Corporate Social Responsibility Enhanced Control Systems Reducing the Likelihood of

Fraud
Author(s): Waymond Rodgers, Arne Söderbom and Andrés Guiral
Source: Journal of Business Ethics , November 2015, Vol. 131, No. 4, Special Issue on
Unethical Conduct Within Organizations: Understanding and Preventing Fraudulent
Behavior (November 2015), pp. 871-882
Published by: Springer

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J Bus Ethics (2015) 131:871-882
DOI 10.1007/s 10551 -014-2152-5 I ■ I CrossMark

Corporate Social Responsibility Enhanced Con

Reducing the Likelihood of Fraud

Waymond Rodgers • Arne Söderbom

Andres Guiral

Received: 28 June 2011/Accepted: 13 March 2014/Published online: 2 April 2014

© Springer Science+Business Media Dordrecht 2014

Introduction
Abstract All kinds of fraud are costly for the people
engrossed both financially and often in terms of the time
needed to clear their name when illegal use has been made
Corporate social responsibility (CSR) is a dominant issue
of their personal details. The relationship among ethics,
in organizations, especially its relationship to fraud. CSR
emphasizes the importance of a company's responsibility
internal control, and fraud is important in the understanding
of corporate social responsibility (CSR). This article
to other stakeholders rather than focus solely on share
uses an Ethical Process Throughput Model embeddedholders
in (Rodgers et al. 2013). Questionable behavior by
individual employees and executives has given rise to
the Fraud triangle in order to better understand the inter
connectedness of ethical positions and internal control critical questions of how corporate ethics efforts can be
enhanced and can tackle the fundamental causes of mis
systems that handle fraudulent situations. Ethical positions
are utilized to underscore how ethical behavioral control conduct, as well as the mounting demands for proactive,
systems can be appropriately applied, which can provide socially responsible, and sustainable business practices. As
unparalleled security, enhanced convenience, heightened a result, some organizations have established CSR initia
tives as a manifestation of their mission and business core
accountability, better fraud detection and is very effective
in depressing fraud, thereby improving CSR among values in response to emerging issues such as internal
organizations. fraud.

The potential for internal fraud is a fact of life for

Keywords Fraud • Ethics • Internal controls • Throughputorganizations today, especially in auditing (Zimbelman
Model • Corporate social responsibility 1997) and financial markets (Erickson et al. 2004).
Infringements of ethics, trust, and responsibility are at the
seat of fraudulent activities (Clement 2006). Fraud is an
intentional dishonesty that brings about to its injured party
an economic loss and/or the individual responsible to
realize a gain (Rodgers 2011).1
W. Rodgers
Cressy's (1953) Fraud triangle depicts that for fraud to
University of Hull, Hull, UK
e-mail: w.rodgers@hull.ac.uk occur, each of three conditions must present: perceived
pressure, perceived opportunity, and rationalization (see
W. Rodgers Fig. 1). Perceived pressure from a non-sharable financial
University of Texas, El Paso, TX, USA
problem produces the motive or incentive for the crime.
A. Söderbom Perceived opportunity is the perception (1) that a control
School of Business, University of Halmstad, Halmstad, Sweden weakness is present, and (2) the probability of being caught
e-mail: arne.soderbom@hh.se

A. Guiral (El) 1 The legal meaning of fraud is comparable regardless, if the offense
Yonsei University, Seoul, Korea is criminal or civil. The difference is that criminal cases must meet a
e-mail: andres.guiral@yonsei.ac.kr higher burden of proof.

Springe

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 872 W. Rodgers et al.

The Fraud Triangle

(Information) 4 Judgment ] 4 Decision

Fig. 2 Eptm of individuals' decision processes diagram wh

P perception, / information, J judgment, and D decision choi
Fig. 1 (iSource Rodgers 1997)
Depiction of the Fra

is remote. Rationalizat
cognitive dissonance w
rationalization and, to a
opportunity linked wi
dons under which an a
wrong. (Fig. 2), an action is taken or not taken.3
This research paper aims to advance the fraud literature Further, the EPTM
by suggesting an Ethical Process Throughput Model positions that the decision
(EPTM) that can assist individuals with a framework make it strenuous for emp
enabling them to analyze complicated ethical situations is, EPTM approach
(Rodgers 2009). To our knowledge, this is the first study designed to provide r
providing alternative ethical positions and decision-making tions achieve their
pathways that might be useful in handling fraudulent sit- 1986; Trevino et al. 2
uations. Our research question inquires whether specific the stakeholder theo
internal control systems and policies supported by different practices" (Freeman
ethical positions may arrest fraudulent situations and theory puts forward that
improve CSR in organizations. To this end, we provide an maximize sharehold
EPTM framework embedded in the Fraud triangle that may consideration the positiv
assist individuals and organizations to become more alert other stakeholders. He
to the ethical implications of their decision choices as triangle and the EPTM ap
indicated by other studies (e.g., Rodgers et al. 2009; Guiral process of "ethical b
et al. 2010). protection procedure of "policies" that could impact upon
While the cornerstones of the EPTM approach centers stakeholders. Moreover, this com
on perception (framing the problem), information (financial control systems and policies
and non-financial), judgment (analysis of perception and different ethical positions. Impl
information), and decision choice, the model can highlight is a good start in order to enh
and explain how the elements of the Fraud triangle can is, fraud can take place as a
influence individuals' actions. Perception involves the internal controls (COSO 199
process of individuals framing their problem solving set or Check and balances of
view of the world (Sitkin and Weingart 1995).2 Informa- foremost rules for internal
tion stage (Fig. 2) includes the set of financial and non- 2010). The EPTM approach
financial information available to a decision maker for balances in order to assist in
problem solving purposes. The judgment stage (Fig. 2)
contains the process individuals' implement to analyze
33The
TheEPTM
EPTM
approachapproach
(Rodgers 1997)(Rodgers
has been used1997)
in several
has been use
contexts such as organizations (Rodgers and Gago 2001; Foss and
2 Rodgers (1997, 2006) argued that perception represents aRodgers
person's 2011), auditing (Rodgers et al. 2009), education (Rodgers
expertise, classifying, and categorization of information. Foretexample,
al. 2007), and financial markets (Rodgers et al. 2013).
an individual effectively implementing cognitive heuristics (Kahn
4 Internal control is defined as a process affected by an organization's
eman and Tversky 1982) of talking about and delivering products
structure, to
work and authority flows, people and systems, implemented
customers when other potential customers are in the sametovicinity
assist an organization to accomplish specific goals and objectives
thereby influencing future sales. (COSO 1999).

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 CSR Enhanced Control Systems 873

limit financial losses by employees. Th

couple with the Fraud triangle can provide
an internal control system to bring
seek to enhance socia
(1) Responsible management for ascertain
situations.
nal controls are established, properly doc
High-profile cases of
maintained and adhered to in each unit,
ron, WorldCom, Adel
or area of an organization, . .
... _ ... . ,, .. . ^ , economic, environmental irresponsibility (e.g., Shell s
(2) Responsible employees to adhere with internal , . , . . , . .
* * ^ nonii »y\ rt r\ in li+mn I nannnfirirtn i n \ hoatho'
assumed invol
controls, and
Exxon's oil sp
(3) Establishing, appropriat
Nike's (and o
ing, and adhering to an o
"sweatshop" la
internal controls is essentia
Nestlé's proce
Since internal controls are
tion and detection of fraud,
systems and policies that a
ethical positions. The six do
cussed in terms of how spe
might be more appropriate i
their behavior are: ethical e
ism, relativist, virtue ethic
and Gago 2001; Rodgers 2009). ethical values, compliance with legal standards, and respect
An ethical behavioral control system that is suitably for communities, their citizens and environment. Decis
implemented can provide unparalleled security, enhanced making in the EPTM is defined here as a multi-st
convenience, heightened accountability, better fraud information-processing function in which cognitive p
detection and is very effective in depressing fraud. That is, cesses are used to generate a set of outcomes (Kohlb
an organization ethical behavioral control system typically 1969; Rest et al. 1999; Rodgers 2009). The central ins
underscores a particular type of ethical consideration that of the EPTM approach is that information inputs are
drives its decision-making behavior (Rodgers and Gago essarily embedded in a cognitive, behavioral, individ
2001). and social context (Reynolds 2006, 2008; Reynolds and
The next section imports a decision-making model Ceranic 2007). This
described as "EPTM" that addresses CSR in an ethical Fig. 2. Based o
model. This section is followed by a discussion of the pathways (Rodger
Fraud triangle and the role played by internal controls.
(1) P -> D
Then, we present our ETPM framework embedded in the
(2) P -► J -> D
Fraud triangle. The next section focuses on six dominant
(3) I -* J -► D
ethical positions that influence behavior as well as reducing
(4) I -» P -> D
fraud. Finally, conclusions and implications of the ethical
(5) P —> I —> J —> D
positions related to organizational internal control issues
(6) I -> P -> J -> D
are discussed.

The EPTM draws attention to: (1) only 2-\ major con
cepts that are instrumental in arriving at a decision; (2) the
Corporate Social Responsibility Viewed in an Ethical order of a particular pathway (and its strength) will great
Model influence the outcome of a decision; and (3) each decision
making pathway relates to a particular
Perceptions about the growing reach and influence of There are many p
global organizations have garnered attention to the influ- We discuss
ence of business on society. For example, the growth in model's six gen
"socially responsible investing" has produced institutional (2001), six dom
demand for equity in corporations that demonstrate a deontology, uti
commitment to CSR (Rodgers 2011). This has led to ethics of care.
"sustainability issues" that had heightened demands for (1) P -> D
corporations to take responsibility for the social, which indicates t

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874 W. Rodgers et al.

act in their perceived self-interest. (2) P J -> D influencing judgment).5 Pressure is generally motivated by
depicts the deontology position (Kant 1996) that situational events in the form of a need for money, personal
emphasizes the rights of individuals and on the judg satisfaction, or to a fear of failure etc. (i.e., M.I.C.E.—
ments associated with a particular decision process money, ideology, coercion, and ego (entitlement)).
rather than on its choices. (3) I -» J -* D mirrors the Opportunity is right of entry to a situation where fraud can
utilitarian position that is related with consequences, as be carried out, such as weaknesses in internal controls,
well as the greatest good for the greatest number of necessities of operating environment, management styles,
people. (4) I -» P -» D emphasizes the relativist posi and corporate culture. Rationalization represents personal
tion, which assumes that decision makers use themselves characteristics that include a willingness to commit fraud.
or the people around them as their basis for defining Personal integrity and moral standards need to be "bend
ethical standards (Coser 1957). (5) P -» I -> J -» D able" enough to justify the fraud, perhaps prompted by the
underscores the virtue ethics position, which is the need to feed their children or pay for a family illness. It is
classical Hellenistic tradition represented by Platodifficult to affect a person's motivation for fraud. Personal
(1997) (427 BC-347 BC) and Aristotle (1984) (384 BC features can occasionally be changed through training and
322 BC), whereby the cultivation of virtuous traits of awareness programs. Opportunity is the simplest and most
character is viewed as morality's primary function. In effective requirement to address to reduce the probability
the virtue ethics position, a circumstance is perceived of fraud. By developing effective systems of internal
(P). A conscious look for information (I) is initiated. control, you can remove opportunities to commit fraud.
Based on the information, a judgment (J) is made, If both the opportunity and pressure to commit a crime
which will support a decision (D). (6) I -> P -> J -> D are present, it is all too simple to put the last touches on the
embodies the ethics of care position (stakeholders' Fraud triangle (Coleman and Cressey 1980) by connecting
perspective), which focuses on a willingness to listen to the third and final point, rationalization. Simply put, indi
distinct and previously unacknowledged perspectives viduals are more likely to perform a wrongdoing, if they can
(Gilligan 1982). Ethics of care position state that justify it to themselves. Extending the retrenchment example
existing important information (I) influences one's per above, it is quite conceivable that the lone employee left
ception (P) of a circumstance. Their influenced percep doing all the work could embezzle organization funds and
tions are judged (J) before rendering a decision (D). rationalize it away because his or her workload has trebled.
Employees who commit fraud generally are able to do
so because there are pressure, opportunity, and rationali
Fraud Triangle and Internals Controls zation factors. Figure 1 portrays what is known as the
Fraud triangle. In order for fraud to occur, all three ele
The recession will typically not affect anyone who is ments have to be present. An organization can take steps to
honest to become dishonest; however, it may be a con affect all three elements. Employees should be cognizant of
venient excuse for those that have thought about it before pressures and how they relate to its overall fraud risk.
to act on it or those already embezzling to up the ante. Rationalizations can be abridged by encouraging a strong
Regrettably most individuals give good reasons for their sense of ethical behavior among employees and by creating
actions by saying they aren't harming anyone. They aren't a positive work environment. By implementing strong
stealing from a human, only an organization. Although, internal controls, an organization can remove much of the
this is not a justification, nevertheless, they want to opportunity for fraud to take place and can amplify the
believe it is. Unfortunately, it appears to be easier to chances of detecting it.
commit an undetected economic crime during a recession Internal controls can be placed into two main categories:
since organizations, in an effort to cut costs, often inad accounting controls and administrative controls. Account
vertently weaken their own internal controls through ing controls are measures that relate directly to the pro
injudiciously targeted cutbacks. For example, if before the tection of assets or to the reliability of accounting
recession, three employees were responsible for requisi information. An example is the utilization of cash registers
tions, payments and reconciliation, and two of the three to create an immediate record of cash receipts. Adminis
are retrenched, only one employee would be left to handle trative controls are measures designed to enhance opera
all three functions. This is imprudent as it eliminates the tional efficiency; they have no direct bearing upon the
segregation of duties, which is a crucial element of good
internal control. 5 Although, Cardwell (1960) maintained that the repeat offender is
not influence by pressure and/or rationalization. Moreover, Dorminey
According to Cressey's Fraud triangle (1953), there are
et al. (2012) advocate that the repeat offender (or predator) replaces
normally three requirements for fraud to occur: pressure, the fraud triangle's antecedents of pressure and rationalization with
opportunity, and rationalization (personal characteristics arrogance and a criminal mindset, respectively.

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 CSR Enhanced Control Systems 875

reliability of the accounting records

administrative control is a requirem
salespeople submits reports displayin
contacted on a given day.
Some of the protective mechanisms
control systems include:
a. Fraud risk assessment

b. Ethical behavioral control systems

c. Proper environment
d. External review

e. Reporting mechanism
f. Hire right
g. Fidelity bonding
Fig. 3
h. Establish "Perception of Detection" FiS- 3 EP™ framework EPTM framework
embedded in the Fraud embedded
triangle in the Fraud trian

i. Forensic data mining

Some of the ways for employee protection mecha- Fig. 3). In addition, to non-shareable financial pressures,
nisms include but are not limited to: the motivations or incentives of fraud perpetrators may be
more appropriately expanded to include money, ideology,
a. Segregation of duties
coercion, and ego (entitlement) or M.I.C.E. (Kranacher
b. Effective bidding processes
et al. 2011). Furthermore, M.I.C.E. permits for the likeli
c. Vendor approval controls
hood of collusion, which, technically, Cressey's non-shar
d. Policies
able financial need does not (Dorminey et al. 2012).
Code conduct, fraud policies, training Moreover, the EPTM "perception" concept includes
Conflict of interest, gifts, gratuities individuals' capability; for without it, to exploit contr
Etc. weaknesses for the purpose of committing and concealing
the fraud act, no fraud can occur. Moreov
e. Internal audit
amends the opportunity concept by restrainin
Depending upon the type of organizational boundaries to a small set of decis
imposed upon the employees will dictate the ethical system necessary capability. Ther
promoted throughout the entity. We argue that people are to affect the likelihood th
different in terms of culture, beliefs, values, attitudes, and exploit opportunities in
education levels in terms of their backgrounds and an organization.
upbringing. However, training and education have been Opportunity implies that (1) a control weakness is
determined to be a successful medium in changing the present, and importantly, (2) the probability of being
behavior of individuals (Rodgers et al. 2007). Not everyone caught is remote. Hence, opportunity requires the ability to
behavior can be affected by organizational systems; with- commit the act and to do so without detection. As indicated
out training and education, individuals' actions can lead to in Fig. 3, opportunity has an influence on "information."
more fraudulent activities and loss of assets. Rationalization is an effort to reduce the cognitive dis
sonance within the decision maker (Festinger 1957).
Moreover, Cressey (1953) asserted that individuals who
An ETPM Framework Embedded in the Fraud commit fraud desire to remain within their moral comfort
Triangle zone. Hence, fraudsters try to justify the fraudulent action
before the first fraud act in order to not view the
To better understand the interconnectedness of ethical a negative manner. Rationa
positions and internal control systems that handle fraudu- the perpetrator to redu
lent situations, we present an ethical decision-making without hesitation. As a dire
model (ETPM) embedded in the Cressey's Fraud triangle nalization element in the
(1953). As depicted in Fig. 3, the Fraud triangle emerges (Fig. 3), professionals have
from the EPTM, where pressure and opportunity are ronments where ethical sen
exogenous, and judgment and rationalization are over- maker contemplating a frau
lapped. We contend that pressure creates the motive/ By employing ethical thinkin
incentive for the fraud, thereby, influencing perception (see greater likelihood of cogni

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 876 W. Rodgers et al.

Table1 1Ethical
Table Ethical processEthical
process Ethicalprocess
processAspects
Aspectsof
of ethical
ethical Aim
Aim IC
IC examples
examples
pathways aspects
pathways aspects and
andinternal
internalthinking
thinking model positions
model positions
control (IC)
control (IC)examples
examples ____________________________________________________
Ethical
EthicalEgoism
EgoismWants,
Wants,
needs,
needs,
and Maximizing
and Maximizing
one's utility
one's
or Establishing
utility or a Establ
posit
P -> D desires advantage in an at the top" presence in
organizational setting order to influen
organizational behavior
Deontology (rule Laws, rights, Ethical behavior is derived Employees perform job
base) procedures, based on duty or job requirements by following
P -> J -> D guidelines, etc responsibility not the the organization's manual
consequences of resultant of work duties and
actions responsibilities (e.g.,
payroll system controls)
Utilitarianism Values, attitudes, and Consequences aimed at Bonuse
I -• J
I ->
-> DD beliefs
beliefs results
results are
are more
more important
important promotions,
promotions, etc. are tied to
than procedures
procedures or
or duty
duty the
the overall
overall improvement
improvement
of the company's
company's
operations (e.g., controls
controls
over compensation)
compensation)
Relativist Wants, needs, and Ethical consideration is Proper controls regulating
I -> P -> D desires are modified relative to the norms of departments that are
by the environmental one's up-bringing, culture decentralized in terms of
conditions or situation placed in operations, personnel, etc.
(e.g., control systems
depicting various types of
measurements that can be

implemented by
departments-present value,
judgmental value, etc)
Virtue Ethics Values, attitudes, and Consequences or outcomes Virtues such as honesty and
P -+ I -» J -» D beliefs are based are based upon one's integrity drive
upon one's reputation or virtues relationships and
perception transactions with
stakeholders (e.g.,
customer relations
management syste
Ethics of care Laws, rights, Ethical behavior is derived Instituting awareness and
I -+ P -» J -» D procedures, based on duty or stability of social,
guidelines, etc. are a responsibility as it relates economic, and
function of the to stakeholders (e.g., environment factors; w
stakeholders' customers, suppliers, other reducing fraud/waste
interests employees, shareholders, respecting differences of
community etc) opinion (e.g.,
implementing suggestions
from suppliers/customer
questionnaire forms

Ethical Positions Reducing Fraud and Enhancing utilitarianism, relativist, virtue ethics, and ethics of care)
Internal Control Systems are viewed as the most dominant and influential in decision
making governed by particular moral perspectives to
reduce fraud risks (Rodgers and Gago 2001; Rodgers
Ethical positions can influence behavior in an organization
when solving problems (Rodgers and Gago 2001). 2009).6 We link these ethical pathways to the ETPM
These
embeddedby
ethical positions may enhance internal control systems in the Fraud triangle to illustrate how specific
reducing fraud and waste due to environmental shifts
internalor
control systems and policies supported by different
changes in personnel. With human nature being what it is,
it is unlikely that organizational misconduct will 6ever
Although,
be it is important to note that other pathways in the
described decision-making model also contribute to the above ethical
entirely stamped out. Nevertheless, the risks of it occurring
positions but in a minor way. As discussed in Rodgers (2009), the
can unquestionably be managed and minimized. The fol pathway to each particular ethical view is the most
corresponding
lowing six pathways (ethical egoism, deontology,
dominant (Table 1).

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 CSR Enhanced Control Systems 877

Table
Table
2 Fraud triangle2
applied
Fraud triangle
Ethical process Pressure applied
Opportunity Rationalization
to weaknesses in ethical control
model
thinking model
systems
Ethical Egoism Wants, needs, and desires If I can get away with it I deserve it
P -» D are high
Deontology If rules do not cover New situation, no No instructions or
P -+ J -> D situation,
situation, IImay
maybe
be policy
policy manual
manual supervisory
supervisoryto
tocontradict
contradict
pressured actions

Utilitarianism Goals are not achieved Ends justify means Maximization of profits for
I -+
-» J
J ->
- D consequential shareholders
oriented

Relativist Cultural, up-bringing, etc. Based on situation or I deserve it

II ->->
P -►
P DD affected
affected by wants wantsenvironment
by needs environment
needs
and
and desires
desires
Virtue
Virtue Ethics
Ethics Virtues
Virtues such such
as character,
as character,
Organization
Organization has vastly
has vastly
Difficulty
Difficultyof establishing
of establishing
the
P
P-tI-»J-tD
- I -> J ^ D reputation
reputation reduces
reduces
but different
but
different opinions nature
nature
opinions
on onofof
thethe
virtues
virtues
may
maynot
not eliminatewhat
eliminate whatconstitutes
constitutes
a a
pressures
pressures virtue
virtue

Ethics
Ethics ofofcare
careAttempting
Attempting to solve
to solveStakeholders
Stakeholders When
When
are are
spread carried
spread carriedto an
toextreme,
an extre
I -» P -» J -> D problems of stakeholders across a wide this type of system can
with confronting territory or produce decisions that
contradictory goals may international thereby appear not simply
not be possible difficult contact subjective but arbitrary

ethical positions may reduce the probability of fraudulental potential benefits of a task, with allowance of some ri
behavior. taking. Management's preference-based style should
establish a "tone at the top" (including
P -> D: Ethical Egoism Position guidance about what is right and wrong) and extent of its
communication throughout the organization. This prefer
Rodgers et al. (2007) claimed that a dominant business ence-based style can push for commitment to integrity
school theory relates to the "ethical egoism" or rational ethics that is communicated effectively throughout
choice decision making immensely the way individuals organization, both in words and deeds. Further, employ
make ethical decisions. That is, rational-based theory can be given ongoing feedback regarding appropr
implies that an individual is better off by maximizing his or actions and behaviors. Management appropriately can d
her internally driven utility function. Rational choice the- with signs that problems exist, especially when the cost
ory calls attention to the role of enlightened self-interest in identifying problems and dealing with the issues could
a person decision-making deriving primarily from eco- large.
nomic models. In other words, people are viewed as adding However, management preference-based style shou
up the benefits and costs of various courses of action monitored for negative pursuit of obtaining goals that m
(rationalization in Fraud triangle—Table 2). lead to fraudulent behavior in an organization. For exam
Internal control systems that incorporate the philosophy pie, management may be pressured to meet unrealisti
and operating style of management are strongly motivated performance targets (particularly for short-term results), a
by their preferences; that normally have a pervasive effect well as the extent to which compensation is based o
on employees (opportunity in Fraud triangle—Table 2). achieving those performance targets. This could lead to
These are intangibles, but one can look for positive or conditions such as financial or other incentives that ca
negative signs based upon management's preference unnecessarily and unfairly test individual's adherence to
behavior. The nature of business risks accepted, (e.g., ethical values. Controls should be in place to reduc
whether management often enters into particularly high- temptations that might otherwise exist,
risk ventures or is extremely conservative in accepting Without a positive "tone at the top" management style,
risks.) can be directly influenced by management's employees' perceived need to commit a fraud and violate
preferences. internal controls may be created by expensive addictions
Based upon management's preferences, internal control such as substance abuse, sex addict
systems should operate in a manner to encourage and spending addiction (pre
employees to proceed only after analyzing tasks and Table 2). Organizations are limi

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 878 W. Rodgers et al.

prevent this. However,

when the ethical egoism
"tone at the top" mana
behavior and spendin
good for the
P -* J -* D: Deontology (rule base) Position sure in Fraud triangle—Table 2). To do so, they must
resolve two threshold issues: one, which sources of infor
Ethical behavioral control systems should examine whether mation and stakeholders of the community at issue are
the decision itself contributes to "in general" the intent of a "relevant" (I)? And two, how does one define the "greatest
rule or law governing employees' behavior in an organi- good" (J) before rendering a decision (D)?
zational setting. This requires identification (P) with the The utilitarian position of behavioral control systems
rule and a subsequent analysis (J) of what comprises a incorporates or implies the following set of fundamental
"good" rule (D). These rules can be derived from their beliefs: maximizing value for shareholders is the right
belief systems, those, which are derived from their mem- social goal for organizations since it is equivalent to
ories, and those values that transcend it (rationalization in maximizing the overall wealth being created by a corpo
Fraud triangle—Table 2). The basic steps of a rule-based ration. Financial markets do a good job of assessing the
ethical behavioral control system include: true value of financial securities such as common stock.
Therefore, stock price performance is the best measure of
1. Promoting understanding the mission of the
value being created for shareholders. Maximizing share
organization,
value also helps to discipline managers and their internal
2. Perform risk assessment to identify and categorize
control systems since it involves holding them accountable
risks,
for a single metric that, in theory, is forward looking.
3. Prioritize risks and activities of employees,
Introducing other metrics would confuse things and make it
4. Design processes, training, and checks/metrics (con
easier for managers to use their positions to advance their
trols) for top level risks,
own interests rather than the interests of shareholders
5. Monitor internal control effectiveness and improve as
(opportunity in Fraud triangle—Table 2). Further, this
required, and
position maintains that internal control systems can
6. Repeat steps 2-5.
improve since managers will do a better job of maximizing
This type of rule-based system should be monitored by share value, if they are given high-powered incentives
regularly confirming that process checks are functional and the form of compensation packages tied to stock pr
that process metrics demonstrate effectiveness for performance, such as stock options. That is, performanc
employees. Corrections are made as required. Furthermore, measurement metrics can be linked with the increases of
a rule-based system cannot legislate employee behavior on sales volume and/or the reduction of expenses. In th
matters dealing with certain types of feelings (e.g., kind- pursuit of "maximizing" the short-term capital stock value
ness, sharing, etc.) leading to incentives or motivations in an organization as well as with offering generous
(pressure in Fraud triangle—Table 2). executive compensation packages; however, it could lead
The rule-based pathway (deontology) highlights the to fraudulent activities such as overestimating sales vo
assignment of responsibility, delegation of authority and ume, reducing expenses by unjustly terminating empl
establishment of related policies in order to provide a ees, etc.
basis for accountability and control, and set forth indi- This utilitarianism perspective entails the attitudes,
viduals' respective roles. Moreover, the assignment of values, and beliefs toward financial reporting, includin
responsibility and delegation of authority also deals with disputes over application of accounting treatments,
organizational goals and objectives, operating functions, Examples include selection of conservative vs. liberal
and regulatory requirements, which include responsibility accounting policies; whether accounting principles hav
for information systems and authorizations for changes. been misapplied, important financial information not d
For example, authority and responsibility are assigned to closed, records manipulated or falsified (rationalization in
employees throughout the organization's departments. The Fraud triangle—Table 2).
responsibility for decisions is related to assignment of Moreover, managers should identify both short- and
authority and responsibility as depicted in an internal long-term reported results. To determine, if financial o
control system to diminish fraud (opportunity in Fraud performance targets are met, appropriate reports are su
triangle—Table 2). Therefore, the appropriate information mitted in order to take appropriate corrective action when
is considered in determining the level of authority and inappropriate actions are recognized. Finally, estimates a
scope of responsibility assigned to an individual. based on valid, reasonable, and documented assumption

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 CSR Enhanced Control Systems 879

I -> P -> D: Relativist Position become aware of and interpret an organizational situation
(P), and then figure out what options are viable (I) to be
This position echoes that incentives and motivations driv- analyze (J) before a decision is rendered (D).
ing ethical behavior are inextricably linked to the A person's character is underlined by consequenti
employees' different values in an organization (pressure in which focuses on the long-term benefits that the virtu
Fraud triangle—Table 2). Hence, it is very complicated to bring to individuals and organization as a whole (pr
argue that the moral standards implemented by an organi- in Fraud triangle—Table 2). What employees lose in term
zation from one department to another (especially in dif- of quick and large profits, they gain in the form of cor
ferent countries) can be imposed on employees. The first rate, civic, and personal virtues of loyalty, perseve
part of a relativist position places an employee as an actor and benevolence. In addition, in utilitarianism the ends,
in a particular environment (I). Their sensitivity (P) would greatest pleasure for the greatest number justifies the
be influenced by discerning the facts within a condition, (sometimes clearly corrupt), but in virtue, ethics means
which will give the issue (D) its substance. That is, ends are fused in remarkable fashion. That is, practicing
employees' fact-finding and investigation are often dis- virtues provides a healthy organizational environmen
torted or blinded by where the decision making takes place. One of the weaknesses of the utilitarian behav
This blindness is a failure to discern relevant facts and control system is the myriad contingencies, and
rigidity of factual development. Hence, cultural, environ- tainties that make a prediction virtually impossi
mental, and other factors drive the ethical considerations at contrast, the value of the virtues is well attested, and
a particular time and place (rationalization in Fraud trian- individual of character is exceedingly predictable
gle—Table 2). reliable. Complex and variable contexts make the appli
For internal control purposes, this position emphasizes cation of rules (P -» J -* D) diff
rationalization in terms of justification of actions taken by behavioral control system is
employees. This position also is a modification of ethical details and offers employee
egoism (P -> D) in those employees' wants, needs, and improvise (opportunity in F
desires strong motivators for decisions made, so as long as A problem with virtue e
there is a way of rationalizing courses of actions. fishing the nature of the virtu
The relativist ethical pathway can be utilized when an and societies often have vast
organization has international operations that are decen- constitutes a virtue. Notwit
tralized. The extent to which modifications to a depart- emphasized by an organizati
mental organizational structure are made in fight of In other words, any character
changing conditions should be made available. For internal virtue must reasonably be reg
control purposes, management's should have concerns virtue for all employees.
pertaining to data processing, administrative, and Virtues are essential to p
accounting functions as it relates to the reliability of ethical framework and con
financial reporting and safeguarding assets (opportunity in holders (rationalization in Fra
Fraud triangle—Table 2). regard, the human resource policies are central to recruiting
For example, international operations reporting and retaining competent people to enable an organiz
accounting principles deviations should be justified and values to be carried out and its goals achieved.
approved by headquarters. Moreover, the decentralized more, attention should be given to additional poli
accounting and administrative activities should be suffi- procedures, which address the organization's rep
ciently monitored, as well as the financial reporting of and value systems.
operating results. Management should periodically evalu- Promoting virtues also can be immersed into th
ate a department's organizational structure in fight of resources internal control system for policies a
changes in services/activities, automation, etc. dures for hiring, training, promoting, and comp
employees. This approach can contribute to existing per
P -> I -> J -+ D: Virtue Ethics Position sonnel policies/procedures in recruiting or developing
competent and trustworthy people necessary to support an
The employees' way of seeing and being in a particular effective internal control system,
situation is related to what Aristotle says about character Further, management should communicate expectations
and of good up-bringing (Solomon 1999). An organization about qualifications of those to be hired or participates
promoting a virtue ethics system would not have as many directly in the hiring process. A fair and equitable control
strict rules and guidelines thereby maximizing the utility system for compensating employees should exist, based
principle (I J -»• D). In this type of system, employees upon level of skill and ability.

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 880 W. Rodgers et al.

The virtues of the orga

bilities and expectations
employees. New employee
responsibilities and ma
given a written copy of
values and cultures of t
sonnel should meet period
job performance and su
rnai performance rev
annually. employees have relationships and will be affected by those
relationships, producing knowledge. The advanta
I -> P -> J -» D: Ethics of Care Position approach are that it is responsive to
harm. The disadvantage is that, when carried to
Ethics of care behavioral control systems are in parts an this type of system can produce
extension of rule-based system (P -» J D), whereby, an not simply subjective but ar
attempt is made to provide attention and concern to the For example, an internal c
relatively important interests of various stakeholders. That sustainability issues are incom
is, ethics of care and rule base positions are not opposed social, economic, and enviro
but complementary attributes of the society: both are when making decisions regard
necessary but not sufficient (Tong 2009). This perspective in Fraud triangle—Table 2
is founded on the assumption that the person is viewed as control system supporting
essentially relational, not individualistic. That is, employ- tures includes the relation
ees have relationships that cannot be separated from their environmental territorie
environment. internal control system is centered on "development,"
Employees might consider how technology, gender, which meets the needs of the
culture, and class (I) affect moral interpretations (P) of ing the ability of future generati
rules within their classroom setting (pressure in Fraud tri- (WCED 1987). This perspe
angle—Table 2). Employees then analyze (J) ethical management, and the natural e
problems in light of their economic, social, and historical resources that should assist
context before taking action (D). For instance, employees Sustainability is critically
may explore the rationale for the oaths taken by corporate only in relation to the capital
managers, the regulations governing the rules, and the also long-term maintenance a
statutes governing corporate behavior. The primary objective of augmenting sustainability is to
Ethics of care behavioral control system rests on the interconnect the essentials of economics, social, and envi
understanding of relationships as a response to another in ronmental efficiency into ethics of care's behavioral con
terms of their particular needs. Moreover, it focuses on the trol system that can be maintained in a healthy state,
moral value of being concerned toward other stakeholders Efforts toward characteristics of this aim are part of sus
(e.g., suppliers, customers, community, etc.) with whom tainability ethical of care's system (rationalization in Fraud
the organization has distinctive and valuable relationships. triangle—Table 2).
The advantages of this approach are that it is responsive to In sum, the six dominant ethical positions have its
immediate concern and harm. The disadvantage is that, respective strengths in influencing individuals to change
when carried to an extreme. This type of system can pro- their behavior (i.e., motives/incentives) thereby strength
duce decision choices that seem not simply subjective but ening internal controls and diminishing rationalization (i.e.,
arbitrary. modifying "judgments"). Notwithstanding, Table 2 illus
Organizational structure should not be so simple that it trates weaknesses in each of
cannot adequately monitor its various department activities could possibly lead to
nor so complex that it inhibits necessary flow of informa- discussed, the Fraud triang
tion. Management should fully understand their control opportunity, and rationalizatio
responsibilities and possess requisite experience and levels behavior in defeating a
of knowledge commensurate with their positions. system. Each ethical posit
Appropriateness of the organizational structure and its drives its pathway. Nam
ability to provide the necessary information flow to manage (wants, needs, and desires
its activities rests upon its operations being centralized or egoism position; rules t

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CSR Enhanced Control Systems
may lessen the appropriateness of a deontology position;
and justifying the means to accomplish a short-term goal
that may hamper long-term goals for the utilitarian position
(Rodgers 2009). In addition, different moral positions can
cause havoc in a relativist control system; virtues may be
conflicting in a virtue ethics control system; and attempting
to get every stakeholder on the same page maybe a fruitless
pursuit.
Conclusions and Implications
We contribute to the existing literature by implementing an
ethical decision-making model embedded in the Cressy's
(1953) Fraud triangle. Specifically, this study shows how
six ethical pathways can significantly curtail fraudulent
behavior. We demonstrate that ethical positions can
enhance behavior by better handling situations of conflicts
of interest, illegal or other improper payments, supple
mental employment, accepting gifts from vendors, etc.
Annual reviews can address whether all employees
acknowledge understanding of the ethical positions to be
implemented in their daily tasks. These positions can also
help employees to better detect misconduct and to mini
mize the consequences of wrongdoing by making
employees more aware of what behavior is acceptable or
unacceptable and suggest what to do if they encounter
improper behavior. Moreover, these ethical pathways can
help management to avoid damages to a company's repu
tation. If a written code of conduct does not exist, ethical
positions may be communicated orally in staff meetings, in
one-on-one interface, or by example when dealing with
day-to-day activities.
Ethical positions should provide management with
guidance on situations as well as the frequency with which
intervention may be needed. Management intervention can
documented and explained appropriately as related to a
particular ethical position. Areas where manager overriding
of controls is explicitly prohibited can be documented and
made known. Lastly, deviations from established ethical
positions can be investigated and documented.
Finally, this study has some limitations. While we pro
vide ethical reasoning to solve potential fraudulent
behavior, our framework does not explicitly address
whistle-blowing implications. For example, after imple
menting our framework one can expect that employees will
become more aware of a wrongdoing. However, it does not
necessarily mean that they will be more prone to report the
misconduct (Lee and Fargher 2013). Another important
issue not discussed in this paper is the role played by
education. Reducing the risk of fraud in an organization
can begin by educating directors, management, and
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881
employees. Future research can explore effective ways to
communicate ethical decision making.
Acknowledgments This study was supported by the National
Research Foundation of Korea Grant funded by the Korean Govern
ment (NRF-2012-S1A3A2-2012S1A3A2033412). Andres Guiral
acknowledges financial contribution from the Spanish Ministry of
Innovation and Science (research projects SEJ2004-00791ECON,
SEJ2007-62215/ECON/FEDER, SEJ 2006-14021, EC02010-17463
ECON-FEDER).
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