By Jordan Deering
Year after year, fraud becomes more prevalent in workplaces across Canada. The Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse (2012) estimates that a typical organization loses five per cent of its annual revenues to fraud. In many instances, a company’s employees are the biggest fraud risks to the business’ bottom line.
Employees may have several key motivators that lead to fraud. The predominant motivators are financial pressures, addictions, lifestyle demands or other personal problems. They lead employees to seek additional funds to ease such pressures. To the detriment of the employer, employees might take opportunities to exploit weaknesses in their employer's systems and controls to their own personal gain. Whether it is the trusted bookkeeper, with access to pre-signed cheques or corporate bank accounts, or the salesman with inflated expense reports, the profile of a fraudster is an ordinary person, often an excellent and trusted employee.
What can an employer do to address employee fraud? Properly managing the risks involves a three-stage approach: prevention, detection and recovery. To give an employer the best chance of reducing both the incidence and magnitude of employee fraud, these three dimensions need to operate in tandem.
The Fraud Triangle
Prevention of fraud involves the employer managing what is often referred to as the Fraud Triangle: pressure, opportunity and tone. The risk of employee fraud is highest when an employee feels pressure for funds, when the opportunity for fraud exists and when the tone of the organization allows the employee to justify their fraudulent actions. Conversely, if the employer tackles each element of the Fraud Triangle, the probability of fraud is significantly decreased. Therefore, strategies to address each element of the Fraud Triangle are the most effective way to prevent fraud.
Decrease the opportunity
In many instances, employers simply rely on audits or technology to detect fraud after it has occurred, rather than proactively addressing the opportunity. It is much better to prevent fraud in the first place. Anti-fraud controls and procedures are the first step for any employer seeking to decrease fraud risk. Employers have the most control over the opportunity portion of the Fraud Triangle and, therefore, can create the most impact in fraud prevention through managing opportunity for employee fraud.
There are a number of ways to decrease opportunity. For example, mandatory holidays will mean an employee in a financially sensitive position cannot maintain exclusive control of books and records. In a larger organization, the same can be accomplished with mandatory task rotation. In addition, employers should consider controls during hiring, such as appropriate criminal or civil background checks, credit checks or reference checks. These controls are particularly important in accounting and other financially sensitive roles, although proper fraud controls should not be limited to these types of employees.
Give your employees support
Personal pressures, such as financial hardships, addictions and mental health issues, are the motivation behind most employment-related fraud. These pressures are often external to the workplace, but manifest themselves within the workplace environment.
Employers should offer programs to support and assist employees with the management of these external pressures to lower the risk of the employee committing fraud. Employee assistance programs, internal training programs and careful monitoring by HR professionals serve as important support tools to manage the various external pressures facing employees.
Set the right tone
The message needs to come from the top of the organization: this employer does not tolerate fraud or theft. Management needs to actively support and endorse anti-fraud training, controls and audits to reinforce this message. The employer should make fraud awareness training part of its regular employee-training program.
Detection
Even the best-planned and implemented fraud prevention strategies will not prevent all employee fraud. Therefore, proactive employers must develop effective policies and procedures to detect employee fraud when it happens. HR professionals can take an active role in two critical fraud detection mechanisms:
Consider a whistleblower line
Employees are often the first to notice something out of place or concerning, which leads to the discovery of a fraud. Employee tips are one of the most effective means of detecting employee fraud. HR professionals can keep the lines of communication open with all staff so that employees feel comfortable to identify their concerns to management in a safe and confidential way. In addition, an employer should consider a whistleblower policy to clearly define the channel of disclosure, the protection of anonymity for the reporting employee and the expeditious handling of the disclosure. In a large organization, a whistleblower hotline – available to internal employees, external customers and vendors – can best detect employee fraud. In a smaller organization, employee education and reminders to employees can be equally effective.
Watch for behavioural red flags
Employers cannot ignore the obvious signs. It may be an employee living beyond their salary, taking extravagant vacations or making large purchases. Conversely, an employee that never takes a vacation and resists sharing their duties with others may also be a fraud risk. In addition, HR professionals should monitor an employee's unusually close relationships with a vendor or customer. HR professionals must take care to watch for the red flags and investigate, as appropriate.
Recovery
If a fraud is detected, care must be taken in order to maximize recovery. Since appropriate and comprehensive investigations are required, the best advice is to immediately retain legal counsel and coordinate a detailed investigation.
HR professionals should take care to avoid common mistakes in fraud recovery:
• Do not notify the employee that the fraud has been detected. In particular, do not immediately terminate or suspend the employee. This will allow the employee time to hide assets or leave the jurisdiction.
• Do not search the employee's computer, tablet, smartphone or office phone. There are significant privacy concerns regarding searches of computer devices, and these searches should only be conducted following legal advice and using appropriate forensic experts who can maintain the evidence.
• Do not notify other employees. The fraudulent employee is entitled to confidentiality and other employees should only be interviewed, when necessary, during the investigation phase.
Secrecy, stealth and speed are the best weapons available to an employer following the discovery of fraud. Recovery is only realistically available if an employer can get ahead of the fraudulent employee in the asset recovery efforts.
Various legal remedies are available to a defrauded employer to aid in the civil recovery of stolen assets:
• Anton Piller Orders: These court orders are often referred to as Civil Search Warrants. They permit a surprise search of a fraudulent employee's home and other locations in order to find the stolen funds or evidence that support the employer's legal case. The court will only grant these orders where there is a legitimate fear that the employee will destroy evidence. HR professionals can assist by having information relating to the employee's residence and other particulars.
• Norwich Pharmacal Order: These court orders direct financial institutions and other third parties to provide information necessary to trace assets of the fraudulent employee, without notifying the employee that such information is being provided. HR professionals can identify bank accounts of employees used for payroll to assist in this type of investigation.
• Preservation Orders or Mareva Injunctions: These court orders freeze assets, either within the jurisdiction or worldwide, so that a fraudulent employee cannot take any steps to sell, dissipate or otherwise dispose of assets. This can include land, property, vehicles, stocks, bank accounts or other assets.
There is no single solution to managing the significant risk of employee fraud. HR professionals need to constantly assess numerous areas to properly prevent, detect and maximize recovery in cases of employee fraud. Properly implementing preventative measures will pay dividends in the reduced incidence of this problem. Timely detection of fraud reduces the quantum of the fraud, and also reinforces the organizational tone of non-tolerance. Finally, HR professionals play a key role in assisting an organization to maximize recovery in civil cases.
Jordan Deering is partner and national leader of Dentons Canada's Fraud, Corruption and Asset Recovery group.