3 Practices To Minimize Rise of Ethical Violations in Small Businesses



Almost two years after his apprehension, Raj Rajaratnam was sentenced to 11 years in prison for illegal insider trading. Rajaratnam is the founder and former managing general partner of the now- defunct Galleon Group, the once largest hedge funds in the world.

According to the U.S. Securities and Exchange Commission (SEC), illegal insider trading is committed when one buys or sells a security, as an effect of knowing material, nonpublic information about it. Rajaratnam knowingly called other hedge-fund traders, industry consultants and even businesses executives to solicit confidential information on respective business organizations. Prosecutors kept on tape all phone calls Rajaratnam made related to soliciting material, nonpublic information.

While Rajaratnam’s well-publicized ethical and criminal violations are primarily related to large, publicly traded corporations, his delinquency centers on issues of integrity. There is no arguing that integrity plays a rigid role in small businesses. In the 2010 global study by the Association of Certified Fraud Examiners (ACFE), median fraud-related loss for organizations in the U.S. with less than 100 employees was pegged at $200,000 per incident. ACFE said the figure was greater than the average loss caused by fraud in the big firms.

With the competitive nature of small businesses’ markets and the financial constraint brought by the slump in the economy, the lack of integrity and the prevalence of its antithesis, dishonesty, pose a big challenge for small business management today. Financial implications aside, dishonesty can disparage a company's reputation among employees, consumers and lenders. It can cripple, or worse, cause the dismal fall of an organization, just like the way Galleon group collapsed with Rajaratnam’s botched schemes.

In small businesses, acts of dishonesty can come from either within or outside. Employees largely commit the within-related dishonesty. Manifestations include employee theft, forgery and embezzlement. Those coming from outside are largely committed by consumers, vendors and other businesses. Manifestations include check and credit/debit cards fraud, bust-outs and Internet and computer fraud. It is important to note, however, that small business owners can trigger both subsets of dishonesty indirectly. They can set up their own traps by making free pass, distinction between blue-collar & white-collar crime and no provision for outside help.

1.) Do not tolerate any act of dishonesty. While the law makes provision for fair trial, it does not allow “free pass” to those who violate it. Whether it’s the dear employee whom you trust or a newbie in the company who committed offense, uphold reasonable personnel policies. When an employee commits acts of dishonesty like theft and fraud, implement the necessary measure. Aside from the purpose of discouraging the acts, it will also affect the ethical landscape in the company, which remunerates in the marketplace in the long run.

2.) Be on guard. Crimes are crimes. While theft of an errand runner may be more pronounced than the “bust-outs” or merchandising swindle by another business firm, business owners should be always on guard. While “trust” has its place in business endeavors, it should be taken with caution. According to ACFE, too much trust is one of the major factors in fraud-related losses in small business. It is natural for people to trust those with high social statuses easily. However, small business owners should remember that they are also the same group of people who are capable to commit fraud, possibly, with biggest amount attached.

3.) Seek help. Don’t try to tackle dishonesty yourself. Various organizations, from government to non-profit, offer assistance to small businesses. If you need a general audit to account the receipts and disbursements of your firm, hire a certified public accountant who is also a certified fraud examiner. If you need technical know-how to prevent Internet and computer fraud, look for an expert. Don’t do it on your own. Two heads are always better than one especially if it’s your business, which is at risk.

Manifestations of dishonesty vary among small businesses. The prevalence, however, is largely affected by the existence of an opportunity to do so. This is to say that the way small business owners act and implement occupational laws and regulations can be inviting dishonesty. As such, it is important that small business owners implement the company’s laws and regulations in a consistent manner. Moreover, practicing the three steps mentioned above can minimize the effects of dishonesty, something Rajaratnam failed to conceive and put into practice.



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