The Surprising Link Between Corporate Culture and Fraud
happy employees being productive

The Surprising Link Between Corporate Culture and Fraud

Building a company culture that is authentic and inspiring is worth the effort for so many reasons. Happier employees boost productivity. Rave reviews attract the right kind of new hires. And, as it turns out, having a healthy culture can actually help reduce the risk of corporate fraud.

The Culture Connection

In a recent study by The Hong Kong Polytechnic University and George Washington University, researchers found that businesses with poor company cultures are more likely to be investigated for deceptive financial reporting.

Using Glassdoor reviews data as the measure, the authors analyzed the relationship between work culture and fraud. After controlling for many characteristics that could influence accounting practices and employees’ opinions, the study found a direct relationship between a lower rated culture and fraudulent financial reporting.

In fact, they found that poor culture predicts companies who are more likely to be investigated by the U.S. Securities and Exchange Commission. But why does culture play such a critical role in financial reporting risk?

The Boiler Room Effect

Job dissatisfaction, an environment intolerant of failure, and inexorable performance goals all combine to create what the authors call “the boiler room effect.” A byproduct of a competitive culture gone awry, it’s the perfect breeding ground for aggressive accounting and fraud.

In these kinds environments, managers find themselves faced with increasing pressures to meet overly aggressive targets and may turn to financial misreporting, even rationalizing their decision to do so. Poorly implemented targets nurture a negative climate in turn, increasing the likelihood of fraud as well as whistleblowing.

However, most companies have internal controls to prevent questionable financial practices from happening. The study points out that good corporate governance with a large share of independent directors on boards or a large number of financial experts on audit committees can mitigate the risks of a poor culture.

So What Can You Do?

Investing in a healthier culture can lower your risk of fraud. Start small by keeping an eye on your Glassdoor ratings. Reply to every review, both good and bad, so you can continue building trust with employees and prospective job seekers.

Build an action plan for addressing culture complaints. Pay attention to what your employees are telling you and take what they say seriously. Although not easy, fixing culture problems now before they escalate into dysfunction can mean avoiding a financial scandal down the road.

For more an in-depth look at the proven effect online reviews have on employer brand perception, job seeker action and employee commitment, download The Proven Value of Employer Brand.

Read the full study examined in this article, “Corporate Culture and Financial Reporting Risk: Looking Through the Glassdoor,” by Yuan Ji, Oded Rozenbaum and Kyle Welch at SSRN.