International Journal of Law, Crime and Justice xxx (xxxx) xxxx

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International Journal of Law, Crime and Justice

journal homepage: www.elsevier.com/locate/ijlcj

The effect of ethical corporate culture on anti-fraud strategies in

South Korean financial companies: Mediation of whistleblowing
and a sectoral comparison approach in depository institutions
Joon Bae Suha, Hee Sub Shimb,∗
a
Korean Police Investigation Academy, South Korea
b
Hannam University, South Korea

A R T IC LE I N F O ABS TRA CT

Keywords: Internal fraud in financial companies can have a devastating effect on the economy, once de-
Ethical corporate culture monstrated in the Savings and Loan Crisis in the US, and the Savings Bank Scandal in Korea.
Financial institution fraud Using path analysis methods, this study attempts to explore direct and indirect pathways among
Whistleblowing three respective dimensions of ethical culture, whistleblowing policy, and overall evaluation of
Anti-Fraud strategies
anti-fraud strategies in two financial sectors in South Korea (i.e., commercial bank vs. small and
Tone at the top
Ethics training
medium sized depository institutions). The study finds that more vibrant and proactive man-
agerial efforts, such as setting an ‘ethical tone at the top’ and implementing an effective ‘ethics
training’ are necessary to develop a whistleblowing policy in an organization, which in return,
positively affect the employees' perceived corporate anti-fraud strategies. This finding, in parti-
cular, can be beneficial for small and medium sized depository institutions, which require more
cost-effective measures to have a competitive edge in financial markets.

1. Introduction

Fraud can be defined as “intentional deception by concealing or misrepresenting information that harms the financial interest of
another person(s) and benefit the financial interests of the perpetrator” (Oxford English Dictionary, 1961). It is categorized in
numerous ways, such as consumer fraud, investment fraud, and online fraud to name some of them (Albrecht et al., 2015). Especially,
financial institutions fraud is known by a generic term of ‘bank fraud’ and it includes a variety of financial crimes, such as em-
bezzlement, loan fraud, and money transfer fraud, etc. (ACFE, 20151). Traditionally, financial institutions are known to have the
greatest risk of fraud in a workplace (ACFE, 2012, 2014, 2016) and fraud that occurs in financial institutions can cause contagious
panic and a series of bankruptcy to national, or even international economy (Krugman and Wells, 2015). For instance, some studies
concluded that fraud and malpractice within the financial institutions were prominent causal factors of notorious financial crises,
such as Savings and Loan Debacle and Subprime Mortgage Crisis in the US (Black, 2005; Calavita et al., 1997; FCIC, 2011; Friedrichs,
2010; Tillman, 2015). Notably, bank fraud can be perpetrated by persons internal or external to the institution. However, this study
pays attention to internal fraud committed by employees or top managers within the depository financial institutions (Hereafter,

∗
Corresponding author.
E-mail addresses: toto1579@gmail.com (J.B. Suh), agoodrain@gmail.com (H.S. Shim).
1
Association of Certified Fraud Examiners, the world's largest anti-fraud organization that provides anti-fraud training and education.

https://doi.org/10.1016/j.ijlcj.2019.100361
Received 9 January 2019; Received in revised form 9 July 2019; Accepted 5 November 2019
1756-0616/ © 2019 Elsevier Ltd. All rights reserved.

Please cite this article as: Joon Bae Suh and Hee Sub Shim, International Journal of Law, Crime and Justice,
https://doi.org/10.1016/j.ijlcj.2019.100361
J.B. Suh and H.S. Shim International Journal of Law, Crime and Justice xxx (xxxx) xxxx

DIs2) in South Korea.

To prevent internal fraud in DIs, the Committee of Sponsoring Organization (COSO, 2013) has proposed the integrated internal
control framework highlighting the importance of cultivating ethical environment. Moreover, the usefulness of whistleblowing policy
was underlined in detecting and preventing fraud in corporations (ACFE, 2012, 2014; 2016; Johansson and Carey, 2016). Although
there are previous studies that delve into the relationship between organizational characteristics and whistleblowing policy (Lee and
Xiao, 2018; Gao and Brink, 2017; Taylor and Curtis, 2013; Dalton and Radtke, 2013; Seifert et al., 2014, 2010; Soni et al., 2015; Lowe
et al., 2015; Rose et al., 2018), the relationship between the appropriateness of whistleblowing policy and corporate anti-fraud
strategy in financial companies has been understudied despite its significance. In this respect, the present study attempts to extend
whistleblowing research into broader financial industrial sectors, entailing commercial banks and small and medium sized (Hereafter
SM) DIs in South Korea. Moreover, the study sheds light on multi-faceted relations between the diverse elements of ethical culture
and overall anti-fraud strategies in the DIs.
Interestingly, Koreans commonly categorize financial companies by number; commercial banks are referred to the ‘first’ sector
and the SM DIs are referred to the ‘second’ sector (FSC, 2017). Since the Great Depression in the early twenty-first century, com-
mercial banks have been regarded as less risky institutions in terms of occupational fraud than SM DIs (Krugman and Wells, 2009:
819). This can be attributed to the fact that SM DIs, which are referred to the ‘second’ financial sector in Korea seem to have more
fraud risk due to several factors identified: (1) small number of staff and low budget to fight fraud, (2) lessened supervision by the
regulating agency, (3) poor segregation of duties (internal control system), (4) low fraud-awareness and weak anti-fraud cultures
(Suh et al., 2019). The Korean Savings Bank Scandal in 2011–2012, which also took place in SM DIs, vividly demonstrated how
occupational fraud in financial companies could have a detrimental impact on a society. For instance, more than 20 savings banks
were suspended by the Korean government due to internal frauds, costing many families and pensioners their life savings. About 200
managers, mostly the executives of savings banks across the nation, have been indicted by the special investigations team at the
Korean prosecutors' office and four savings bank executives committed suicide in the midst of investigations (KBS News, 2012).
Coleman (1987) once argued that work-related subcultures sometimes allow certain criminal activities to be seen as acceptable or
even required behavior, while they are strongly condemned by a whole society. In this sense, the Korean Savings Bank Scandal is a
good example of demonstrating the importance of ethical corporate culture. The incident has led to the questions about the work-
place integrity and the effectiveness of anti-fraud strategy in the financial companies, especially at the SM DIs (Oliver, 2011; The
Kyunghyang Sinmun, 2012). These structural differences between the two sectors became a strong motivator of the present study.
Surprisingly, there was scarce academic literature that attempted to discover the cause of internal fraud and struggled to consider
the differences in the financial sectors. In this respect, this study seeks to investigate the structural differences between mainstream
commercial banks (1st sector) and SM thrift institutions (2nd sector) with respect to their ethical culture, whistleblowing policy, and
overall evaluation of anti-fraud strategy. Using path analysis methods, this study explores direct and indirect pathways among three
respective dimensions of ethical culture, whistleblowing policy, and overall evaluation of anti-fraud strategy. We aim to suggest an
effective counter-fraud strategy, customized to each financial sector. This comparative attempt has much more potential to contribute
to counter-fraud studies since, to date, the difficulties in data collection from the financial sectors have hindered quantitative research
despite the vulnerability of the industry to internal fraud (Tillman, 2015; ACFE, 2012; Wells, 1997).

2. Literature review and hypothesis development

2.1. Anti-fraud strategy and its effectiveness

Cressey's fraud triangle (1953) indicates that there are three interrelated elements, which enable someone to commit fraud:
‘pressure’ that drives a person to want to commit fraud, ‘opportunity’ that facilitates him or her to commit fraud, and the ability to
‘rationalize’ the fraudulent behavior. The vulnerability that an organization confronts from the people capable of conjoining all three
elements is called ‘fraud risk’ (ACFE, 2015). There are various factors influencing fraud risk that a company is posed with: (1) the
nature of its business, (2) the environment in which it operates, (3) the effectiveness of its controls, and (4) the ethics and values of
the company (ACFE, 2015). Many studies imply that control weakness or low certainty of punishment is a major contributing factor
to fraud by creating opportunities in organizations (Albrecht et al., 2015; Dorminey et al., 2012). Therefore, it is vital to assess the
effectiveness of corporate anti-fraud strategies with respect to detecting and preventing fraud in an organization. There can be
various measures to gauge its effectiveness, but one of the most common methods is to directly enquire the members about the
effectiveness of the anti-fraud strategy in their company (Hunziker, 2017; Tunley et al., 2018).
Naturally, companies adopt different business strategies to compete within their industries. Bentley et al. (2013) found that
business strategy was a useful indicator for evaluating companies' internal control strength. Interestingly, Wheeler and Rothman
(1982: 1425) argued that illegal behavior was found more often in newer, smaller, less profitable organizations on the margins of
more central business networks. For designing an effective anti-fraud strategy, a recent study discovered that increased organiza-
tional investment could boost anti-fraud culture and monitoring control effectiveness, but only an elevated ethical corporate culture
was significantly associated with the decreased level of perceived fraud in organizations (Suh et al., 2018). Similarly, many studies
underscored the importance of developing ethical culture with respect to corporate anti-fraud strategies (Button and Brooks, 2009;

2
DI is one type of financial institutions that relies on customer deposit for major fund source and provides core banking services, such as loan and
savings to clients (i.e., commercial banks, credit unions, and savings institutions) (Saunders and Cornett, 2008).

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COSO, 2013; Giles, 2015; Gill and Goldstraw-White, 2010). Therefore, we formulized the overall evaluation of corporate anti-fraud
strategies as our outcome variable.

2.2. Ethical culture and core elements

The concepts of culture and climate are sometimes interchangeably used to explain organizational behavior. Culture is the
members' beliefs about how the organization should behave and operate, whereas climate is a shared perception of how the orga-
nization is currently operating (Agarwal and Malloy, 1999). Hence, ethical culture is more aimed at influencing behavior whereas
ethical climate is more likely associated with shared attitudes (Trevino et al., 1998). Trevino defines ethical culture as “a subset of
organizational culture, representing a multidimensional interplay among various formal and informal systems of behavioral control
that are capable of promoting either ethical or unethical behavior (Trevino et al., 1998: 451).” In a similar vein, Button and Gee
(2013) proposed the Fraud, Resilience and Culture Model fusing individual fraudsters, organizational structures, and cultural factors
all together to mitigate the fraud problem. According to Button (2008), an organization always confronts a security system with
malefactor, a person who does illegal things. However, the individuals are not in a vacuum and there are multiple factors that have
effects on them. In this context, organizational and industrial cultures can be highlighted in influencing whether a person involves in
fraud or not (ERC, 2010; Button and Brooks, 2009; Johnston, 2005; Rose-Ackerman, 1999; Coleman, 1987). Therefore, we seek to
explore the effect of ethical culture on the outcome variable.
Regarding ethical culture, Schwartz (2013) argued that three essential elements must be present if illegal or unethical activities
within or on behalf of the corporation are to be minimized sustaining an ethical corporate culture. The three principal elements entail
(1) the existence of core ethical values embedded throughout the corporation such as ‘integrity’; (2) the establishment of a formal
ethics program such as ‘ethics training’; (3) the continuous presence of ‘ethical leadership,’ which is an appropriate ‘tone at the top’ as
reflected by the board of directors, senior executives, and managers. In this regard, the present study attempts to test Schwartz's
(2013) three core elements of ethical culture (i.e., ethical leadership, ethical value, ethics training) and their possible impacts through
the mediating role of whistleblowing policy on the overall evaluation of corporate anti-fraud strategies in the Korean financial
sectors. The strength of this study lies in our broad data set encompassing diverse financial sectors. In return, this is expected to
overcome the limitations of the previous studies, which generally relied on the responses from a few companies or university students
(Alleyne, 2013; Trevino and Victor, 1992).

2.2.1. Tone at the top (ethical leadership)

“Downstream water cannot be clean unless upstream water is pure” (Old Korean saying, n.d.). Research in moral development
strongly suggests that honesty can be best reinforced when a proper example is set, which sometimes referred to as ‘the tone at the
top.’ Ethical leadership is to inspire others through words, examples, and good management to cultivate ethical awareness and
courage (Treviño et al., 2000). To prevent fraud, management must reinforce to its members through its actions that unethical
behavior will not be tolerated. (Albrecht et al., 2015). On the other hand, it is possible that CEOs or directors with power are more
likely to circumvent anti-fraud controls and able to commit more serious fraud (Tipgos, 2002; Wheeler and Rothman, 1982).
Therefore, the senior management of a company should firstly set an ethical tone at the top (ethical leadership) to prevent fraud in
the organization (Albrecht et al., 2015). In this respect, we developed the following Hypothesis.
Hypothesis 1A. There is a positive relationship between the perceived tone at the top and overall evaluation of anti-fraud strategy in
the organization.

2.2.2. Workplace integrity (ethical values)

Integrity can be defined as “honesty, sincerity, fairness, and adherence to high moral standards” (Audi and Murphy, 2006: 14).
Given the possible moderating role of integrity in the relationship between ‘rationalization,’ one of the Fraud Triangle elements and
‘fraud,’ it is generally expected that employees with higher integrity would not easily rationalize unethical behaviors (Albrecht et al.,
1984: Albrecht et al., 2015; Dorminey et al., 2012). Especially, workplace integrity is likely to be very important in organizational
settings because hierarchical structures and the division of labor in a company can lead to more ‘moral disengagement’ mechanisms (
Detert et al., 2008), which are also related to ‘rationalization’ in the Fraud Triangle (Cressey, 1953). To put differently, employee
fraud can be suppressed by encouraging a strong sense of workplace integrity and we formulized the following Hypothesis.
Hypothesis 1B. There is a positive relationship between the perceived workplace integrity and overall evaluation of anti-fraud
strategy in the organization

2.2.3. Ethics training

Ethics training is the foundation of fraud prevention and detection (Warren et al., 2014). All managers, staff, and employees
should be trained in terms of what fraud is, how fraud damages, and how to report any suspicious activities (ACFE, 2015; Giles,
2012). Generally, ethics training takes two forms; value-oriented and compliance-oriented programs; value-oriented programs fo-
cusing on ethical values are generally believed to have a stronger influence on reducing employees' misconduct than compliance-
oriented ones emphasizing threats of punishment (Weaver and Trevino, 1999). Warren et al. (2014) studied the effects of ethics
training on organizational culture before and after the introduction of formal ethics training in a company. Two years after the
training, sustained effects were found on the ethics indicators such as observed unethical behavior and perceptions of organizational

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efficacy in managing ethics. In this regard, we developed the following Hypothesis.

Hypothesis 1C. There is a positive relationship between the perceived ethics training and overall evaluation of anti-fraud strategy in
the organization.

2.3. Whistleblowing

Whistleblowing is defined as “the disclosure by organization members (former or current) of illegal, immoral or illegitimate
practices under the control of their employers, to persons or organizations that may be able to effect action” (Near and Miceli, 1985:
4). Previous research has investigated a range of determinants of whistleblowing at both organizational and individual levels (Near
and Miceli, 1995; Seifert et al., 2010, 2014; Lee and Fargher, 2017; Gao and Brink, 2017; Lee and Xiao, 2018). Lee and Fargher
(2017) revealed that a high-quality audit committee is associated with a lower likelihood of retaliation and external reporting. Seifert
et al. (2010) discovered that organizational procedural justice, distributive justice, and interactional justice increase the likelihood of
organizational accountant's internal reporting of financial statement fraud. Plus, Seifert et al. (2014) found higher internal whis-
tleblowing intentions when there is a great level of trust in the organization and in supervisors.
Moreover, ACFE (2012, 2014, 2016) discovered that appropriate whistleblowing policy in a firm could significantly decrease the
detection period and loss of fraud. However, Dussuyer et al. (2015) revealed that when wrongdoings were reported by whistle-
blowers, supervisors were perceived to react less by thanking the employee, but more to ignore what was reported or worse to make
the whistleblower a scapegoat for bringing it to their attention. Hence, preventing retaliation for whistleblowers is pivotal for the
success of the policy, but how to protect whistleblowers has always remained as a challenge in an organization (Lee and Xiao, 2018;
Giles, 2012; Dyck et al., 2010; Trevino and Victor, 1992). Expectedly, the different nature of business and operating environments
can present unique ethics and values in companies (ACFE, 2015). As a result, the respective ethical elements in each financial sector
will diversify the mediating role of whistleblowing on corporate anti-fraud strategies in the DIs. Therefore, we developed the fol-
lowing hypotheses for our mediating variable, the appropriateness of whistleblowing policy.
Hypothesis 2A. There is a positive relationship between the perceived tone at the top and the appropriateness of whistleblowing
policy in the organization.
Hypothesis 2B. There is a positive relationship between the perceived workplace integrity and the appropriateness of whistleblowing
policy in the organization.
Hypothesis 2C. There is a positive relationship between the perceived ethics training and the appropriateness of whistleblowing
policy in the organization.
Hypothesis 3. There is a positive relationship between the perceived appropriateness of whistleblowing policy and overall
evaluation of anti-fraud strategy in the organization.

3. Method

3.1. Data

Data were garnered from the ‘Occupational Fraud Risk’ study (see Suh et al., 2018). Targeting financial industry employees from
two different financial sectors (first3 and second4), the survey was conducted in South Korea from June to September 2016. The use of
a web-based questionnaire could guarantee their voluntary and confidential participation. Although a total of 444 employees were
initially asked to participate in the survey, our final analysis sample included 376 participants (response rates = 84.68%). The sample
appears to have quite comparable, albeit non-representative, characteristics to those of the whole population of Korean DIs' em-
ployees (Suh et al., 2018). Since the percentage of missing data was acceptably low, pairwise deletion techniques could be introduced
in our analyses (Hair et al., 2005).

3.2. Measures

3.2.1. Overall evaluation of anti-fraud strategy

The dependent variable of overall evaluation of anti-fraud strategy is created using two five-point (1 = strongly disagree,
5 = strongly agree) items: (1) “Overall, internal control systems within my current organization are effective for preventing fraud,”
and (2) “Overall, probability of getting caught for fraud is high within my current organization” (r = 0.766, p < .001). The first item
attempts to tap the effectiveness of fraud prevention, whereas that of fraud detection is reflected in the latter one (KPMG, 2009).
Respective responses are summed (Mean = 7.314, Std. Deviation = 1.838) and this composite variable appears to satisfy normality
(West, Finch, & Curran, 1996).

3
nationwide banks and regional banks.
4
local agricultural & fishery cooperatives, community credit cooperatives, credit unions, and savings banks.

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3.2.2. Tone at the top

Tone at the top for anti-fraud is measured by a single, normally distributed item that taps ethical leadership (Schwartz, 2013).
Participants are asked to rate the statement of “Regarding anti-fraud, senior executives in positions of authority set an example for
other employees within my current organization” on a scale of 1 (= strongly disagree) to 5 (= strongly agree) (Mean = 3.260, Std.
Deviation = 1.128). The theoretical orientation of this construct is founded on the notion that upper management's tone, called
ethical leadership, can also spread ethical behaviors to other members of staff (Rae and Subramaniam, 2008; Sutherland, 1983; see
also Victor and Cullen, 1987).

3.2.3. Workplace integrity

Given the belief that there is a positive association between ethical climates and ethical decision making (O'Fallon and Butterfield,
2005; Schwartz, 2013), to design an analytic model including integrity, one of core ethical values, is a prerequisite to reflect the
variation in an ethical corporate culture (Schwartz, 2013). A single, normally distributed five-point (1 = strongly disagree,
5 = strongly agree) item is utilized to measure workplace integrity. Participants are asked to respond to “The level of integrity within
my current organization is high” (Mean = 3.860, Std. Deviation = 0.996).

3.2.4. Ethics training

An effective ethics training program leads to an ethical, law-abiding corporate culture (Treviño et al., 2006; Schwartz, 2013).
Ethics training is measured with the following five-point (1 = strongly disagree, 5 = strongly agree) item: “Ethics training is well
conducted within my current organization” (Mean = 3.720, Std. Deviation = 0.959). No normality issue is observed.

3.2.5. Appropriateness of whistleblowing policy

The composite scale of appropriateness of whistle-blowing policies is created by summing two items (Mean = 6.184, Std.
Deviation = 2.095) whose response options range from 1 (= strongly disagree) to 5 (= strongly agree). Participants are asked to
answer whether “An effective whistleblowing system is operated within my current organization,” as well as whether “Whistleblower
protection policy is well operated within my current organization” (r = 0.744, p < .01). These two items attempt to capture their
levels of belief that management will promote an organizational member's ethical behavior (whistleblowing) (Warren et al., 2014).
There is no normality issue.

3.2.6. Control variables

Our analyses include a total of six controls: (1) age (Mean = 2.63, Std. Deviation = 0.848), (2) male (= 1, female = 0; fre-
quency = 230, percent = 61.2), (3) high-ranked (= 1, low-ranked = 0; frequency = 49, percent = 13.0), (4) high school and less (=
1, college and over = 0; frequency = 37, percent = 9.8), (5) presence of anti-fraud department (= 1, absence of anti-fraud de-
partment = 0; frequency = 310, percent = 82.4), and (6) second financial sector (= 1, first financial sector = 0; frequency = 171,
percent = 45.5).

4. Results

4.1. Descriptive statistics by financial sector

To consider whether systematic differences in participant responses are observed across financial sectors, both t-test and chi-
square test are conducted (see Table 1). Overall, the results show that first sector (commercial banks) employees are more likely than

Table 1
Descriptive statistics by group (n = 376).
Variable Range (Min.- First Financial Sector (n = 205) Second Financial Sector t-Test Chi-Square Test
Max.) (n = 171)

M (S.D.) # (%) M (S.D.) # (%)

Overall evaluation of anti-fraud 2–10 7.73 (1.69) 6.82 (1.89) 4.92***

strategy
Tone at the top 1–5 3.54 (1.04) 2.94 (1.15) 5.33***
Workplace integrity 1–5 4.07 (.90) 3.61 (1.05) 4.51***
Ethics training 1–5 3.96 (.90) 3.44 (.95) 5.46***
Appropriateness of whistle-blowing 2–10 6.90 (1.91) 5.32 (1.99) 7.85***
policy
Age 1–4 2.52 (.84) 2.77 (.84) −2.86**
Male 0–1 118 (57.6) 112 (65.5) 2.472
High-ranked 0–1 23 (11.2) 26 (15.2) 1.306
High school and less 0–1 15 (7.3) 22 (12.9) 3.235
Presence of anti-fraud dept. 0–1 188 (91.7) 122 (71.3) 26.711***

Note. ***p < .001, **p < .01, *p < .05.

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Table 2
Correlation matrix of all study variables (n = 376).
1 2 3 4 5 6 7 8 9 10 11

Overall evaluation of anti-fraud strategy (1) 1.000

Tone at the top for anti-fraud (2) .689*** 1.000
Integrity (3) .709** .635** 1.000
Ethics training (4) .786** .634** .664** 1.000
Appropriateness of whistleblowing policies (5) .695*** .709*** .581** .690** 1.000
Male (6) .029 .055 .089 -.059 .028 1.000
High-ranked (7) .140** .092 .172** .136** .147** .114* 1.000
Age (8) .070 .055 .130* .054 .094 .194*** .486*** 1.000
High school and less (9) -.032 -.022 -.018 .002 -.020 -.231*** .031 .134** 1.000
Presence of anti-fraud dept. (10) .250*** .189*** .211** .202** .224*** .163** -.008 .112* -.129* 1.000
Second financial Bank (11) -.246*** -.266*** -.230** -.271** -.376*** .081 .059 .146** .093 -.267*** 1.000

Note. ***p < .001, **p < .01, *p < .05.

those working at second sector (community thrift institutions) to favorably rate their ethical corporate culture. Specifically, sig-
nificant group-mean differences are indicated in overall evaluation of anti-fraud strategy (first financial sector vs. second financial
sector; mean = 7.73 vs. 6.82), tone at the top for anti-fraud (mean = 3.54 vs. 2.94), workplace integrity (mean = 4.07 vs. 3.61),
ethics training (mean = 3.96 vs. 3.44), appropriateness of corporate whistleblowing policy (mean = 6.90 vs. 5.32), and age
(mean = 2.52 vs. 2.77). Added to this, a chi-square test shows that 91.7 percent of first sector employees recognize the presence of
anti-fraud department within an organization, whereas only 71.3 percent employees working at second financial sector have the
same response (frequency = 188 vs. 122). Group differences in the other items (i.e., sex, rank, and education level) fail to reach
statistical significance.

4.2. Correlations

Before conducting several path models, zero-order correlations between respective two predictors are preliminarily examined
(Table 2). Each of theoretical constructs (tone at the top for anti-fraud, workplace integrity, ethics training, and appropriateness of
whistleblowing policy) appears to correlate well with the dependent variable of overall evaluation of anti-fraud strategy. Also all
directions of significant bivariate relationships are quite similar to those indicated by previous findings. Since no noticeable sign of
multicollinearity is observed in respective coefficient estimates, we can decide to include all the inter-correlated variables in our path
analyses.

4.3. Baseline path model for total sample

A series of recursive path models are estimated using the maximum likelihood (ML) procedure with bias-corrected (BC) boot-
strapping methods in Mplus 8.0 (Muthén and Muthén, 1998–2017). Given the possibly non-normal distribution of specific indirect
effects, the use of the non-parametric resampling method is desirable with appropriate control over such concern being maintained
(Preacher and Hayes, 2008). The structural part of the baseline path model (Fig. 1) is composed of five theoretical constructs (tone at
the top, workplace integrity, ethics training, appropriateness of whistleblowing policy, and overall evaluation of anti-fraud strategy),
and each of them is designed to respectively control for six observed controls (sex, rank, education level, age, presence of anti-fraud
department, and financial sector). To test mediation, the total sample (n = 373) is utilized.
Respective estimates with 95 percent confidence intervals (CIs) are drawn from a total of 2000 bootstrap samples. First, the three
sub-dimensions (tone at the top, workplace integrity, and ethics training) of ethical corporate culture appear to simultaneously,
positively affect overall evaluation of anti-fraud strategy with BC 95 percent CIs of 0.057–0.387, 0.252-0.645, and 0.513-0.973
respectively. Stated differently, when bank employees perceive that the levels of tone at the top, workplace integrity, or ethics
training within their organizations are high, they are also likely to evaluate their corporate strategy for anti-fraud in a positive way.
Second, both tone at the top and ethics training are found to positively influence appropriateness of whistleblowing policy (BC 95
percent CIs of 0.562–0.952 and 0.505–1.014 respectively), whereas workplace integrity fails to reach statistical significance. That is,
participants who highly rate tone at the top or ethics training within their workplaces also tend to regard their corporate whistle-
blowing policy as effective. Third, appropriateness of whistleblowing policy appears to positively impact on overall evaluation of
corporate anti-fraud strategy (BC 95 percent CI of 0.101–0.300). In other words, those who show favorable attitudes toward their
corporate whistleblowing policy are also likely to positively view their overall strategy of corporate anti-fraud. In addition, the
baseline path model for total sample is observed to explain 70.1% of the variance in our dependent variable (overall evaluation of
anti-fraud strategy).

4.4. Multi-group path models

Given the far-reaching, differential effects of SM community thrift institutions (2nd sector) on all theoretical constructs (Fig. 1; see
also Table 1), there is a need to conduct an additional multi-group analysis. As expected, somewhat different patterns of significance

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Fig. 1. Path Model for Total Sample (n = 373). Note. Inside the shaded box, thick solid line = significant effect, thick dotted line = insignificant
effect; Outside the shaded box, thin solid line = positively significant effect, thin dash-dotted line = negatively significant effect.

are observed between one path model for first sector employees (Fig. 2) and the other for second sector employees (Fig. 3). First, the
direct effect of tone at the top on overall evaluation of anti-fraud strategy fails to reach significance among first financial sector
employees, whereas, among second sector employees, tone at the top is positively associated with overall evaluation (BC 95 percent
CI of 0.098–0.500). Second, the significance of the direct linkage between workplace integrity and overall evaluation of anti-fraud
strategy varies across financial sectors. Specifically, the integrity-evaluation link appears to be significant only for first financial
sector employees (BC 95 percent CI of 0.421–1.005). Other than these two direct paths, no differential significance is observed by
financial sector.
To examine whether respective direct and indirect effects are statistically significant, along with whether differential significance
patterns are observed among such corresponding paths, an additional significance test is conducted for both population groups
(Table 3). Overall, the results are in line with our prior, visual check on Figs. 2 and 3. In more detail, among first sector employees,
appropriateness of whistleblowing appears to mediate the linkage between tone at the top and overall evaluation of anti-fraud
strategy (full mediation), as well as the ethics training-overall evaluation link (partial mediation), whereas whistleblowing fails to
play a mediating role in the relationship between workplace integrity and overall evaluation. Added to this, two out of three direct
paths (i.e., integrity-evaluation and training-evaluation) are observed to reach statistical significance.
Among the second sector employees, on the other hand, although the partial mediation linkage between ethics training, ap-
propriateness of whistleblowing, and overall evaluation of anti-fraud strategy is maintained in a similar way, the other patterns of
significance are quite different. Specifically, appropriateness of whistleblowing partially (not fully) mediates the tone at the top-
overall evaluation relation, and no influence is found between workplace integrity and the dependent variable. Added to this, when
there exists an anti-fraud department, only second sector employees are likely to favorably evaluate their corporate anti-fraud
strategy.

5. Discussion and conclusion

Albrecht et al. (2010) argued that most chabol scandals in South Korea occurred under the circumstances where malpractices of
chabols were regarded as shrewd financial tactics rather than unethical corrupt practices. In other words, cultural rationalizations,
such as fraud-tolerant attitudes in a corporation can increase the likelihood of fraud occurrence. This lesson not only can apply to
such conglomerates but also to financial companies in Korea. Reviewing many financial failures, such as S&L Debacle, Subprime

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Fig. 2. Path Model for First Financial Sector Employees (n = 202). Note. Inside the shaded box, thick solid line = significant effect, thick dotted
line = insignificant effect; Outside the shaded box, thin solid line = positively significant effect, thin dash-dotted line = negatively significant
effect.

Mortgage Crisis, and Korean Savings Banks Scandal, cultivating an ethical culture is stressed as the first line of defense for fraud
mitigation (ERC, 2010; Giles, 2015, 2010; Suh et al., 2018). However, the conceptual diversity of organizational cultures and dif-
ficulties in measuring the theoretical constructs have hampered developing comparison studies of various cultures and their possible
impacts on counter-fraud strategies (Warren et al., 2014). However, this study could successfully obtain comparable samples from
two different financial sectors in Korea (mainstream commercial banks vs. SM depository institutions). Moreover, the study dissected
the ethical corporate culture into three sub-dimensions (Schwartz, 2013) and sequentially explored its respective effects on ‘whis-
tleblowing policy’ and ‘corporate anti-fraud strategy.’
The results of path analyses provided meaningful implications for the management of fraud risk in financial companies in South
Korea, which was rarely spotlighted in counter-fraud studies. First of all, the mediating role of ‘whistleblowing policy’ was confirmed
in both pathways starting from ‘tone at the top’ and ‘ethics training’ to overall evaluation of anti-fraud strategies in the baseline path
model for total sample, supporting all the hypotheses except 2B. Specifically speaking, when bank workers perceive that the levels of
three core elements of ethical corporate culture (i.e., ‘tone at the top,’ ‘workplace integrity,’ or ‘ethics training’) are elevated, they are
also likely to evaluate their ‘corporate anti-fraud strategy’ as working effectively. Plus, respondents who highly assess ‘tone at the top’
or ‘ethics training’ within their institutions also tend to regard their ‘whistleblowing policy’ as more appropriate. Lastly, those who
show favorable attitudes toward their corporate ‘whistleblowing policy’ are also likely to perceive their ‘overall anti-fraud strategy’
positively. In other words, other than the indirect effect of ‘workplace integrity,’ the other two pathways of ethical cultural elements
(i.e., ‘tone at the top’ and ‘ethics training’) – ‘whistleblowing policy’ – ‘overall evaluation of anti-fraud strategy’ are corroborated.
Therefore, our study suggests that financial companies should firstly develop the ethical environment that can nurture whistle-
blowing programs by setting ‘ethical tone at the top’ and implementing ‘ethics training.’ After that, whistleblowing programs can be
implemented as expected to prevent and detect fraud in organizations.
One possible reason ‘workplace integrity’ failed to significantly impact ‘whistleblowing policy’ can be explained by moral psy-
chology literature (Kohlberg, 1981), which suggested that high ethicality often face rejection. Trevino and Victor (1992) discovered
that whistleblowers were perceived to be highly ethical but at the same time, they were susceptible to the dislike of and rejection by
other group members. In this sense, ‘workplace integrity’ is related to high moral standards in the organization, but seems to have no
effect on ‘whistleblowing policy’ without the supports of top management and co-workers in a company (Lee and Fargher, 2013;
Kaptein, 2011). By the same token, empirical research suggested that contextual variables explained more variance in the decision of

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J.B. Suh and H.S. Shim International Journal of Law, Crime and Justice xxx (xxxx) xxxx

Fig. 3. Path Model for Second Financial Sector Employees (n = 171). Note. Inside the shaded box, thick solid line = significant effect, thick dotted
line = insignificant effect; Outside the shaded box, thin solid line = positively significant effect, thin dash-dotted line = negatively significant
effect.

Table 3
Direct and specific indirect effects by group (n = 373).
Parameter First Financial Bank (n = 202) Second Financial Bank (n = 171)

b S.E. BC 95% CI b S.E. BC 95% CI

Direct Effect
Overall evaluation of anti-fraud strategy .182 .124 [-.075, .415] .274 s .104 [.098, .500]
← Tone at the top
Overall evaluation of anti-fraud strategy .701 s .145 [.421, 1.005] .240 .139 [-.010, .541]
← Workplace integrity
Overall evaluation of anti-fraud strategy .475 s .160 [.153, .774] .972 s .159 [.661, 1.281]
← Ethics training
Specific Indirect Effect
Overall evaluation of anti-fraud strategy .197 s .073 [.073, .358] .085 s .043 [.016, .187]
← Appropriateness of whistle-blowing policy
← Tone at the top
Overall evaluation of anti-fraud strategy .039 .043 [-.028, .151] .000 .018 [-.040, .037]
← Appropriateness of whistle-blowing policy
← Workplace integrity
Overall evaluation of anti-fraud strategy .169 s .069 [.069, .346] .093 s .052 [.010, .222]
← Appropriateness of whistle-blowing policy
← Ethics training

Notes: BC 95% CI = bias-corrected 95% confidence interval; s = significantly different from zero.

whistleblowing than individual variables (Craft, 2013; Near and Miceli, 1995) and Hollinger and Clark (1982) found that both
management and co-workers functioned as more crucial social controls in reducing employee deviance than formal sanctions. In this
regard, our study implies that more managerial or dynamic elements of ethical culture, such as ‘ethical leadership’ and ‘ethics

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J.B. Suh and H.S. Shim International Journal of Law, Crime and Justice xxx (xxxx) xxxx

training’ rather than a static element (i.e., ‘workplace integrity’) appear to be more associated with enhancing the perceived ap-
propriateness of ‘whistleblowing policy.’ This is a significant finding of this study showing the relative strength of respective elements
on ‘whistleblowing programs.’ That is, more vibrant and proactive managerial efforts, such as setting ‘ethical tone at the top’ and
implementing effective ‘ethics training’ are necessary to develop an appropriate whistleblowing policy in an organization.
Secondly, the study demonstrated that SM financial institutions (2nd sector) had far more room to improve in terms of ‘ethical
culture,’ ‘whistleblowing policy,’ and ‘overall anti-fraud strategy.’ To be specific, the employees in SM institutions evaluated their
‘tone at the top’ (2.94 vs 3.54), ‘workplace integrity’ (3.61 vs 4.07), and ‘ethics training’ (3.44 vs 3.96) significantly lower than those
working for commercial banks (1st sector) at 0.1 percent level (p < .001). By the same token, ‘overall evaluation of anti-fraud
strategy’ (6.82 vs 7.73), and ‘appropriateness of whistleblowing policy’ (5.32 vs 6.90) in the second sector were significantly poorer
(p < .001) than the first sector banks. This concurred with findings of ACFE (2012) that small organizations typically had fewer
resources than their larger counterparts, which often translated to fewer and less effective anti-fraud controls. Therefore, managers
and owners of community thrift institutions (2nd sector) should focus their anti-fraud efforts/activities on the most cost-effective
control mechanisms, such as ‘ethical tone at the top,’ ‘whistleblowing policy,’ and ‘ethics training’ (ACFE, 2012), which were also
corroborated by this study.
Additionally, it is surprising that ‘workplace integrity’ has no effect at all on ‘whistleblowing policy’ and ‘anti-fraud strategy’ in
the path model of the SM financial institutions (Fig. 3). Cleary et al. (2013) argued that any threat to ‘workplace integrity’ can lead to
a toxic and corrupt environment that may be deleterious to organizational members. According to them, such an environment can act
to prevent employees from speaking up about ethical issues or workplace concerns, which can result in failure to identify areas for
improvement. In a similar vein, it must be remembered that Savings Bank Scandal in 2011–2012, the Korean version of S&L Debacle,
took place in the SM financial institutions. The financial losses due to the Savings Banks Scandal were estimated to reach around $26
billion and one of the prominent causal factors was attributed to the poor workplace integrity in the sector (Oliver, 2011; The
Kyunghyang Sinmun, 2012). Our findings also clearly demonstrated that the SM financial institutions are more vulnerable to internal
fraud due to poor ethical cultural elements such as low workplace integrity. Therefore, the owners and executives of the SM thrift
institutions should put great efforts to enhance workplace integrity, by adopting rigorous staff vetting procedures to hire honest
employees and setting clear statement of ethical behavior in organizations (Button and Brooks, 2009).
Finally, in both financial sectors, ‘ethics training’ was revealed to be a valid path in boosting both ‘whistleblowing appro-
priateness’ and ‘overall evaluation of anti-fraud strategy.’ Plus, the effect of ethics training was also congruent in both sectors (Figs. 2
and 3). This can be explained by the role of ethics training, which is associated with increasing individuals' awareness of moral issues
and encouraging ethical behavior (Bandura, 1977; Warren et al., 2014). Therefore, ethics training should be underscored in both
sectors. However, in terms of sectoral difference, the employees in the second sector seem to be more affected by ‘tone at the top’ than
those working in the first sector. This might be due to the unique operating environment of the SM thrift institutions. That is, the
owner or senior management in a community financial institution seems to have more control over the financial company because of
its small organizational size. However, this can also result in more opportunities for corruption in SM institutions, posing more
serious risks than their larger, already well-established commercial banks (Wheeler and Rothman, 1982). In a similar vein, Black
(2005) once argued that the financial institution itself can become a ‘weapon’ or ‘vehicle’ to commit fraud when control over an
organization is realized. Therefore, strong corporate governance systems, such as independent outside-directors and rigorous auditing
procedures, should be emphasized more in the SM DIs to prevent internal fraud (The Chosun Ilbo, 2018).
Although our study has a limitation in that employee perception data was used rather than real fraud statistics, our study breaks
the ground in counter-fraud studies by freshly comparing two different financial sectors (mainstream commercial banks vs. SM
depository institutions) and discovering a linchpin role of ‘whistleblowing policy’ between ethical cultural elements and corporate
anti-fraud strategies. Moreover, the necessity of focusing on more proactive components of ethical culture such as setting ‘an ethical
tone at the top’ and implementing ‘effective ethics training’ were highlighted than a static element in our analysis. This finding would
be especially beneficial for the SM thrift institutions (the 2nd financial sector in Korea) that require more cost-effective measures to
prevent fraud, which can bring a competitive advantage in current highly contested market situations (Button and Gee, 2013). We
expect that future counter-fraud studies can benefit more from this cultural comparison approach in various different settings.

Appendix A. Supplementary data

Supplementary data to this article can be found online at https://doi.org/10.1016/j.ijlcj.2019.100361.

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