4.43

DECREASING TRANSACTIONAL COSTS

Less internal conflicts

Increasing trust among employees

Increasing third party trust in your employees

Increasing productivity as a result of less internal frictions

Increasing employee retention

Decreasing the number of hours spent in staff meetings

A greater attachment to the company values and principles

BETTER REPUTATION

Attract prospective employees with better qualities and skills/qualifications

Greater respect from employees and third parties for the company brands and assets

Better general perception when companies commit to help local communities and/or refuse play by the rules of a corrupt society

Credibility

INCREASING PROFIT

Increasing productivity due to less hours spent in decision making, higher employee commitment to the corporate objectives etc.

Lower investments in employee induction trainings and recruitment as a result of higher rates of employee retention

Decreasing costs with company assets (cars, computers) used by employees in performing their duties or offered to them

Better internal communication: better task understanding, better employee performance

Thank you!

Centre for Advanced Research inManagement and Applied Ethics

www.etica-aplicata.rocristian.ducu@etica-aplicata.ro

Cristian Ducu, PhD cand.

Smart Solutions & Support, Romania

www.omnisolutions.rocristian.ducu@omnisolutions.ro072 251 6889