Category Archives: Chuck Gallagher

Fraud: Every Business is at Risk

By Chuck GallagherChuck Gallagher

At first, when his wife said that Sargent Willis was on the phone and had some questions, Reverend Bobby thought he might have run a red light and was caught by a traffic cam. Sadly, the actual problem was much graver. The police officer began to question him about Sue Hardy, the church’s treasurer, and the role she played in the church’s business affairs. It seemed that there were some suspicions of financial impropriety, and that Sue was the likely perpetrator.

The Shock of a Collapsing Illusion: We hear a lot these days about identity theft, Internet fraud, email scams or Wall-Street defalcations, but the truth is most organizations are more vulnerable to fraud than they might think. Whether it is a church, a non-profit or a small business that you’ve put blood, sweat and tears into, the chance that you’re at risk for fraud is substantial.

The conversation between Reverend Bobby and Sargent Willis led to arrest and conviction of what Reverend Bobby once described as a pillar of sainthood in their small but growing church. Sue was a Christian’s Christian. The backbone of the church, Sue gave of her time, taught Sunday school and was the treasurer for years.

Sadly, regardless of the type of organization, most frauds take place from within the company’s own ranks, and more times than not, by trusted individuals that we would never suspect.

By their nature, small businesses, non-profits or associations are typically run on a shoestring budget, which makes staffing tight and internal controls limited. And while most people are trustworthy, external factors can create a need that, combined with opportunity and a dose of rationalization, create the potential for unethical and fraudulent activity.

When the perfect storm of fraud hits and the illusion fades into reality it becomes clear the devastation that fraudulent activity creates. Every choice has a consequence and the consequences of fraud are significant and far-reaching.

What to Look For: Let’s use the example of Sue above to frame the discussion about how good people make very bad choices, which leads to fraud.

According to the Association of Certified Fraud Examiners the following are red flags for fraudulent behavior:

1. Most frauds are committed by people who have worked in the organization for a number of years. People who have ten years or more of experience with the organization cause higher fraud losses. Why? The answer is simple: the longer a person is employed within a company, the greater the trust and responsibility. Likewise, trusted employees are not often considered likely candidates for fraud.

2. Individuals in one of six departments commit the vast majority of all frauds: accounting, operations, sales, executive/upper management, customer service and purchasing. If fraud occurs in your business, it is likely by someone who has opportunity; individuals in these six areas have the greatest opportunity to violate trust.

3. Fraudsters displayed one or more of these red flags before or during the commission of the fraud: living beyond means, financial difficulties unusually close association with vendors or customers, and excessive control issues. Any of these behaviors could be a sign of impending danger.

In looking back on the situation, Reverend Bobby could have seen disaster coming. Sue was a trusted member of the church holding her position for more years than Reverend Bobby had been there. Not that longevity is a bad thing, but church leadership could have required a change of roles from time to time disrupting the natural flow of funds. Typically when things change inappropriate behavior comes to light.

But, beyond Sue’s tenure, she was quite protective over the money and monetary processes for the church. Excessive control is a significant sign that something might be amiss. When people are unwilling to let go of their control, take a vacation or insist that only they can do the task, leadership should step back and examine the role and function more carefully.

Finally, in Sue’s case, there never seemed to be enough. Sue received calls often from creditors. Consistently she would either quickly hang up, showing her dissatisfaction with the call received, or take the call on her cell phone, out of ear shot, and return to work irritated at the interruption.

Final Outcome: In the end, Sue embezzled over $200,000 from the church where she was trusted. The discovery was both a shock and disappointment to Reverend Bobby and the entire congregation. Every choice has a consequence. Sue’s choices – made over time – created significant consequences. Today she is serving a prison sentence that will leave a permanent scar on her and those close to her.

Bobby shared that he now understands the importance of his role in this whole troubling problem. As management, Bobby has a responsibility to understand the three components of unethical behavior and often-illegal behavior: need, opportunity and rationalization. Most importantly, Bobby knows that with some minor changes Sue might have, although tempted, been prevented from making those dangerous choices, which led to an outcome that no one wanted.

As a manager of your organization, what steps are you taking to protect your most valuable assets – your employees – from making dangerous decision that impact them and your organization?

Chuck Gallagher is the President of the Ethics Resource Group and an international expert in business ethics. Chuck provides training, presentations and consultation with associations and companies on ethics and creating ethical cultures where people do the right thing, not because they have to, but because they want to! Information can be found at chuckgallagher.com or Chuck can be reached via email at chuck@chuckgallagher.com or by phone at 828.244.1400.

The Human Side of Business Ethics: When Good People Make Bad Choices

By Chuck GallagherChuck Gallagher

“Never in my wildest dreams did I see this coming. When I first started “borrowing” from the company I had every intent of paying back what I took. Heck, I did pay some of it back…at least at the beginning!” Those were the words Mark said as he confessed that the life he was living was, for the most part, an illusion. Truth be told, Mark, for all his legitimate successes, had over time become no more than a liar and a thief. His choices created consequences that he never dreamed were possible.

Mark’s recantation of his ethical fall is all too common. People who fold their arms stating “I would never do something illegal much less unethical!” find that what triggers inappropriate behavior is a basic part of human nature. We are all subject to temptation and therefore can and do make bad choices.

If bad choices lead to tough consequences, what can we do to identify bad behavior before it starts? What can we do, as managers or leaders, to prevent unethical choices from being made in the first place? Those are two very profound questions, both of which are at the heart of why it is critical to talk about the Human Side of Ethics in your organization.

How Does Bad Behavior Start?

Research has shown that three behaviors are at the core of what would cause or allow an otherwise ethical person to make unethical and potentially illegal choices:

Need. Or, perceived pressure that a person is experiencing. Need may come in a variety of forms. The person who is in too much debt likely experiences financial strain – which was the root of Mark’s need. Alice, a church secretary, found her need triggered by her granddaughter’s diagnosis of cancer. Infamous Bernie Madoff’s need was certainly not money; likely, he was triggered by the need to be infallible. Whatever the pressure, need is the core emotional state that starts the ball rolling from a choice that is ethical to unethical.

Opportunity. It makes no difference what your need may be if you don’t have the opportunity to satisfy it. Then there is no fuel for the potential unethical fire. Mark was a trusted employee, and with that trust came opportunity. Alice was trusted, and had been for so many years that no one could comprehend she was capable of any unethical activity. Madoff took opportunity founded in trust to a new level.

Rationalization. Need combined with opportunity provides a firm foundation, but the glue that holds unethical activity together is the ability to rationalize that what is wrong, is right. If you ask most people found guilty of unethical/illegal behavior, they will tell you they felt their actions were legitimate. Mark, for example, rationalized that he was not “stealing” money as long as his intent was to pay it back. Further, he solidified this mental game by paying some of the money back. “Surely, I wasn’t guilty of stealing money as long as I was paying it back,” he stated.

The mind can be tricky and when you combine need with opportunity, and can rationalize bad behavior as good, you have the perfect storm to move from ethical to unethical, and potential illegal, behavior.

What Can We Do to Prevent Unethical Activities?

As business managers and association leaders there are clear actions we can take that can help keep folks between the ethical lines.

Look for Need! We can’t control what needs our employees have but we can be aware of any changes or activities that would suggest an increase in need and the stress that need brings. For example, Mark shared that he been receiving calls at work from creditors which was when the pressure intensified to find a solution. Signs to look for are: (1) calls from creditors or personal calls intensifying at work; (2) abnormal purchases without apparent new sources of funding; or (3) lifestyle changes – marital issues or challenges with aging parents.

Minimize Opportunities. The most effective course of action to keep our employees and associates between ethical lines is to remove opportunities to conduct unethical activities. For example, Mark embezzled money from a client’s trust fund. Had the bank account that Mark used required two signatures, the embezzlement would have been far more difficult. What would Mark do, ask the co-signer to help him steal money from the trust? So, less opportunity equals less chance for unethical activity.

Train Rationalization. When employees hear what rationalization sounds like, when we bring to consciousness what is active in the subconscious, it becomes far easier to support each other in our ethical choices. At a recent ethics seminar an attendee commented, “But everybody does it.” As those words were spoken, another participant yelled out, “Rationalization!” The crowd erupted in laughter as people began to see just how simple and easy it is to rationalize the “little things.” And, when we rationalize the little, the larger unethical choices become easier to swallow.

The Value of Good Choices

Want to create a culture of ethical behavior in your organization? It’s easy if you think about it. When you start by understanding how good people make bad choices, and follow it with an effective ethics-training program that reinforces ethical choices and accountability, you have a recipe for success. Every choice has a consequence. What choices do you make for your organization to help keep your most valuable assets between the ethical lines?

Chuck Gallagher is the President of the Ethics Resource Group and an international expert in business ethics. Chuck provides training, presentations and consultation with associations and companies on ethics and creating ethical cultures where people do the right thing, not because they have to, but because they want to! Information can be found at www.chuckgallagher.com or Chuck can be reached via email at chuck@chuckgallagher.com or by phone at 828.244.1400.

The Value of a Whistleblower: How to Build a Culture of Ethics within Your Company

By Chuck GallagherChuck Gallagher

Roger, a good friend and an ethical individual, was at a business conference last week with a co-worker, Sam, who decided to take a few of his subordinates out for an evening of entertainment – entertainment not sanctioned by the company. The next day, as Sam was preparing to submit his receipts for his expense report, Roger noticed that he was submitting the receipts for his prior night’s activities. More importantly, Roger noticed that Sam’s description on the receipts was inaccurate. Sam flat-out lied on his expense report.

Roger wondered what would be the ethical thing to do. On one hand he could ignore what he saw and just let it pass, rationalizing that it was not his business. Or, he could confront Sam and encourage him to reconsider his choice, suggesting that following the ethics policy of his company would create better consequences. Or, lastly, Roger could comply with the company’s guidelines and report the ethical lapse.

The question isn’t what did Roger do. The question to consider is: “What would you do?”

If you chose the third option – the one that is expected as part of compliance with most organizational ethics guidelines – you would be labeled a “whistleblower.” Who wants to be called that? Snitch, tattletale and other negative words from childhood come to mind when someone is called a whistleblower. Yet, if your company or association is committed to creating a culture of ethical behavior, the term “whistleblower” is the number one key to ethical success.

How Can That Be? Statistics indicate that 42% of the time someone “tipping off” an employer about an ethical lapse or potential fraud is the number one way companies maintain ethics and prevent fraud. Amazing as it may seem, internal staff is the best police system for maintaining ethical behavior.

Most are amazed that it is that high; all too often we want to look the other way, or are afraid to confront those committing ethical blunders. It’s easy to understand the hesitancy; many of us are afraid to rock the boat. Often, what we fail to realize is that the person committing an ethical blunder is putting the company in danger. So, how do we create a culture of ethical actions?

1. Recognize That Unethical Choices Never Start Large. The “Unethical Continuum” is a natural progression of what many call a “slippery slope” of human action. This progression allows small infractions to go unnoticed or unreported until the day people or companies are in the midst of a full-fledged ethics disaster. Sam didn’t “intend” to act unethically; he felt that he was doing the right thing by treating his subordinates to something beyond the norm at the company function. His challenge was figuring out who would be responsible for the expense. The challenge with his ethical choice was a common problem: Rationalization.

2. Understand the Three Components of Human Behavior that Lead to Ethical Lapses. When a human makes a choice, any choice, there are typically three components that come together that allow a choice to be made and move forward: (1) need, (2) opportunity and (3) rationalization. While, as employers we have little control of an individual’s need, we do have some level of control over opportunity to make ethical choices and how one might rationalize behavior.

3. Be Clear About what Ethical Behavior Looks Like. Large companies have clearly drafted ethics and compliance policies that employees are expected to understand and follow. The smaller the company, the less likely there will be a clearly written ethics policy. But large or small, the challenge for all companies is communication about what is acceptable and unacceptable. Creating an ethics policy and training it effectively are keys to exposing rationalization and improving ethical behavior within an organization.

4. Train, Train, Train! Let’s be honest: most ethics training is boring! It centers on the rules and never gets to the heart of what motivates human behavior. And, frankly, if we don’t understand what starts folks on that slippery slope downward into the unethical realm, then we miss the opportunity to change behavior before it is too late. Effective training should move beyond just what’s included in the ethics and compliance policy and cover (a) why people make unethical choices (b) what can be done to prevent unethical choices and (c) what motivates our behavior. Telling someone what to do is far less effective than helping them see the value in consistently making ethical choices.

5. Encourage Accountability. What keeps people between the ethical lines is shared accountability. We are our brother’s keeper. If one is to be kept within the ethical lines then we must not only have the road signs (ethics policy), but the practical means to correct behavior. As stated earlier, 42% of the time ethical blunders are reported by co-workers or those who witness the issue. And while “whistleblower” carries a negative connotation, the reality is someone who cares enough to call “foul” to unethical actions is the most valuable ethics asset and organization has.

When in Doubt, Do the Right Thing! Ethical missteps are all the same; they will eventually lead to a negative outcome. Little infractions that go undetected or unreported often lead to larger infractions until “unethical” becomes “illegal”. Perhaps we should reframe or replace the word “whistleblower” with “ethical partner”. One thing is certain: ethical choices are empowered choices and that is certainly one critical component of business success.

Chuck Gallagher is the President of the Ethics Resource Group and an international expert in business ethics. Chuck provides training, presentations and consultation with associations and companies on ethics and creating ethical cultures where people do the right thing, not because they have to, but because they want to! Information can be found at www.chuckgallagher.com or Chuck can be reached via email at chuck@chuckgallagher.com or by phone at 828.244.1400.