The financial loss of theft was secondary to the effect on company culture.
Crexel Co. was a manufacturing company that operated a large industrial complex. Because of the size of the plant and its related infrastructure, the company had a significant ongoing investment in maintenance and repair, especially in maintenance supplies. Crexel spent millions each year on steel, cable, and similar materials — and now some of it was going missing.
The primary supplies were maintained in a warehouse, where they were protected by physical access controls. But leftover supplies — for example, when a job used only 800 feet of a 1,000-foot roll of coaxial cable — were left in a less secure, open area called “the Yard.” Controls over the Yard were minimal because the supplies needed to be quickly and easily accessed for small maintenance jobs.
This system appeared to be working efficiently, until a regular audit of the maintenance function revealed that items were disappearing from the Yard without explanation. Based on audit testing, the auditor, Mr. Whythen, estimated that annual losses would be in the tens of thousands of dollars if it wasn’t stopped.
At first, Mr. Whythen assumed that maintenance staff was using the supplies and that the jobs simply had not been entered into the maintenance log. This proved not to be the case. He then hypothesized that local college students might have taken the items, possibly as a fraternity initiation prank. This, too, turned out to be incorrect. Finally, Mr. Whythen set up a concealed surveillance camera to find out what was really going on. The results were surprising and disturbing.
Many of Crexel’s employees were skilled handymen and carpenters, with the ability to build their own garages and cottages. As it turned out, many of these employees were stealing supplies from the Yard to take home for their own projects, and ignoring the posted signs, which clearly stated that these items were not trash but valuable company property.
On further investigation, the problem got even worse. Not only were the employees unrepentant about stealing company property, but they also bragged to co-workers about the creative ways they snuck their loot back to their cars and trucks past the security guards at the front gate. One worker even liked to boast that the Yard had built his entire garage — he had not paid for even a single nail or foot of wire. And the worst part was the other employees encouraged and supported this behavior, comparing the thieves to modern-day Robin Hoods.
The company was faced with a dilemma. The financial loss, while real, was clearly secondary to the effect on company culture.
Axel was aware of “slippery slope” research, which shows that small frauds frequently lead to larger ones. Having a workforce that celebrated thieves as heroes was a recipe for future disaster. But their alternatives were limited. Shutting down the Yard, and moving the scraps to the warehouse, would be inefficient (that was why the Yard was created in the first place) and would do nothing to address the ethical conundrum. Prosecuting the employees for theft would be difficult and — in Crexel’s highly unionized environment — would generate more ill will toward management than the issue was worth. Installing security cameras and stationing full-time security guards at the Yard would not be cost-effective. Telling the employees that they could take whatever they liked from the Yard was another option, but one that could lead to employees taking everything whether they needed it or not — and potentially to fights between employees about who could take which items.
In the end, Crexel came up with a simple, elegant solution. The company put price tags on each item in the Yard, at prices substantially lower than market, and installed an honor charity box for the United Way. It put up signs telling employees they could take whatever they wanted, but they were asked to put the appropriate sum into the United Way box. The contents of the box would then be emptied and given to the charity on a regular basis. There would be no guards or security cameras.
Crexel also added a sign that read, “Total contributed to the United Way so far = $xxx.” Behavioral psychology studies have found that people tend to behave more positively when they are reminded of their membership in a positive group.
Crexel’s innovation was a great success. Employees who would (tacitly or otherwise) support fellow employees who stole from the company were far less willing to condone stealing from the United Way. The bragging about unethical behavior stopped almost immediately, and employees began to take pride in the ever-mounting total contribution to the charity. In many cases, employees even contributed amounts in excess of the price tags on the goods they took and started bragging about that. A ticking ethical time bomb had been transformed into a source of strong ethical reinforcement.
Lessons Learned
- Organizations should be aware of situations that permit — or even encourage — ”mini frauds,” as considerable research suggests small frauds lead to larger frauds. Such situations can be dangerous beyond their own financial impact.
- It is often easy for otherwise ethical employees to justify taking financial advantage of their employer (the rationalization side of the Fraud Triangle). It is accordingly dangerous to assume that other employees will discourage such behavior, at least on a small scale.
- In the past, many companies attempted to establish an ethical culture by reinforcing penalties for undesired behavior. But it is sometimes more powerful to establish identity in an ethical group as a proactive way to reinforce a positive image.
- Sometimes the most obvious issue is not the more important one. In this case, if Crexel had focused on safeguarding the material in the Yard, it would have missed the more important ethical concern. The solution Crexel adopted cost them money, but the ethical reinforcement was of far greater value.
- The conventional response to an uncovered fraud is to increase controls. This is often valid, but an auditor should first examine the circumstances that encourage the fraud to see if the controls are unrealistic or inappropriate. Policies and limitations should not just be knee-jerk reactions that all but guarantee noncompliance.
- Controls can be more effective when external parties are involved. If the donation box had just said “money for charity,” it is possible that Crexel employees would have been less motivated to pay for Yard materials. But by explicitly designating the donations for the United Way — a charity with whose good work the employees were all familiar — Crexel made it even harder for employees to continue to justify the thefts.
- It is important for a company to monitor its ethical culture. In this case, Mr. Whythen heard about the bragging from friends who worked in the complex. Had he not found out about it, or if he had ignored it, Crexel could have missed this ethical issue.