An Employer’s Guide to Employee Fraud
What is Employee Fraud?
Employee fraud involves the intent to defraud where the employee relies on their deception to accomplish or hide their fraudulent activities.
If you have any questions or with to discuss any issues raised in this guide, please contact our Civil Fraud Asset Recovery Unit, which provides specialist loss recovery and employment advice to corporate victims of workplace fraud.
Why Employees Commit Fraud
If a business is able to understand why employees commit fraud in the first place, then the business will be better placed to identify the risks it faces and then consider whether the measures that they have to counter and deter fraud are adequate.
Dr Donald Cassey, a specialist in this area, developed a concept known as the “Fraud Triangle”. This explains the elements that are often present when employee fraud occurs. The three elements of the triangle are:
This explains how the employee is able to carry out the fraud. It could be that the employee has uncontrolled or unrestricted access to the chequebook or there are inadequate checks and balances in place for dealing with cash that comes into the business.
2. Pressure or Incentive
This describes how the fraud can occur when pressures overcome acting honestly. This could be as a result of the employee living beyond their means, being in personal debt or having gambling or other addictions.
This describes how an employee may attempt to use perceived grievances that they may have with the business to rationalise what they are doing. Common examples being a belief that the employee is not paid enough, or that the sums taken are small when compared to the sums being made by the business.
All businesses should regularly review their fraud prevention and risk management measures. When doing so, it is essential that proper consideration is given to the “Fraud Triangle”. By fully understanding the factors that can cause an employee to commit a workplace fraud, a business will be in a much better position to assess whether the countermeasures it has in place adequately protect the business and its interests.
What to Do If You Detect Fraud in the Workplace?
If a fraudulent act is detected while the employee is still employed, an employer should be able to respond quickly and in secrecy so as not to alert the suspect employee that their wrongdoing is about to be uncovered.
If word gets back to the suspect, they may go to extreme lengths to destroy or alter incriminating evidence. Establishing an effective investigation strategy and limiting “who knows what” while initial enquiries are undertaken. This is particularly relevant if the nature of the fraud or wrongdoing (such as the misappropriation of confidential information) would justify an application for some form of injunctive relief.
Securing the available evidence can have a direct impact upon the prospects of a successful civil recovery of the loss suffered by the business. It is not uncommon for an employer to suddenly find that a certain financial record or company laptop is “missing” when they investigate a possible fraud.
In every case, the documentation, whether in paper or digital format, will be vital. Employers should, as part of their risk management procedures, consider how best to maintain and preserve books and records so that opportunities for destruction and tampering are minimised.
Any investigation will obviously need to take into account how the employee will be dealt with under the applicable disciplinary procedures. Accordingly, the question of how evidence will be gathered and preserved will inevitably be closely related to the disciplinary process.
Even if the disciplinary process is the main focus of attention, a business faced with a fraudulent employee should always have one eye on how best to gather and preserve evidence so this is available for any future civil recovery action the business may decide to take against the, by now, former fraud.
Most businesses have fraud prevention measures of varying degrees of complexity and sophistication. These will have been designed not only to deter workplace fraud but also to aid in its detection. However, no system is foolproof and should be regularly reviewed for weaknesses and to ensure that procedures are being complied with.
It is galling for any employer to discover it had procedures in place to prevent fraud from taking place but these were circumvented due to staff changes, and ways of working within an organisation. For example, where the checks and balances designed to prevent one person having the authority to authorise, check and make payments to suppliers have, over the course of time, left responsibility in the hands of one ‘trusted’ employee. These are exactly the sort of weaknesses a fraudster can exploit.
Equally important is creating a business culture that makes it abundantly clear that fraud is taken seriously by management. This sends out the signal about the conduct an organisation expects from its staff. One practical way to do this is to have well-publicised reporting procedures to facilitate the reporting of suspicions by employees.
The evidence suggests this is an effective fraud detection measure. In the Global Fraud Survey 2014, the Association of Certified Fraud Examiners (ACFE) identified its tips off at the most common detection method with over 40% of employee fraud cases being detected as a consequence of a tip-off. Fellow employees accounted for nearly half of these tip-offs. The ACFE also found that organisations with a hotline that enabled staff or third parties to report concerns were more likely to detect a fraud as a result of a tip-off.
This can have a real impact on the likelihood is that frauds identified as a result of tip-offs are discovered sooner (sometimes much sooner) than they otherwise would have been. This, in turn, will often mean that the loss to the business is less than it would have suffered had an ongoing fraud been detected at a later date by other methods.
Finally, when fraud is suspected an employer should be prepared to respond quickly and in a way that does not alert the suspect employee that their wrongdoing is about to be uncovered. In this context, securing the available evidence before it can be tampered with or destroyed can be key to the disciplinary investigation. It can also significantly increase the prospects of a successful civil recovery action against the employee to recover the loss suffered by the business.
Aside from the immediate disciplinary aspects, managing the wider consequences of employee fraud requires careful consideration. In particular, it is important that relationships with other parties who have an interest in the fraud are managed to effectively in order to minimise the losses suffered and increase the civil recovery options. A clear strategy is also often essential to minimising any reputational and wider commercial damage to an employer’s interests.
Such a strategy will often mean addressing how best to deal with:
If, when and how to involve the police is a major consideration. The fraud may be such that is it in the best interests of the employer to involve the police immediately. On the other hand, there may be steps that a business wishes to take prior to the police becoming involved, which will place the business in a much stronger position to make recovery of the losses suffered. The business may also, for strategic reasons, determine that it is not in their best interests to involve the police.
If the fraud involved activities in relation to the bank account, such as forged cheques, the bank will need to be advised of the situation. It may well be that the business also has claims that can be made against its bank for the repayment of sums misappropriated from the account, for example, if the bank as allowed cheques to be drawn on the account in breach of the mandate.
Many businesses have a policy of insurance that includes an element of fidelity insurance that is designed to ensure the business in the event of employee dishonesty. Immediate consideration should be given to the terms of such insurance when a fraudulent employee is discovered, as many policies will contain exclusions which require that a claim is made under the policy within a very short period of the fraud being discovered.
Often the fraudulent employee has worked with his or her colleagues for many years and will be regarded as a friend. The employer will need to consider how it manages the flow of information to other employers, even after the fraudulent employee has left the business. This can be managed successfully if thought is given to the way and manner in which information is disseminated to other employees. It can be more damaging for morale if other members of staff become aware of the fraudulent employee’s activities from third parties who do not work within the business.
It may be that the local or national press become aware of the activities of the fraudulent employee. The business needs to consider putting in place a strategy for dealing with this, especially if the former employee is due to appear before a Magistrate or Crown Court after being charged with a criminal offence. The potential reputational impact can often be managed so as to demonstrate that the business has taken swift and decisive action following the discovery of the fraud.
It is possible the fraud may have involved customers or other third parties or the fraudulent employee may be well known to them. Careful thought needs to be given to what to say customers so as to minimise the risks of wider commercial damage to the employer’s interests.
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