Final answer:
Organizations need an open environment to prevent fraud, as demonstrated by insider tendencies to protect bureaucracy reputation at personal risk. U.S. bank supervisory laws in the 1990s move toward transparency, mandating timely action against identified problems. Insurance companies mitigate moral hazard through monitoring and incentivizing security measures in businesses.
Step-by-step explanation:
Organizations aiming to prevent fraud should foster an environment where reporting suspicious activities is straightforward and encouraged for employees and stakeholders. Bureaucracracies are naturally inclined to protect their reputations, making it challenging for insiders to report internal issues such as mismanagement or criminal behavior. The risk of personal repercussions often inhibits internal reporting, although doing so is essential for maintaining organizational integrity.
Legislative measures, like those introduced in the United States in the 1990s for bank supervisors, mandate transparency and quick action upon discovering problems. These laws are an attempt to mitigate potential financial crises, such as the one experienced during the 2008-2009 recession, by obligating overseers to disclose and react promptly to issues. However, the effectiveness of such regulations is often scrutinized, especially when significant problems are not identified in time to prevent widespread financial loss.
Insurance companies employ similar strategies to reduce moral hazard and deter fraud. By investigating fraudulent claims and monitoring behavior, such as mandating certain security measures, they encourage businesses to engage in risk-reducing practices. This could entail offering lower insurance premiums to businesses that implement advanced security and fire sprinkler systems, thus incentivizing the adoption of preventative measures.