From CPA Journal: What does management do when a star employee violates company policy? If management lets a star employee get away with such violations, how will this affect average employees? The authors published an academic study examining these issues in 2018; in this article, the authors discuss its implications for CPAs. In the long term, lenience with star employees can lead to average employees being more likely to get away with similar ethical violations, greatly weakening the control environment and increasing fraud risk.
Star employees provide their employers with a range of benefits from their exceptional performance, including greater organizational effectiveness and efficiency. However, sometimes such stars violate company policy or engage in occupational fraud, which the Association of Certified Fraud Examiners (ACFE, Report to the Nations on Occupational Fraud and Abuse, 2020, p. 6) defines as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” Such situations prompt difficult decisions about how stars should be disciplined.
In the short run, the logic behind letting star employees get away with certain infractions may seem quite compelling. However, this short-term decision could have important longer-term consequences. In particular, how might management respond if an average employee were to commit a similar violation in the future? Would management treat the average employee differently than the star, or would the average employee also be likely to get away with it because of the apparent lenient precedent that had been set? If the average employee also gets away with this type of behavior, what impact would this normalization of unethical behavior have on the company’s control environment [Committee of Sponsoring Organizations of the Treadway Commission (COSO), Internal Control–Integrated Framework: Framework and Appendices, 2013] and fraud risk?
In the sections below, the authors describe their research on these issues; then they develop implications for CPAs in corporate or not-for-profit settings and CPAs in auditing.
The 2018 Academic Study
The authors published (with a third coauthor) an academic study on management’s handling of ethical violations by star employees and average employees (Scot E. Justice, Jeffrey R. Cohen, and Dana R. Hermanson, “Star Employee Occupational Fraud: Treatment and Subsequent Effects,” Journal of Forensic and Investigative Accounting, 2018, vol. 10, no. 3, pp. 294–315; https://bit.ly/3czPtIc). In the 2018 study, the authors built on some older research in the sales field to examine two key questions in non-sales settings: 1) Are star employees treated differently than average employees when they engage in occupational fraud? and 2) How are average employees treated for ethical violations when a star employee previously got away with a similar violation or was punished for the violation? Across the two experiments, the authors focused on how treatment of stars in one period could affect the treatment of average employees in the future. The sections below describe the two experiments and related results.
Experiment 1: Are Stars Treated Differently?
The first experiment in the 2018 study examined whether managers believe that most managers they have worked with would treat stars more leniently than average employees in occupational fraud cases. The authors focused on “most managers” to avoid bias issues with asking what participants would do themselves.
In Experiment 1, the authors sampled 119 managers using a case scenario where a star or average employee used a company credit card to purchase jewelry for personal use. The magnitude of the act was either $500 (small) or $5,000 (large). The authors measured the discipline intensity response on a scale anchored with “do nothing” and “terminate” the employee. The tolerance response was measured by a scale anchored with other managers who were “not likely” and “very likely” to tolerate the act.
The authors found that the participants believe that most managers will respond to a star employee’s occupational fraud with greater tolerance and less discipline than when the act is perpetrated by an average employee. Furthermore, larger acts generate greater discipline than smaller acts; thus, the authors provided experimental evidence that stars can get away with more than average employees can.
Experiment 2: How Does Treatment of Stars Affect the Future Treatment of Others?
The second experiment in the 2018 study examined the effect of strict or lenient treatment of a star on the subsequent decisions a manager makes when an average employee perpetrates a similar act of occupational fraud. In Experiment 2, 108 different managers assumed the role of a manager who had been previously directed by the CEO to either discipline or not discipline a star employee who perpetrated occupational fraud. Subsequently, an average employee perpetrates a similar act of occupational fraud. As with the first study, the magnitude of the act was $500 or $5,000.
The authors found that managers are less severe in their discipline of an average employee, and are more likely to tolerate the act, if a star had been allowed to get away with a similar act previously. This indicates that allowing a star employee to engage in occupational fraud influences the discipline of, and tolerance for, average employees who subsequently engage in similar occupational frauds. The authors also found that larger acts resulted in more intense discipline. Thus, this experiment provided evidence that lenient treatment of a star in one period can lead to more lenient treatment of an average employee in a future period.
Implications for CPAs
What the authors’ 2018 academic research suggests is that if a star employee gets away with occupational fraud, the foreseeable progression shown in the Exhibit is likely. The lenient treatment of star employees can set an observable precedent. This lenient treatment of stars becomes a key consideration when an average employee engages in a similar act. Managers have to decide between punishing the average employee (thereby treating different employees differently) or treating the average employee the way the star was treated before.