Prudent outfits should beware the enemy within

Accounting fraud and other kinds of misbehaviour occur mainly when there are fewer people looking.

The global financial downturn has brought workplace fraud into focus, and some observers say this crime rises as companies reduce staff to increase their efficiency

In the corporate world "efficiency" tends to mean only one thing - laying people off, dismantling hierarchies that have become moribund, and creating leaner and meaner organisations.

Most would argue that in these difficult, post-global financial crisis times, seeking efficiencies is a necessary evil. But others argue just the opposite: the thinning out of organisations is likely to cause inefficiencies.

Professor Stephen Ackroyd, a UK academic who has written extensively on organisational misbehaviour, says staff reduction leads to fewer resources being deployed on internal controls and a consequent growth in accounting fraud and other forms of misbehaviour.

Prof Ackroyd, a lecturer in organisational analysis at Lancaster University, was speaking last month at a conference in Sydney entitled Workplace (Mis)behaviour - Cause and Response.

Such misbehaviour occurs mainly when there are fewer people looking, he says, and it is particularly apparent in large, multinational organisations that may have hundreds of subsidiaries scattered across the globe.

"You get a detachment between head office and the smaller operations … which are treated at arm's length. The people at head office don't get any sense of identity with the people in those units."

There is, says Prof Ackroyd, no "continuous hierarchy". Leaders of the smaller units are often given free rein over how they achieve their targets, as long as they are not breaking any laws.

Most telling, he says, is the huge differential between the pay of those at the top and those at the bottom of organisations.

"Those executive teams are getting several hundred times more than the people lower down in their organisations," he says. Employees will rationalise the fraud by arguing that their organisation was not playing fair when it overpaid the bosses.

Prof Ackroyd's analysis concurs with the findings of a global survey conducted last year by PricewaterhouseCoopers (PwC), which examined the prevalence of fraud within 3,000 multinational companies.

The PwC survey found that in organisations where senior executive pay included a performance-based variable component of more than 50 per cent, 36 per cent of respondents reported experiencing fraud. This was a stark contrast with those organisations with no such performance pay, where only 20 per cent reported fraud.

Both the PwC findings and Prof Ackroyd's comments are backed up by experts of forensic accounting in Australia. During the global downturn, forensic accounting - normally one of the more oblique areas of financial services - became a star performer. Forensic units have reported an unprecedented boom in clients suffering fraud in the post-crisis period.

Deloitte Australia says that it has undertaken as much as five times its normal workload in this area over the past 12 to 18 months and that there is no sign of it slacking off. KPMG has also reported a considerable increase in its forensics business - and the need to hire staff to cope with the surge.

While the media tend to concentrate on the proliferation of external, web-based misbehaviour such a identity fraud, cyber-hacking, gang activity and the potential penetration of susceptible social media, internal fraud remains by far the biggest problem for corporate Australia - and the world.

"It is the people within - not to mention the major relationships with customers and suppliers that are struck from close quarters - which count here," says Gary Gill, KPMG's senior forensic expert in Australia.

The lesson for corporations? Look more closely at the internal rot, not at external, unspecified forces supposedly doing you harm.