Frank about fraud

By Boyd Neil
Illustration: Susanna Denti

To protect its reputation a company should first come clean about fraud and then clean up the mess

The recent epidemic of corporate scandals has undermined confidence in stock markets around the world. Consequently, the media is exceedingly attentive to suspected fraudulent activity, particularly involving executives. This can lead to a "rush to judgment" ahead of any formal finding of actual fraud. Any public company facing allegations of fraud or other wrongdoing must act quickly to control the situation and protect its reputation. If not, it may become mired in a public relations debacle from which recovery is almost impossible.

From a communications angle, acts of fraud — from a single employee defrauding an employer to the large-scale corporate financial malfeasance that dupes millions of shareholders — are singularly insidious. Fraud strips a company of working capital, and it attacks its soul — that is, it puts at risk the hard-earned reputations of a company and its senior managers and the trust customers, shareholders and partners have in a company's brand.

Fraud is an assault on trust and reputation. If not well-handled, the damage to a company's reputation — either from the fraud or the way a suspected fraud is managed by senior managers — can be as profound as the impact on the company's bottom line. In the current environment, any suspicion of fraud, or public allegation of a lack of financial integrity, has to be treated by senior managers as a serious threat to reputation.

Communications, therefore, must figure into not only the investigation itself but also the recovery plan. Rebuilding trust with stakeholders will be key, especially when the fraud is on a grand scale.

According to author and management consultant Saj-nicole A. Joni, in business trust develops on the basis of integrity and capability. In publicized cases of fraud, a company's or executive's integrity is demonstrated by the extent to which they are transparent about what has happened, and to demonstrate they are not hiding from the accusations or the consequences. A company's or executive's capability is demonstrated by the speed with which an independent process for review and investigation of the issues is established and the thoroughness of that process. In short, come clean, then clean up the mess.

With an effective approach to communication, a company's reputation can be protected during the investigation (even if little can be said about the fraud investigation) and in the recovery phase by following some simple rules that apply in most crisis circumstances.

In general, these principles, while seemingly complex given the nature of the accounting and legal issues that may be involved, are actually straightforward. What shareholders, employees and the public want to know is:

• someone is taking responsibility for finding answers;
• there is a course of action being pursued that will lead to a resolution of the fraudulent activity;
• a process of reform will be carried out by the company so the deceitful behaviours (whether among employees or the corporate suite) won't happen again; and
• if there's been financial harm to individuals there is a commitment to restitution.

Based on these principles, then, here are five rules for successful communication about fraud.

Don't hide: The more a company is seen to be hiding the more likely it is the public and media will react aggressively to its inaction. Nortel found itself questioned about irregularities in its accounting policies. Having no special knowledge of what was going on inside the company, one can't evaluate how Nortel's audit committee or executives are handling the situation as a whole. However, that the company's former CEO was absent from the public discussion about the purported irregularities was interpreted — at a minimum — as poor judgment and certainly far from exculpatory.

In March, the Financial Post wrote that "whatever happens next, Nortel's decision to place two senior executives on paid leave marks another low light in one of the worst-managed episodes in recent corporate crisis management. . . . More seriously, all of this violates the three commandments of crisis management: Tell it all, tell it early and tell it yourself. Nortel is still telling the story, Nortel didn't tell it at the first opportunity and Nortel CEO Frank Dunn is nowhere to be seen." In April, Nortel fired Dunn and some of his colleagues.

I am sure this represents some element of journalistic overstatement, and there is likely a lot we don't know about why nothing was said. Nevertheless, the expectation implicit in the column was that investors and the public want a company's senior management to come clean early, to set in place independent processes for resolution, and to have the highest-ranking executive be front and centre explaining what is going on. The damage from taking cover may in the end be more acute than any proof of actual wrongdoing. 

Don't lie: Sooner or later, the company or the individual involved will get caught in the lie and the wound from the lie may be more severe than the damages from the commitment of the fraudulent act. Remember Martha Stewart was not found guilty of insider trading but of conspiring to hide the truth from the SEC about what actions she and her investment adviser took. However, Stewart's name is now synonymous with insider trading, and her reputation has been fatally wounded by her apparent willingness to cover up what actually happened. If she had cooperated with the investigation, would she have suffered public pillorying, innumerable personal indignities and the damage to her company's reputation that have since followed?

The buck stops here: Imagine how powerful the truth becomes. The public and a company's employees will be ready for someone to say, "Yes, things have gone off the rails; yes, something is amiss; but I am going to fix it." And they want to hear it from someone who can do something about it, and in whom they have given their trust. Writing about Sun Life Financial's involvement in the US mutual fund scandal, The Globe and Mail's Eric Reguly made the point that "instead of moving with alacrity to explain the scandal, clean it up and put the whole sorry mess behind it, the company pulled up the drawbridge and waited for catapult bombardment. [The company] gives the impression it is run by arrogant, yet terrified lawyers, not a management team that should have some idea of the importance of damage control and reputation protection."

The company's CEO and other board directors hid behind what Reguly called a "smokescreen." Without senior executive ownership of the problem, and its resolution, the company's name stayed in the headlines for weeks. And who can guess what damage was done to employee and shareholder trust and confidence. The public, employees, shareholders and partners need to see a personal commitment from the most senior executive that any suspected fraudulent goings-on are being handled promptly and honestly. They need to feel confident that the CEO is taking personal control of the matter.

Media isn't your only audience: The fourth rule is even if the media is on your doorstep demanding answers about suspected fraudulent activity, there are other audiences that need to hear what is going on. In large scale public cases, critical business partners and suppliers may also seek reassurance. But one of the most important audiences during a fraud investigation is a company's employees. They must have faith that management is committed to a thorough, independent and honest investigation. They must feel confident they are working for an organization that values integrity and trusts them. Employees must be reassured that the suspected actions of one or two colleagues do not throw into question their reputations. And they must feel confident management is handling the situation impartially. From this perspective, internal communication is just as important as that with third parties or the media.

At the same time, regulatory actions can further damage the company's reputation if it is not cooperative and communicative with regulators. For example, in May Lucent had a US$25-million fine levied against it by the SEC for lack of cooperation with an investigation. Such actions only compound the damage done to the company by adding questions about management's integrity.

Walk the walk, talk the talk: The fifth rule is to remember that being frank with respect to a deception or scam is an opportunity to demonstrate integrity and transparency. Both of these are integral elements of corporate reputation today. Companies that recognize that employees and the public have become discontented with financial manipulation and corporate fraud, and act decisively and openly to take ownership of the problem and its resolution when fraud is found in their domain, significantly improve the odds that the company's reputation can be recovered. Vanessa Wittman, who took on the job of CFO at Adelphia Communications Corp., which had been pillaged by the Rigas family and forced into bankruptcy, concluded that to regain its former standing the company had to be "beyond reproach on every front."

Protecting a company's reputation during a fraud investigation — even if it involves only one wayward employee — is as important as protecting it from litigation. Remember, a reputation when blemished is difficult to recover.