The hidden cost of the Covid-19 crisis - an increase in fraud and corruption

Dr Claudelle von Eck: Interventions are cheaper than the cost of consequences of unethical culture.

Although there are some who are benefiting from the current crisis, most organisations find themselves in the middle of a perfect storm. We’re seeing disruption on a scale not seen over a long time – if ever. Sure, humanity has had to deal with pandemics before, but back then we were not dealing with the degree of complexity that we have to deal with now. And, we certainly were not as interconnected and interdependent then as we are now, where the fall of one rock triggers an avalanche. 

I’m not aware of any organisation that had foreseen a pandemic accompanied by extended worldwide lockdowns in their risk register. The reality is that disaster management plans have simply not taken into account the possibility of the extent of what we have to deal with now. Leaders are finding themselves in a tailspin trying to deal with all the issues that are crawling out of the woodwork, one after the other. How many of our people have the equipment needed to work from home? Do they have access to enough bandwidth? How do we know that they are ok? What does our staff morale look like? How many of our female employees are victims of the increased gender-based violence in the country while we’re in lockdown? How many of our people fall in the high-risk category? By how much is our revenue going to shrink? Where is the breaking point when we will have to start retrenching people? How do we delay that breaking point and hopefully even avoid it? These are just some of the issues confronting leaders. And, of course, there are businesses that have already closed down. 

The worst of the lot is probably the prolonged uncertainty as organisations are forced to navigate through a maze with moving walls. We have been talking about volatility, uncertainty, complexity and ambiguity (VUCA) for a while now. Quite a different thing to live in VUCA at a grand scale as a collective. 

I hate to be the bearer of further bad news, but logic dictates that crises don’t only bring out the best in us, it also brings out the worst in us as a collective. While leaders are fighting fires, their attention is diverted. Combine that with increased desperation as individuals see their income diminishing or disappearing, and you have the perfect recipe for a spike in fraud and corruption. 

I shall point to one important study that holds some serious red flags for leaders who have to steer through this maze with moving walls. During 2009, the Association of Fraud Examiners conducted a study called Occupational Fraud: A Study of the Impact of an Economic Recession, to assess the association between fraud and a weakened economy. The context was the 2007-2008 Global Financial Crisis which resulted in many economies going into a recession. Although the study was conducted in the USA, its findings hold valuable lessons for organisations all over the world. More than 80 percent of respondents, who are Certified Fraud Examiners, stated that they believe there is more fraud during times of economic distress.

The three factors that are generally accepted as drivers of fraud are opportunity, pressure and the ability to rationalise illegal behaviour. With more and more organisations being forced to retrench people, it stands to reason that it would likely result in diminished internal controls (e.g. how do you segregate duties when there are not enough people for all the duties?) and a diminished focus on preventative measures. Opportunity, tick. Salary cuts, resulting in people not being able to meet their personal obligations. It is often the white collar workers who are hit hardest as they tend to sit with bigger amounts of debt. It also stands to reason that many of those who still have their jobs would now have to assist extended family members who have lost their jobs. Pressure, tick. People may feel angry at the fact that they are on the losing end through no fault of their own. We are in unprecedented times and desperate times call for desperate measures. Room for rationalisation, tick. Thus a rather obvious picture emerges. 

One should of course also be concerned about executives starting to dabble in unethical behaviour as they try to save the organisation from sinking or see opportunities in the crisis. Thus the organisation may become a predator, with other organisations and consumers as the prey. We have already seen organisations being hauled before the Competition Tribunal for hiking prices during the pandemic. It is likely that we will see an increase in predatory behaviour, with ethics flying out of the window, as more and more organisations find themselves in distress. The Corporate Governance Index produced by the IIA SA has already shown a year on year decline in the ethics dimension. Could we sink lower? Yes, all indications are that, if we are not careful, we are at risk of scoring even lower in the ethics dimension post the crisis. 

Thus, oversight bodies and executive teams need to be alive to the possibility of fraud and corruption increasing within the organisation as well the organisation veering off its ethical path in how it behaves as a corporate citizen. As difficult as it may be under the current circumstances, oversight bodies cannot afford to take their eye off this particular ball while fighting Coronavirus related fires. The unfortunate reality is that if wrongdoing is not nipped in the bud, the likelihood of it becoming infectious and spread like a virus increases. The deeper the roots of fraud and corruption are able to burrow into the organisation, the more difficult it becomes to weed them out later, and unethical behaviour could become endemic – the prevailing culture. 

Which organisations are more likely to not see fraud and corruption spiking? Those who have already invested in building an ethical culture and where ethics intelligence is prevalent. That goes far beyond just saying the right things at the top. Setting the right tone means saying the right things at the top, plus doing the right things at the top, plus ensuring that there are interventions in place that facilitate the effective filtering down of the tone through all layers in the organisation, plus ensuring that there are feedback loops in place that give the oversight body assurance that the organisation is moving in the right direction where ethics is concerned. 

An ethics intelligent organisation is one where its people have developed the ability to spot ethical implications in decisions and actions, and are able to deftly navigate through ethical dilemmas. That is not a state of being that is created overnight. It takes a concerted effort and interventions and continual maintenance. Those interventions are by far a lot cheaper than the cost of the consequences of an unethical culture, where fraud and corruption prevail.

During a disruption like we’re experiencing now, organisational cultures are tested to the limit. It is difficult to predict what pictures will emerge when we try to put Humpty Dumpty together again. Leaders can therefore not afford to take the eye off the balls that fuel fraud and corruption, i.e. opportunity, pressure and ability to rationalise unethical behaviour. In addition, it is fundamentally important that leaders spare a thought for what seeds are being planted now. What are we doing now to invest in ensuring an ethical culture in the new normal, whenever we settle in it? 

Employees, customers, suppliers and other stakeholders will remember the behaviour of the organisation during the crisis and that will set the tone for future relationships. Employees will remember whether their employers supported them through the crisis, for example, utilising employee assistance programmes and making them feel that they care. Customers will remember the service providers who hiked prices during the pandemic or who scrambled to charge debit orders earlier to be the first in as the lockdown was announced. Suppliers will remember those customers who unduly delayed payments and used the lockdown as an excuse. 

Uncaring and unethical behaviour may seemingly pay off in the short term, but not in the long run. Oversight bodies should especially increase vigilance around those with short-term contracts, especially when short-term focus would be in their interest. Plant the right seeds now to ensure a stronger future and don’t neglect preventative measures and internal controls. I know that it is more work, but what would the consequences be if we do not see this as a priority?