Yearly Archives: 2021

Numerous cases of corporate misconduct have emerged globally in recent years and caused large financial, reputational, and other damages for firms, their stakeholders, and even broader society. Managers’ and employees’ inherent tendency to commit such misconduct is deeply rooted in the operating and control environment of their organization. For example, Wells Fargo was caught in 2016 for opening two million fake accounts and selling products and services to customers under false pretenses to increase sales figures. Even though the misconduct in Wells Fargo was committed by lower-level employees, their motive to engage in such misconduct was derived from the aggressive sales targets and cross-selling strategies set by middle- and upper-level managers. Further, weaknesses in Wells Fargo’s internal control systems also provided employees with opportunities to engage in misconduct. Similar examples can be seen in other recent high profile cases such as those of Volkswagen, Theranos, and BP. In each of these cases, as with Wells Fargo, both the underlying acts of misconduct and the organizational cultures and management pressures that gave rise to them were likely to be observed by numerous employees well before they resulted in economic damage to the firm and its customers, employees, and investors.

If external stakeholders, such as investors, could obtain such information about firms’ internal operating and control environments, they might be able to assess the risk of future misconduct. However, since external stakeholders do not directly observe or participate in the daily operating and control practices within firms, they cannot easily obtain such inside information. In comparison, employees have the best access to the information on firms’ internal operations and controls simply as a by-product of their daily work.

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