Toxic workplace culture a hidden fraud risk, RSM warns

As anti-fraud efforts surge, workplaces are being warned to keep an eye out for workplace culture “red flags” to protect themselves from ethical risks.

A newly released report from RSM Australia urges companies to pay attention to governance blind spots to catch early warning signs commonly linked to fraud, ethical lapses, and other compliance risks.

RSM noted the report was aimed at educating boards and directors to help highlight the cost of dysfunctional culture and the tools needed to effectively protect an organisation.

The report, A guide for boards to turn cultural insights into better governance decisions, identified red flags in employee behaviour that could signal a workplace culture that enabled fraud, corruption, or misconduct.

Based on the findings, the five main signs of a workplace culture at high risk of fraud, corruption, or misconduct included a lack of regularly updated fraud and corruption risk assessments, an absence of a fraud and corruption control policy, inadequate enforcement of unacceptable conduct, no assigned ownership of fraud and corruption risks, and an ineffective whistleblower program.

Dan Hutchens, RSM Australia partner for risk advisory services, said it was imperative that boards and directors were proactive in measuring their workplace culture and those that didn’t risk creating “governance blind spots”.

“Toxic and dysfunctional workplaces are bad for business, and there is a strong link between weak organisational culture and misconduct, fraud and compliance failures,” he said.

“When an organisation operates without strong ethical norms, it creates space for unethical behaviour to thrive, and the cost of these failures can be significant. Direct losses from fraud or misconduct can be substantial, but there are also indirect costs: productivity loss, staff turnover, reputation damage, legal penalties and executive distraction.”

It was added that workers who broke company policies and encouraged others to do the same, or had personal relationships with suppliers, were among the behavioural red flags to be aware of.

Hutchens linked the fact that a lack of accountability, no code of conduct or a means for employees to raise concerns indicated a workplace where culture was neglected, therefore leaving the organisation at risk.

RSM Australia said it wanted all workplaces to be aware of the risks, as the longer a toxic culture persisted, the more expensive and complex it became to fix.

Hutchens said strong workplace cultures drove performance, trust, innovation, and long-term value creation, with an external perspective being a beneficial way to ensure culture remained healthy.

“Taking a proactive approach to identify problems early and guiding management to address them can save money in the long run. One of our clients had us conduct a fraud and corruption awareness survey every year. As part of this process, employees reported warning signs of potential fraud or corruption, which may not have otherwise been reported,” he said.

“Other clients have asked us to do independent, focused culture surveys on matters such as integrity and safety. When employees know the survey data is protected by the third party, they feel safe in speaking out about challenging issues.”

“This won’t always happen with HR surveys, as employees know that the head of HR often reports to the CEO. Thanks to these culture check-ins, the organisations were able to address issues early, before they escalated.”