Tackling employee fraud

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Recent figures released by the Fraud Prevention Service revealed a 52% increase in fraud committed by employees in the first half of 2012. The prevailing theory as to why businesses have experienced such a dramatic increase in theft from their own employees is that it is due to the economic downturn. Job insecurity, a lack of employee engagement and a sense of entitlement have also been mooted as possible causes.

What is clear is that internal fraud poses a huge risk to businesses, not just in the pure financial sense, but in terms of damage to hard-won reputations.

Of course, the difficult issue for businesses is that they do not know that they are victims of employee fraud until it is uncovered, at which point the damage is already done. So, what proactive steps can you take to address this risk? The first option is to seek assistance with crime reduction and advice around minimising security risk – both in terms of physical security and IT security.

Typical fraudster?

Another tactic is to learn how to spot a potential fraudster. According to KPMG (“Who is the Typical Fraudster?” – 2011), the typical employee committing fraud against his own company will be male, between 36 and 45-years-old, holding a senior management position, and with continuous service of more than 10 years. There is also a suggestion that such employees do not take regular holidays, in the fear that their fraud will be uncovered in their absence.

In other words, and contrary to popular belief, the prime candidates are your most trusted, long-serving, hard-working and senior employees. These individuals will usually command a lot of trust and are frequently responsible for implementing checks and balances on the transactions of others. With that in mind, is there anything else you should be looking out for in employees themselves, and what can you do to minimise the opportunities for fraud to take place?

Nine ways to minimise fraud opportunities

1. Increase your internal controls. Fraudsters will usually have access to money or stock, depending on the nature of your business. Particularly for those individuals in finance roles or with access to money, introduce spot checks, regular reviews or audits, and make sure that these are carried out, preferably by somebody different each time. This should apply to every level of employment. The fear of detection may be enough to deter a would-be thief.

2. Are your policies clear for cash handling and transactional work? Employees should be in no doubt as to how they should behave, and a failure to follow procedure should be clearly linked to a disciplinary sanction.

3. If you work in retail, do you retain the contractual right to search bags? Do you have clear policies about the purchase of goods and the carrying of cash on the shop floor? Again, clear and unequivocal rules leave no room for complacency and will allow the business to make an example of offenders.

4. A good proportion of fraud is uncovered as a result of whistleblowing. However, some employees can be too concerned about the consequences of being mistaken, or not being believed, to come forward. To avoid this, be sure to operate a sound procedure, where an anonymous disclosure option is included for those who are concerned about the ramifications of whistleblowing.

5. Encourage your employees to take a break – preferably for an extended two-week period. Not only is this good for employees’ health, it will give whoever takes the reins in their absence the opportunity to uncover any fraud. Reluctance or refusal to take annual leave should ring alarm bells.

6. Tackle employees who seem to be suffering from stress or who appear unhappy and demotivated. Research suggests that they are more likely to give in to temptation.

7. Be alert to the senior employee who surrounds themselves with a core group of “favourites”, particularly if they bully or intimidate other colleagues. It is not uncommon for teams to collude to operate fraud. You should also be suspicious of employees who are evasive when asked direct questions about files or accounts, or fail to answer them altogether. There may be a reason.

8. Consider the use of covert surveillance where appropriate. There are strict rules governing when, and for how long, covert monitoring is acceptable, but it is an option in some cases, so take advice.

9. Look out for those employees who appear to live beyond their means. The newspapers are full of stories about fraudulent employees with modest incomes, living lavish lifestyles at their employer’s expense. One employee’s ongoing theft was uncovered by her employer after he attended her extravagant wedding and grew suspicious!

Remember, the outcome of your internal investigation and disciplinary process is not dependent in any way on the findings of the police or Crown Prosecution Service. Once an arrest has been made, the police may remove documentation and other evidence for long periods of time before returning it to you, so it is always wise to make copies for your own records.

Angela Brumpton is an employment lawyer at Hill Dickinson LLP.

For more information on this topic, see XpertHR’s coverage of related employment tribunals:

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