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FEATURE STORY

Stop, Thief!
Steps to identifying and preventing fraud in the workplace

No small business owner wants to think that his employees would steal from him, but consider for just a moment the ongoing battles of the missing Lean Cuisine from the break room freezer. How many post-it notes have appeared on the refrigerator door requesting the frozen entrée back and damning the criminal who took it to a life of gastric misery? Case closed. Company theft happens. With that in mind, it’s important for business to take a proactive stance to prevent theft and fraud with strong deterrents.

There are two types of costs associated with workplace fraud; direct costs associated with the loss (including the money or property taken) and indirect costs associated with the investigation and prosecution such as legal, administrative and even public relations fallout from such an event. The indirect costs can increase exponentially if an outside party such as a client or vendor is affected by the fraudulent act.

According to the Association of Certified Fraud Examiners (ACFE) bi-annual summary of fraud entitled, “2006 ACFE Report to the Nation on Occupational Fraud and Abuse” a typical fraudulent act can incur up to 5% of a company’s gross revenues annually. For small businesses, the impact is even greater. A number that large can often be a fatal blow causing a small business to crumble.

“When you allow an employee to write company checks who is also reconciling the books, you’re leaving yourself open for possible fraud,” says Katy Ford, a small business specialist with Hoover’s during a recent podcast on AllBusiness.com. “Other common abuses include skimming cash, falsifying expense reports, and check schemes. Monitor the mail. Have all bank accounts sent directly to your house, so you’re the first person to review the business’s finances.”

What constitutes fraud?
The ACFE defines Occupational Fraud as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

Laws to Protect and Serve
The most far reaching legislation in the area of workplace crime came as a result of the Enron and WorldCom scandals in the 1990’s. Company executives and their accounting firms conspired to hide losses and bilk the companies for billions and employees who knew about the scams did nothing for fear of losing their jobs. The Sarbanes-Oxley Act of 2002 (SOX) requires large, publicly held companies to establish internal control procedures. Included in these are means for reporting fraud such as whistle-blower protections for the individual(s) reporting a suspected workplace crime.

Additional laws applying to business include, but are not limited to

• The Employee Polygraph Protection Act – permits outside investigators to evaluate a potential criminal or fraudulent situation, question suspects, and implement the use of polygraph testing to further an investigation in the workplace.

• The Fair Credit Reporting Act – regulates how consumer credit is reported, regulated and maintained in the United States. Enforced by the Federal Trade Commission (FTC) the FCRA is designed to promote accuracy and confidentiality in consumer credit reporting. Small business must be especially knowledgeable of this act’s requirements for data access, storage and disposal when performing background checks for employment. Individuals must be notified in writing of the employer’s intent to perform a background check or credit check as part of the employment process as well as any negative effects of the report. They must also be notified of the agency used to generate the report should they wish to take defensive action to deny the report or make changes in its findings.

• State Workplace Drug and Alcohol Testing Act – allows the employer to request drug or alcohol testing for an employee suspected to be under the influence or as a method of pre-employment screening for constitutionally permitted positions. There has recently been greater latitude in pre-employment testing and it generally goes unchallenged in today’s employment market.

An Ounce of Prevention
Businesses can take simple steps to help ensure security and deter opportunities for crime in the workplace.

Provide confidential reporting.
By establishing confidential methods for employees to report a crime such as anonymous tip lines, mail slot, or company intranet, the company is far more likely to know about incidents and be able to stop them. “According to the ACFE report, nearly two-thirds of fraud cases are discovered through tips from other employees. So it’s really to your benefit to create an open door policy with your employees,” continues Ford. The report also showed that employees are more likely to use tip lines to where numbers are directed to an outside vendor rather than those to an inside number.

Perform audits
Use multiple types of audits including internal, external and surprise audits to allow for comparative snapshots of the company’s procedures and finances. Audits are especially useful when suspicious activity can be narrowed down to a specific department or individual.

Educate Employees
Educating the workforce regarding the company’s policies and procedures to prevent, investigate, and prosecute cases of fraud falls primarily to the company’s human resource department. Proper training can reduce “median loss to an organization due to fraud by $100,000,” says the ACFE report. Furthermore, “without any training, the losses averaged $200,000…” and the average time to detect a crime also nearly doubled. Overall, the cost to educate employees is the least costly option for business and can drastically reduce fraudulent incidents. Key touch points with employees range from new hire orientations to creating awareness campaigns and ongoing reminder efforts such as monthly emails, posters and periodic re-training programs.

Trust, but verify.
It’s important to have a trusting relationship with your employees, but that doesn’t mean that business owners shouldn’t check up on their staff periodically. If an employee provides an explanation for a discrepancy, acknowledge the response and then verify what you’ve been told. If everything checks out – great; you’re in the clear. On the other hand, if you discover that the truth has been stretched or the explanation is completely erroneous, you’ve got reasonable doubt and should immediately begin to investigate the situation further.

Try to eliminate opportunity
Like any good detective novel, the two great indicators of a suspect are those who have motive and opportunity. If the business can remove or reduce the opportunity to perpetrate crime, the employee may be less tempted to venture to the ‘dark side.’ Prevention tools such as video camera surveillance, checks and balances of cash drawers, security codes on areas where inventory or cash are stored, and even providing employees with lockable desk drawers, personal lockers, and company passwords for computers can reduce temptation.

 What are your options when a crime is suspected?
Once a potential crime is discovered, companies can handle the situation in a number of ways. Some of the most effective steps are outlined below.

• Investigate – quietly. Confidentiality should be maintained at all costs during the initial investigation phase. It behooves both the employer and those being investigated to maintain a high level of discretion. Should the allegations turn out to be false, keeping a low profile will help to ensure the suspect’s reputation. Should evidence lead to further legal action, the company will be in a better position to catch the perpetrator ‘red-handed’ and have legal authorities take over the case.

• Bring in reinforcements. Depending on the severity of the alleged crime, it may be prudent and necessary to call the local, state, or even federal authorities to take over the investigation. If you are in a highly regulated industry such as banking or financial advising and suspect that one of your advisors is embezzling funds, the Securities and Exchange Commission agents must be notified and will immediately begin investigating the situation.

• Talk one-on-one with employees and take statements. If employees are unwilling to give statements or change their statements, it’s time to evaluate their employment with the company. Beware of and follow SOX and other regulations on whistle blowing and how they may apply to each employee during the questioning process. If you at any time feel that you’re venturing out of your comfort zone, it may be time to revert to step 2.

• File an insurance claim. Many companies carry additional insurance policies against fraud. Sometimes referred to as fidelity bonds, this type of insurance covers the business for “any employee(s) who dishonestly (1) commit(s) fraud for personal benefit, or (2) cause(s) the insured to sustain a loss.” Remember that the burden of proof is with the business to demonstrate that the loss was caused by the employee. The insurer may also require that legal action be taken against the wrongdoer in order for the claim to be paid. The policy does not generally cover undocumented losses such as unexplained inventory or cash losses.

It’s never easy to confront employees with allegations of theft or wrongdoing, so why not make it as difficult as possible to commit a crime in the workplace? The business will benefit from a drastic reduction in theft and the employees will feel greater security knowing that the company has done everything in its power to keep employees and their livelihoods protected. To learn more about human resource issues like employee fraud and how you can protect your business, talk to a Fiducial Advisor by calling 866-FIDUCIAL or visit the web site at www.Fiducial.com .