I have been a proponent of remote work for two decades, but here is one positive outcome I never anticipated: Decreased corporate fraud. You might think that having a distributed company would increase opportunities for corporate fraud and financial misconduct because of decreased direct oversight, but that was not the case.
Researchers from Yale studied companies during the pandemic. From “Remote Work Is Linked to a Decline in Financial Misconduct” by Yale Insights:
A new study co-authored by Barrios found that firms better positioned to operate remotely before the pandemic experienced significantly larger declines in fraud after 2020, an effect equivalent to cutting the baseline rate roughly in half. This decline was especially pronounced at companies that emphasized teamwork, where misconduct is more likely to depend on coordination among insiders.
One reason may be that remote work altered how coordination happens. Sustaining a fraudulent scheme typically requires insiders to align stories and reinforce trust over time. In-person environments make that easier. Remote work, by contrast, shifts communication onto digital platforms that leave records and may make sustained collusion more difficult.
In-person interactions, it appears, set the stage for like-minded criminals to build trust and join forces. “Having people work in an office is a very powerful coordination technology,” Barrios says. “It can be used to build great things—but also to sustain bad ones.”
The article went on to say:
Most efforts to address fraud focus on increasing regulations and monitoring. But “rules alone are not enough,” Barrios and his co-authors, Jessie Jianwen Guo and Yanping Zhu of New York University, wrote in their study. After all, major corporate scandals continue to erupt despite the presence of numerous regulations. “You can write a rule,” Barrios says, “but people still decide whether to follow it.” Less attention has been paid to how organizational design and people’s interactions affect the likelihood of misconduct.
How to discourage financial misconduct
Financial misconduct can happen when oversight is weak and silence is common. The strongest approach to discouraging financial misconduct and corporate fraud is a layered system of culture, prevention, detection, and enforcement working together. In practice, that means combining leadership commitment with internal controls, training, audits, and whistleblower reporting.
For small businesses particularly, the tone definitely comes from the top. Founders and senior leadership need to model ethical behavior. In addition, there needs to be a formal code of conduct and I would recommend a basic employee handbook so nobody can say they didn’t know the rules.
As the company gets bigger, ensure there is regular oversight and unplanned audits, in addition to scheduled financial reporting. Put appropriate controls in place and make it difficult for someone to do the wrong thing.
Photo by Markus Winkler on Unsplash
