When you think of corrupt executives, names like Lay and Skilling from Enron probably come to mind. But almost every lender has met a prospective borrower who raises a red flag. Perhaps you know someone who brags about cash paid “under the table” to evade taxes — or one who skimps on safety requirements and benefits to save money?
Trust your instincts as you get to know the people beyond the numbers. Unethical behavior at the top of any organization — commonly referred to as the “tone at the top” — is among the factors that lead to fraud. That’s because attitudes about ethics flow down the organizational chart.
How tone can foretell fraud
In a recent white paper, “Tone at the Top: How Management Can Prevent Fraud in the Workplace,” the Association of Certified Fraud Examiners stated:
If upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud because they feel that ethical conduct is not a focus or priority within the organization. Employees pay close attention to the behavior and actions of their bosses, and they follow their lead.
One indiscretion — for example, a personal expenditure claimed on a corporate expense account or a year end that’s held open until Jan. 3 to artificially boost sales — often leads to a series of unethical decisions.
Where there’s smoke, there’s fire
The 2011 National Business Ethics Survey lists misconduct (in addition to cooking the books) that a lax or greedy tone at the top may eventually lead to, including:
- Abusive or intimidating behavior of superiors to employees, including sexual harassment and discrimination,
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Lying to outside stakeholders, such as customers, vendors and lenders,
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Safety violations,
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Inferior product quality,
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Bribes and kickbacks,
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Price fixing,
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Misuse of company time and resources,
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Falsified time reports,
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Internet policy violations and inappropriate social networking by employees, and
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Asset misappropriation.
When combined, these unethical behaviors can destroy an organization. So, how can you stop the downward spiral? Pay attention to the tone at the top of an organization — and choose only borrowers that set a positive tone.
How to identify best practices
Ethical owners and executives share several common denominators. First, they communicate with stakeholders openly, honestly and often. They write a formal code of ethics that is shared throughout the organization. They provide a reporting mechanism for employees to expose ethics violations, such as anonymous hotlines or ethics surveys. Finally, they investigate and punish unethical behaviors — and reward ethical conduct and whistleblowing.
In addition to getting to know your borrowers personally, ask about their corporate ethics policies and internal controls against fraud. Be wary of those who downplay the importance of ethics in their operational success.
As a loan officer, you meet all kinds of people who want to borrow from your institution. It’s these people — as well as their business models and financial statements — that your bank needs to trust before the underwriters can approve their loans.