There’s a fraud going on in your organization right now

“Somewhere in your organization a fraud is taking place, right now.”

The venerable accounting teacher, James Boyd McFie, would say those words at the beginning of every lecture he delivered on a programme for directors that I used to lead. The sentence created a suitable chill in the audience.

It is true. No matter which organization you’re part of, someone, somewhere is up to no good. It could be the guard taking some chai to find parking for a visitor. It could be the cleaner taking some of the company’s soap home. It could be the procurement boss supplying materials via his own family-owned shell companies. It could be the CEO running a parallel bank. It could be directors taking massive perks to look the other way.

If you’re global car giant Volkswagen, it could be someone installing “cheat software” in a corner somewhere on many of your cars to rig emissions tests in your favour. That little corner has just had massive repercussions. Once exposed, VW’s cheating has knocked it off its perch as the world’s pre-eminent car maker. It faces total liability in the tens of billions of dollars, mass recalls of cars, and falling sales. Its CEO was forced out, and his replacement faces many questions of his own. Worst of all, VW faces a long battle to regain the trust of its customers.

Directors attending Jim McFie’s lecture always ask: “So what am I supposed to do? How can I possibly keep my eye on every corner of a large organization? I’m just a board member.”

The first thing to remember is that ethical failure is not something that is done by a few bad apples alone. Behavioral economist Dan Ariely has pointed out: only a few people are really bad. Most people are mostly good, sometimes bad. Your organization will occasionally suffer from the misdeeds of some real rogues; but a lot of the time, what happens is good people going bad.

As David De Cremer and Bjarne Lemmich wrote in the Harvard Business Review earlier this year, the temptation is to introduce a “policeman culture – an excessive reliance on compliance by enforcing the strictest rules and regulations.” When we believe all bad things are done by bad people alone, we are very reluctant to be in that vilified group – and we may be in denial that bad things are happening in our organizations.

On the other hand, an acceptance that all of us can be on what De Cremer and Lemmich call “the slippery slope” might lead us to be more enlightened about ethics frameworks.

My own observations about ethics based on a lifetime of watching companies and leaders, mostly good, sometimes bad, suggest the following: it all starts at the top. If ethics are taken lightly at the pinnacle of the enterprise, cheating and pilfering will be rampant. If an enlightened culture of trying to do the right thing at all times is transmitted from the top, the organization has a chance of minimizing ethical lapses. Otherwise, big, career-ending, company-crippling catastrophes await.

Here, I am not referring to what people say; I am more concerned with what they do. Pretty much every organization I have ever encountered has the words “integrity” or “ethics” in its values statement. Hardly any actually means it. The leaders uttering those words most vociferously are often the ones ensnared in nasty, selfish little scams soon after.

The people at the top set the tone. They have the power to build culture, influence behaviour, set a standard, enforce compliance. Their credibility, however, does not arise from how many nice-sounding words they utter, or how many compliance experts they hire. It comes from their personal actions. If the bosses are doing the dirty, rest assured most of the workforce will be on the take soon.

This means that the stewards of society must be very, very careful regarding whom they appoint to top positions. CEOs should never be appointed if their integrity has not been investigated thoroughly. Board directorships should be reserved for those with a track record of honest endeavour, not for every charlatan of loose morals in town.

Ethics pays. In the long run, only the organizations that do things the right way survive and thrive. The others rot from within, weaken themselves thoroughly and ultimately seek bailouts and turnarounds. Or just collapse.

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