Why Employees Don’t Report Ethics Violations

Posted on Tuesday, December 06, 2016

At some workplaces, employees fail to report unethical or fraudulent behavior for a variety of reasons, and that failure to take action can create an atmosphere where misconduct spreads like wildfire.

Common Violations

The list of unethical and fraudulent behavior reported by employees, according to the National Business Ethics Survey, includes:

Falsification and misrepresentation of financial records.
Theft or related fraud.
Lying to employees, customers, vendors or the public.
E-mail and Internet abuse.
Violations of safety regulations.
Discrimination based on race, color, gender, age or similar categories.
Sexual harassment.
Giving or accepting bribes, kickbacks or inappropriate gifts.
Intimidating behavior or bullying by superiors and managers.
Misuse of confidential information.
Placing employee interests over the best interests of the organization.
Misreporting hours worked.
Price fixing.

Producing goods or services that fail to meet specifications.

To help prevent such a catastrophe at your company, the Association of Certified Fraud Examiners (ACFE) and the AICPA have put together training materials for business executives. In a report titled "Tone at the Top," they explain how to prevent fraudulent and unethical behavior by highlighting the story of Walt Pavlo, a white-collar ex-convict who was involved in the MCI WorldCom scandal.

Pavlo calls the failure to report improper workplace behavior the "go along to get along" philosophy and says he participated in it when he was a senior manager in the Billing Collections department at MCI Worldcom.

As a result of the culture, Pavlo says, he and some associates were able to bilk MCI Worldcom of about $6 million over six months. For his criminal efforts, he served two years in federal prison for wire fraud, money laundering and obstruction of justice.

Pavlo describes three major factors that played a part in his illegal expectations:

1. Meeting analysts' expectations.Pavlo says he felt extreme pressure from his superiors to meet revenue projections. According to the ACFE report: "Employees and executives alike knew where the numbers needed to be in order to meet those projections, and they would meet to discuss different ways to manipulate the records so that it looked like MCI WorldCom was living up to analysts' expectations."

2. Compensation and incentives that encourage unacceptable, unethical and illegal conduct. In Pavlo's case, in addition to his salary, he was eligible for thousands of dollars in stock options each year if he met financial ta


3. Pressure to meet numerical goals. According to Pavlo, he learned how to conceal uncollectible debt and artificially boost the company's assets and profits from his supervisors. With their help, he says, he delayed write-offs and made the revenue numbers seem more attractive.

Pavlo is not alone in not reporting unethical behavior when he first encountered it. According to the National Business Ethics Survey, only 55 percent of employees said they reported misconduct that they observed in the workplace. The survey was conducted by the Ethics Resource Center, a not-for-profit organization.

One step in preventing the spread of workplace misconduct is to understand why employees hesitate to report unethical conduct. Here are some of the top reasons:

Cynicism that corrective action will be taken.
Uncertainty about how to make a report or who to contact.
No confidentiality. Will their identities be discovered if they report a violation?
Retaliation by superiors or colleagues.

There are ways to overcome these concerns and encourage employees to report unethical or illegal conduct. One step is to establish a formal code of ethics and require employees to sign it.

Other steps your company can take include:

Set a tone at the top that unethical behavior will not be tolerated.
Encourage employees to report transgressions and ensure them that the information will be taken seriously. Set up a hotline that allows employees to report information anonymously, if desired.
Make it clear that reports will be treated confidentially and that the company will not tolerate retaliation.
Create a positive work environment that nurtures loyalty between employees and the company.
Carefully screen job applicants by thoroughly examining educational credentials, criminal records, employment history and references.
Outline penalties for ethical transgressions. This not only helps deter unethical and fraudulent behavior, it assures employees that corrective action will be taken.
Reward integrity. Let employees know that meeting financial goals is not the only measure of success. Acting with integrity and ethics should also be recognized.

Keep in mind that employees look to management for direction. Creating an ethical culture prevents losses and improves loyalty and morale. "Preventing fraud is good business," notes the ACFE report, "and it starts at the top."

Posted in Fraud & Forensics Group

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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