Management as a Regulated Profession - Essay Example

Management as a Regulated Profession You are the Head of Financial Crime Prevention in a regulated financial services firm in a sector and jurisdiction of your choice. You have been approached by the Director of Human Resources who is concerned about recent media coverage posed by the threat of internal fraud. They have asked you to produce a report highlighting the risks posed by internal fraud, as well as the indicators/red flags and controls to mitigate the risks. They have asked that you make particular reference to HR systems and controls in your report. 1. Introduction The increase of complexity of organizational activities worldwide has led to the limitation of the effectiveness of the measures taken for the control of fraud. The introduction of strict legislative texts, like the Sarbanes-Oxley Act in USA, has been proved to be an initial measure for the limitation of fraud in modern organizations (Heier et al., 2005, p.39). In the internal organizational environment, the ability of a firm to prevent fraud is depended on the level of cooperation/ coordination among employees at different levels of the organizational hierarchy. Under these terms, the human resources systems used within a specific organization are considered to be crucial for the success of the organizational initiatives against fraud. It should be noted that the effects of internal fraud on business performance can be differentiated in accordance with the nature of business operations, the business structure and the aims/ objectives of each organization; different assumptions are made in the literature regarding the effects of internal fraud on organizational performance; different plans of action can be suggested for mitigating fraud in firms that operate in various industrial sectors. Greenlee et al. (2007) focuses on the relationship between the internal fraud and the type of organizational structure – emphasis is given on non-profit organizations where ‘the losses due to fraudulent activities can directly reduce resources available to address tax-exempt purposes’ (Greenlee et a, 2007, 676). On the other hand, Levi (2008) notes that the expansion of global crime has been rapid due to the increased ability of ‘would-be perpetrators to recognize and act on specific opportunities’ (Levi, 2008, p.389). From another point of view, the external organizational environment is likely to affect a firm’s ability to control crime – the specific view is supported by Tilley et al. (2008) who emphasize on the difficulty to control crime in organizations that operate in ‘high crime neighbourhoods’ (Tilley et al., 2008, 443). In the case of Barclays – organization under examination – internal fraud is related with the absence of an effective framework for the security of data exchanged across the organization – weaknesses in the firm’s current HR systems should be appropriately addressed in order for internal fraud to be limited. 2. Internal Fraud in Barclays (London, UK) – characteristics, risks, HR systems In the context of modern organizations, fraud is related to specific criminal behaviour – that can be differentiated from criminal behaviour in its common form – referring to the crime as part of daily life. In businesses, internal fraud may be difficult to be identified and controlled mostly because of the co-existence of losses that occur as a result of non-effective organizational plans. At the next level, HR systems can have a significant role in the control of internal fraud in modern firms; effective HR systems can offer signs for the potential involvement of employees in such activity. In Barclays –as in most modern organizations – the effectiveness of HR systems cannot be depended only on the ability of these systems to ensure the high productivity of employees; additional issues, like the prevention of criminal behaviour by employees should be taken into consideration when evaluating the HR systems developed in a particular organization. In order to understand the role of HR systems in the development of internal fraud in Barclays it would be necessary to identify the common forms of this activity – in general but also in relation to the specific organization; at the next level, it would be possible to suggest measures that could help to mitigate internal fraud in the particular organization. The role of existing HR systems in the development of internal fraud across Barclays (London branch) should be also examined. In accordance with Levi (2008) ‘although some frauds are committed by generic transnational `organized crime' networks, others are merely mobile small groups or individuals who can transplant techniques wherever they go’ (Levi, 2008, 389); in this context, internal fraud is not likely to have a standard form; rather it is expected to be differentiated in businesses operating in various industrial sectors; in this case, the characteristics of internal and external organizational environment can lead to different forms of internal fraud – depending on the participation of employees in the application of organizational ethics. On the other hand, the effects of internal fraud can be more severe when the relevant activities are initiated by employees that work at the high levels of the organizational hierarchy; this assumption is based on the view of Zahra et al. (2005) who noted that ‘fraud by top management is a topic that has stirred public interest, concern, and controversy’ (Zahra et al., 2005, 803). Moreover, it seems that the personal perceptions (and probably the background) of employees are likely to influence their responses to fraud. The research made by Holtfreter et al. (2010, p.188) led to the assumption that ‘the overlap between fraud offending and victimization exposure is partially explained by low self-control’ (Holtfreter et al. (2010, p.188). In any case, it has been proved that ‘inconsistencies exist in correlating private standards and behaviour as important predictors or determinants of ethical business conduct’ (Thoms, 2008, p.419). At a next level, it is noted that ‘transformational leadership and active management by exception have a substantial impact on the performance of audit committees’ (Spangler et al., 1990, p.134) It should be noted that internal fraud has specific characteristics, or else it refers to specific activities; therefore, the measures taken for the limitation of internal fraud should be based on the specific framework – appropriate adjustments are necessary aligning the commercial ethics with each firm’s culture and objectives (Cendrowski et al., 2006, 69). In accordance with Wells (2007) occupational fraud can be defined as ‘the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets’ (Wells, 2007, 1). The limitation of internal fraud in modern organizations is related with the development of effective compliance systems; these systems help to identify the level of employees’ compliance to the organizational code of ethics. Regarding this issue it is noted that ‘management commitment to compliance values, managerial oversight and planning, and organizational resources are just as important’ (Parker et al., 2009, 3). The nature of organizational activities can also influence the modes of internal fraud developed in a particular organization; this issue is highlighted in the study of Zey (1999) where it is noted that ‘securities fraud activities require high centrality and intensity of communication combined with highly centralized decision making’ (Zey, 1999, p.50). In other words, internal fraud can have different forms across firms in accordance with their structure, the nature of their operations, their leadership style but also their objectives; the value of business transactions is also likely to affect the modes of internal fraud used in a specific organization (Kim, 2007, p.287). The above issues need to be taken into consideration in order to develop plans of action aiming to mitigate internal fraud in Barclays. Before this task, it would be necessary to refer to the characteristics and the form of existing HR systems in the particular organization; appropriate plans of action could be then suggested for controlling internal fraud in this organization. The HR management in Barclays is based on specific principles: a) strict criteria are set for hiring employees in various position across the organization, b) the background of candidates is a key criterion for their hiring, c) the performance of employees is periodically controlled – in relation with their position in the organization, d) rewards, benefits and personal development are some of the elements of HR policies used in Barclays, e) different procedure of hiring is provided to people of different educational/ professional background and f) the candidates can choose among countries and organizational departments – through appropriately customized technology the candidates can check for the vacancies available to a particular region or a specific branch/ department of the firm (see the corporate website). There is no reference to a specific scheme that can intervene for the prevention of internal fraud – referring to the hiring phase of HR management in Barclays. This means, that the potential involvement of employees in such activities cannot be effectively controlled in advance; at the level of the hiring procedure, employees are not given a clear explanation of the mechanisms available for the control of internal fraud across the firm. The existing fraud risk control framework (see corporate website, sustainability, 2010) offers a robust basis for the control of fraud in the organization; however, in the terms of the firm’s human resources no effective mechanism of fraud control seems to exist; appropriate plans of action would be suggested in relation to the specific organizational sector. In accordance with the above, internal fraud in Barclays could be controlled only if appropriate measures would be taken; the update of existing HR systems would be the priority of the firm’s managers. The methods required for the achievement of this target and their role in the limitation of internal fraud across the specific organization are analyzed in the next section. 3. Methods for mitigating internal fraud in Barclays (London, UK) – update of HR systems In order to identify the measures required for the mitigation of internal fraud in Barclays it would be necessary to refer to the employees’ practices that could be possibly regarded as having the characteristics of occupational fraud – as this concept has been defined by Wells (2007) – see previous section. Employees in Barclays have been found to follow a series of practices that are opposite to existing regulations related with the financial services industry; these practices could be summarized as follows: a) the procedure followed for the verification of customers’ identity is not adequate; the documents provided by customers are often inappropriate towards the verification of their personal details; b) the recording the customers’ personal details is also inappropriate; the documents included the personal details of customers are often left unattended; it is easy for these documents to be lost (or at least for the customers’ details to become known to third persons), c) the access of the firm’s databases is permitted to all its employees – including the employees working in the secretarial department of the firm; this means that most employees of the bank – i.e. all employees apart from those working in the cleaning of the organization – have access to the firm’s databases without a relevant categorization to exist; each employee should be given a specific level of access in the firm’s databases in accordance with his/ her position in the organization; time limits for the system’s availability would be also exist; the system’s databases should not be accessible after a specific time; when the customer services section of the firm is off then no access to the firm’s central system should be allowed apart from specific organizational sections, for example the financial controllers of the firm, d) the practices of the firm’s traders are not adequately controlled; even if the firm’s investors can be informed on the firm’s main investment directions and priorities however they cannot be informed on the exact criteria on which the decisions of the firm’s traders are based and e) the firm has developed cooperation schemes with firms that operate in other countries; through these schemes the employees of the third-parties can offer customer services – in the name of Barclays – and have access to the firm’s database. One of the key obstacles to the limitation of internal fraud in Barclays would be the absence of a mechanism that controls the application of the relevant policies; even if rules have been introduced aiming to control fraud across the organization, there is a fact delaying the whole procedure: there are no individuals in the firm having been appointed as controllers of internal fraud; this is a phenomenon developed in most modern organizations as highlighted by Kovacich (2007). Therefore, the plan for mitigating internal fraud in Barclays should include – as a first phase – the appointment of a team of appropriately skilled professional as controllers of all issues related to the internal fraud across the organization. The ‘endogenous risk’ of the organization (Goodhart, 2005, p.118) should be a criterion for deciding on the measures that would be most appropriate for controlling internal fraud in Barclays. In accordance with the above, the following measures should be taken in Barclays in order for the internal fraud to be mitigated across the organization: a) appropriate disciplinary rules would be developed; these rules would be strict and would be extended up to the dismissal of an employee – in case that the latter would be founded to be involved in severe violation of the organizational ethics or the legal regulations related with the specific activity (see also Comer et al., 2004, 333), b) the terms for the access of the firm’s databases both by its employees and by third persons – in the context of cooperation with foreign firms in regard to the customer services – should be reviewed; a limit should be set for the accessibility of the system by the employees and third persons in accordance with their position in the firm, the value of the personal details related and the level of the exposure of the customers to a potential damage, c) the firm’s rules in relation with the activities of its traders should be reviewed; the practices and the performance of the firm’s traders should be reviewed periodically – within short periods of time – ensuring that a severe financial loss from the relevant activities will be avoided. At the next level, employees of the firm should be offered appropriate training regarding the aspects of internal fraud in regard to the firm’s activities and the consequences of this behaviour on the firm’s customers but also on its employees. The measures required for the protection of the customers’ personal details should be clearly explained to the firm’s employees; it should be also made clear that any failure to follow the regulations set by the financial authorities (as incorporated in the firm’s code of ethics) could lead to the disciplinary control of the employee involved; the punishment imposed would be then equal to the damage caused both to the organization and its customers. Part 2 Select an organisation engaged in combatting financial crime that operates across juridictional boundaries and evaluate the effectiveness of the organisation in achieving its’ objectives. Illustrate your answer with case studies 1. Financial Services Authority – role, evaluation of performance In Britain, the Financial Services Authority is the main organization handling the application of commercial regulations by firms operating across the country. The performance of this organization has been proved to be significant – taking into consideration the fines imposed on the firms that failed to meet the standards set by the rules regulating economic activities across the specific country. In the banking sector the level of fraud is extremely high; in a relevant report of FSA it is noted that ‘online banking fraud losses have seen the biggest increase, totalling £21.4m during the six months to June 2008, a 185% rise compared to 2007; the increase is largely due to increased phishing and spyware scams’ (FSA, newsletter, number 12, on Financial Crime, 2009). The value of FSA – as an authority controlling the application of rules regulating the economic activities in Britain – can be understood by referring to certain case studies – cases of firms the activities of which were investigated by FSA and appropriate fines were imposed. 2. Case studies Aon Ltd An indicative example of the dynamic intervention of FSA in the financial services industry has been the case of Aon Ltd; the investigation of the firm’s practices by FSA led to the assumption that ‘the firm made various suspicious payments, amounting to approximately US$7 million, to a number of overseas firms and individuals’ (FSA, newsletter, number 12, on Financial Crime, 2009); FSA fined the firm with a fine of £5.25 million for not taking the measures required in order to contol the risk related with its activities – a failure that led to the development of corruption across Aon Ltd. Sindicatum Holdings One of the most important cases – in terms of internal fraud – that FSA had to deal in 2008 has been that of Sindicatum Holdings Ltd (SHL); the firm violated the rules related with the money laundering by avoiding establishing appropriate ‘anti-money laundering systems and controls’ (FSA, newsletter, number 12, on Financial Crime, 2009); the investigation of the firm’s practices by FSA led to the following findings: ‘a) the identities of the firm’s customers were not adequately verifying and recording and b) Michael Wheelhouse, SHL’s money laundering reporting officer, failed to take reasonable steps to implement adequate procedures for verifying the identity of the Firm’s clients’ (FSA, newsletter, number 12, on Financial Crime, 2009). As a result, FSA imposed on SHL a fine of £49,000 while a separate fine was imposed on Michael Wheelhouse for avoiding using the FSA’s regulations in relation with the verification and the recording of the customer’s identities. HSBC HSBC failed to develop systems that protect the data of its clients; officer’s of FSA investigated the specific issue and came to the conclusion that at least three branches of the firm lost the data of their customers – the loss has been proved to be deliberate since the personal details of the firm’s customers ‘have been sent via post or courier to third parties’ (FSA, newsletter on Financial Crime, 2009). At the next level, through the further investigation of the specific case it was revealed that ‘confidential information about customers was also left on open shelves or in unlocked cabinets and could have been lost or stolen’ (FSA, newsletter on Financial Crime, 2009); the training of the firm’s employees regarding the measures required for the protection of the customers’ personal details has been found to be quite limited – in cases such policies were non-existent. The fine of HSBC for the above violation of the relevant regulations reached the £3 million pounds. Morgan Stanley Morgan Stanley is another firm that was fined by FSA as a result of the violation by the firm of specific commercial regulations. More specifically, the examination of the firm’s practices by FSA led to the assumption that Morgan Stanley was led to a ‘a $120 million negative adjustment in June 2008 because of systems and controls failings in relation to trader mis-marking’ (FSA, newsletter on Financial Crime, 2009). FSA fined the firm with a high fine – reaching the £1.4 million. At the next level, it was proved that the firm’s losses occurred mostly because of the practices of one of its traders, Matthew Piper – a separate fine of £105,000 was imposed to Piper by FSA. Piper used to ‘deliberately mis-mark the positions he traded on behalf of Morgan Stanley’ (FSA, newsletter on Financial Crime, 2009); also, Piper avoided reporting the actual losses of the firm – a fact that led to the severe damage of the firm’s financial stability. The case of Morgan Stanley presents similarities with other cases referring to the activities of firms operating in the financial services industry worldwide – like the case of WorldCom (Scharff, 2005). The most important issue in the specific case has been the fact that the officers of FSA managed to identify the malpractices of the firm’s managers and intervene dynamically – before the firm cause severe turbulences to the British exchange market. Bibliography Cendrowski, H., Martin, J., 2006. The Handbook of Fraud Deterrence. John Wiley and Sons Coenen, T., 2009. Expert Fraud Investigation: A Step-by-Step Guide. John Wiley and Sons Coenen, T., 2008. Essentials of corporate fraud. John Wiley & Sons Comer, M., Stephens, T., 2004. An HR guide to workplace fraud and criminal behaviour: recognition, prevention and management. Gower Publishing, Ltd Doig, A., 1997. The Privatisation of the Property Services Agency: Risk and Vulnerability in Contract-Related Fraud and Corruption. 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John Wiley and Sons Zahra, S., Priem, R., 2005. The Antecedents and Consequences of Top Management Fraud. Journal of Management, Vol. 31, No. 6, pp. 803-828 Zey, M., 1999. The Subsidiarization of the Securities Industry and the Organization of Securities Fraud Networks to Return Profits in the 1980s. Work and Occupations, Vol. 26, No. 1, pp. 50-76 Online resources Barclays, 2010, corporate website, employment, available at http://group.barclays.com/Careers Barclays, 2010, corporate website, sustainability, available at http://group.barclays.com/Sustainability/Reporting/Sustainability-Report-2008/Our-sustainability-themes/Responsible-global-citizenship/Managing-financial-crime/Editorial/1231782648598.html Read More