Essential Finance – Fraudulent liaisons

Lesley Fidler focuses on how organisations can approach the tricky matter of employee fraud.
What do the words employee fraud conjure up in your mind? Multi-million pound (or dollar) operations perpetrated at the highest level, in the manner of Enron? Or visions of fast cars and the trappings of a champagne lifestyle being enjoyed by someone with no visible means of support? Maybe you recall last years cases of theatre administration staff at Stratford East, Sadlers Wells and the Castle Theatre in Wellingborough who, in separate circumstances, were suspended on grounds of admitted or suspected misuse of their employers funds? Whilst these are the well-publicised instances of employee fraud, in order to be newsworthy they need to be the more unusual situations. There are almost certainly numerous other, less blatant employee frauds going on now. Can your organisation afford to lose its hard-earned funding in this way? Sadlers Wells had insurance cover in place, but this may be an expensive luxury for the smaller organisation.

Types of fraud

The classic safeguard against fraud is to require segregation of duties so that more than one person is involved in carrying out aspects of the same transaction. Ideally different combinations of people are used at different stages of an operation, effectively providing peer supervision. But in organisations with only a handful of staff how realistic is such a system? And even if it is possible, are employees in a position to override such procedures? Not necessarily because they have fraudulent intentions, rather to simplify an unnecessarily cumbersome process. For example, how often is one of a pair of cheque signatories asked to sign a couple of cheques now in case I need them whilst you are away?

There is no end to human ingenuity and if I could provide a comprehensive list of the ways in which employee fraud can be perpetrated, I probably ought to change career. However there are behaviours that crop up regularly  or at least are discovered more frequently.

Who can amend payroll records and in particular add or remove employees names or increase salaries? Even if you would spot a ghost, would you notice if a leavers salary was paid for an extra month? Even if it followed a change in bank account details?
How easy would it be for false invoices to be paid? Or for a genuine invoice to be paid twice? Is cash collected and counted with more than one employee present? Are those employees changed so that collusion is less likely?

Opportunity knocks

Generally, fraud occurs when an employee with a motive meets an opportunity that the employee perceives as having an acceptably low risk of detection. Whilst an employer cannot change its employees motives, it can restrict opportunities by increasing the risk of detection. The employee who realises that a genuine mistake went unnoticed has far less deterrent the next time the opportunity arises. It was normal system checks that brought the Wellingborough theft to light.

Beware the employee who tests positive to all or most of these indicators:

– Operates autonomously so that no-one else is allowed to become familiar with the work
– Starts early, finishes late and never takes holidays, so that there is no-one else aware of what is going on
– Fails to delegate, justifying this with pretexts such as its a bit complicated, I can do it far quicker myself
– Creates unusual and/or complex systems so that others cannot easily follow the work or pick it up and offer assistance
– Enjoys a lifestyle that defies explanation.

Of course organisations need to be vigilant against such acts by single individuals, and this appears to be where most organisations devote most, if not all, of their attention. But besides the unsupervised maverick, employers need to guard against low-level fraud  fraud that is so low-level that in some organisations it represents the base line. But if ten people over-claim expenses by £10 each a week, then around £5,000 will vanish each year.

But does fraud need to involve the extraction of cash? More insidious and possibly far more costly over the totality of employers, is the systematic theft by employees of their own time and effort. Is it acceptable for employees to extend their Friday lunch hour to three hours and then idle away the rest of the afternoon in unproductive chatter? How does this fit with the part-timer who works from Monday to Thursday and consequently receives only 80% of the equivalent full-timers salary? Should he in fact receive 8/9 of the full-time equivalent to reflect the lost Friday afternoons? What about the employee who is totally unproductive every Thursday because Wednesday is her night out with the girls and she has a serious hangover the next day?

Dealing with fraud

If this all sounds as if I advocate chaining employees to desks or operating clocking systems, then I apologise for misleading you. Compulsion is not going to create committed, productive employees. If the weeks targets have been met by Friday lunchtime, why not go out for the afternoon? If the employee who loses Thursday mornings regularly works into the evenings to catch up, is it really a problem that she flexes her time in this way? It probably depends on the organisation. The ideal is when employees know what is expected of them, know when they have achieved it and know what the reward will be, all tailored to suit the particular business and all operated in a climate of honesty and openness. The situation to avoid is when employees have no idea what constitutes satisfactory performance and discover that no-one complains when they produce less work, put in less effort or otherwise abuse their employers resources. Perfect factors to start a downward spiral.

And two final links between people management and creating a climate of honesty. First, do you condone fraud by accepting the CVs of those you appoint without checking qualifications and following up references? There are suggestions that over 75% of CVs in the UK contain irregularities. Second, how does your organisation ensure that an employee who suspects a colleague of work-related fraud can find a receptive, confidential listener who then takes appropriate action?

Lesley Fidler is Employer Consulting Group Director, Baker Tilly

w: http://www.bakertilly.co.uk