'Broken windows' in your compliance program?

By Mark W. Jenkins, CFE; Christopher Meadors, J.D., CPA

Years ago, I read about the famous "broken windows" criminology theory in a March 1, 1982, article in The Atlantic. The authors, George Kelling and James Q. Wilson, cited a famous 1969 study, which began with a researcher parking a vehicle with its hood open on a rough street in the Bronx. Within 10 minutes, vandals began to pick the car clean. The next day, people ripped up the upholstery and smashed the windows.

Then the researcher parked a similar type of vehicle in a high-rent, crime-free neighborhood. After an hour, nothing happened to the car. The researcher then broke the car windows with a hammer. Soon, passersby joined in to destroy the car.

All of the vandals in both locations were well-dressed and clean-cut. The vehicles' disorderliness and the broken windows appeared to be the factor in the acts of vandalism.1 (See Broken Windows: The police and neighborhood safety, The Atlantic.)


I posit that this theory has strikingly similar parallels with how a company manages its anti-fraud/corruption policies, procedures and investigations. If a company has limited or non-existent anti-corruption programs and/or doesn't follow them, and is reluctant to investigate policy violations thoroughly, some employees will see the lack of internal controls — the broken windows — as a license to commit fraud.

Before concluding that your windows are intact, consider some statistics. The ACFE 2014 Report to the Nations stated:

  • In a typical organization, 5 percent of revenues are lost to fraud, which includes corruption.
  • The median dollar loss for asset misappropriation is $130,000. For corruption, it's $200,000.

According to PWC's 2013 Economic Crime Report:

  • 37 percent of respondents said their company had experienced economic crime in the past year, which was up from 30 percent in 2009.
  • 53 percent of CEOs were concerned with bribery and corruption, up from 34 percent in 2009.

These statistics indicate that fraud and corruption is occurring — and increasing —in most organizations and the majority of companies might be victims of fraud and corruption. Just like many self-help groups that champion the creed "admitting you have a problem is half the battle," the same applies in fraud and corruption deterrence and prevention.

How then is fraud discovered? Let's look again to the Report to the Nations:

  • 3 percent of fraud/corruption cases are discovered by external auditors.
  • 6.8 percent are discovered by accident.
  • 14.1 percent are discovered by internal auditors.
  • 42.2 percent are discovered via tips.

An anonymous hotline probably is the logical answer for fraud detection. However, only 54.1 percent of companies surveyed have a hotline!


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