On Strong Foundations: The Importance of Ethics and Compliance in Fighting Fraud

“Make sure you are standing on the right ground, then stand firm with determination.“
– Abraham Lincoln 

I titled my article “On Strong Foundations!” inspired by Nuri Bilge Ceylan’s film About Dry Grasses. Foundations, just as in individuals, determine the depth of a company, shaping its existence, character, and meaning. At the core of this foundation lies “ethics.” 

 Globally, the week of November 3-9 is celebrated as Corporate Ethics and Compliance Week. On this occasion, I want to address the critical role ethics and compliance play in combating internal fraud within companies. 

In today’s modern business world, ethics and compliance have evolved from being mere procedures to becoming the cornerstones of organizational culture. As fraud investigators, we closely observe how these values are nurtured in corporate structures and how effectively they serve as defense mechanisms against fraud. 

To understand the importance of ethics and compliance in combating internal fraud, let us first define these concepts. 

What Are Ethics and Compliance?
Ethics refers to the capacity of individuals or companies to distinguish between right and wrong behaviors. In the business world, ethics signifies that employees and managers must make decisions based on universal and timeless values such as integrity, transparency, and fairness. Compliance, on the other hand, refers to the adherence of a company’s activities to legal regulations, internal policies, procedures, and industry standards. Compliance ensures that a company acts not only in line with legal obligations but also adheres to ethical standards.

The range of unethical or illegal activities in a company is broad. Examples include bribery and corruption, conflicts of interest, financial crimes, information security breaches, discrimination and harassment, insider information leaks, environmental and social responsibility violations, occupational safety violations, unfair competition, and market manipulation. 

What Is Employee Fraud?
Employee fraud occurs when an employee engages in deceptive actions to misuse company assets for personal gain or violations. This situation can lead to financial losses for companies, reputational damage, and disruptions in business processes. 

How Does an Ethical and Compliance Culture Support Fraud Prevention? 
The more a company prioritizes ethics and compliance, the better it can manage fraud risks. Ethics and compliance serve as a solid foundation for managing a company’s fraud risks. A company built on this strong foundation is more resilient to the disruptive risks of fraud and can remain standing. 

Internalizing ethics and compliance within corporate culture allows employees at all levels to adopt proper behaviors. Employees become part of the company’s ethical values through ethics and compliance weeks, training sessions, and case studies. This type of cultural transformation prevents fraud from becoming “normalized” and increases employee reactions and reporting tendencies in case of potential fraud attempts. Moreover, internal audit and control mechanisms within the company also become more effective. 

In short, in companies where ethics and compliance culture is strong, the likelihood of employees committing fraud decreases because values such as integrity, transparency, and accountability guide their behaviors. 

How Can an Ethical and Compliance Culture Be Established?
The importance of ethics and compliance in combating fraud stems from the following: 

Ethical Leadership and Behavioral Guidance: Building an ethical and compliance culture starts with strong determination from senior management. When company leaders embrace and exemplify ethical behaviors and compliance standards, they demonstrate the importance of these values to all employees. Additionally, ethical values guide employees in decision-making processes and reduce fraud potential. Ethical rules clearly define acceptable behaviors for employees. 

Transparency and Accountability: Companies that emphasize ethics and compliance make their processes more transparent and traceable. This facilitates the early detection of fraud risks and enhances employees’ accountability awareness.  

Strengthening Audit and Control Mechanisms: Ethics and compliance culture drives companies to prioritize internal audit and control processes. As a result, fraud attempts are detected earlier, and intervention becomes easier. When a transparent and accountable system is established, it becomes harder for employees to commit fraud. 

How to Design an Effective Ethics and Compliance Program?
Designing an effective ethics and compliance program starts with understanding the values, risks, and industry-specific needs of the company. After completing these strategic preliminary studies, companies need to take certain steps to establish a corporate culture based on ethics and compliance. I would like to briefly summarize the most essential steps below: 

Defining Ethical Codes and Policies: Companies should define the values and rules employees must adhere to. Ethical codes provide fundamental principles that steer employees away from fraud. Ethical codes and policies are essential components of a solid foundation; they are not mere slogans but declarations of a company’s ethical stance, ensuring operations are carried out accordingly internally and externally. If ethical codes and policies are built on a strong foundation, implementing subsequent processes becomes much easier. 

Training and Awareness Programs: Training employees on ethics and compliance is critical for reducing fraud risks. Through training programs, employees learn to make ethical decisions. During times such as Ethics and Compliance Weeks, corporate activities can be organized to explain the importance of ethical principles to employees and teach them how to report potential fraud. Such awareness programs help employees recognize fraud indicators and increase reporting rates. 

Establishing Reporting Mechanisms: Having secure and confidential reporting mechanisms for fraud cases supports the ethics and compliance culture. Employees can report fraud cases without fear of retaliation through this mechanism.  

Fraud Risks Decrease in Companies with a Strong Ethics and Compliance Culture
Companies that adopt an ethics and compliance culture not only comply with legal regulations but also guide their employees in business decisions where laws fall short, and ethical stances are required. As employees remain loyal to the company’s ethical values and compliance principles, fraud risks decrease. Moreover, in companies that adopt this culture, employee engagement and job satisfaction also increase because employees feel motivated to work in an honest and trustworthy environment. 

The Power of Ethics and Compliance
In conclusion, a strong ethics and compliance culture is indispensable in combating internal fraud. Companies can reduce fraud risks and create a more reliable work environment by focusing on ethical values and legal compliance. A company that adopts an ethics and compliance culture not only manages its risks but also achieves a trustworthy and reputable position in its industry. 

The source of our stance and strength lies in the solidity of the foundation we stand upon.