A quarter of the fraud cases included in the Association of Certified Fraud Examiners 2008 Report to the Nation on Occupational Fraud and Abuse reported losses of over $1 million- the median loss incurred by companies in the study was $175 000. Anyone is capable of committing fraud, however, according to the Association of Certified Fraud Examiners, fraud is much more likely to occur by those in accounting and upper management positions. In many cases, fraud activities are conducted by first time offenders. This makes the hiring process more challenging, as you cannot make any assumptions of future behavior based on examples from the employee’s past actions. With this in mind, many of the precautionary steps taken during the hiring process- reference checks, background checks and interviews, are only the start of an ongoing process in the fight against workplace fraud.
Characteristics of Fraud
A study by the ACFE states that only 7% of those caught committing workplace fraud had prior convictions and just 12% had been terminated previously by an employer for fraudulent conduct. There are many misconceptions about the more common types of fraud that take place at work. With the headlines filled with reports involving major ponzi schemes and million dollar bribery scandals, many people forget how much companies lose due to the presence of small scale fraud in the workplace. However, there is no set list of characteristics that one can possess that signal whether or not they will end up committing fraud- just as not act of fraud will ever be exactly the same. One of the misconceptions regarding fraud is that it always involves big schemes and should be easy to detect.
Preston Ricardo, a partner at Golenbock Eiseman Assor Bell & Peskoe in New York states that:
“They (the fraud activities) typically start small and grow in scale and complexity as time passes and the thefts go undetected. In addition, studies have shown that almost half of fraud cases are committed by two or more people working together, either internally or with someone outside the company. Fraud is most prevalent in companies with fewer than 100 employees.”
Some additional actions that you can take during the hiring process- beyond references, criminal and other background checks, would be to look into the validity of the information presented to you by all applicants. The ACFE article “Developing a Strategy to Fight Fraud” by Andrew Durant states that in addition to a criminal background check, employers should also conduct the following inquiries:
- Confirm name and address of applicants
- Confirm educational qualifications
- Check membership of professional bodies
- Confirm employment history
- Check financial status
- Confirm directorships held and any disqualifications
- Media and Internet search
Observing Employee Behaviour
One of the easiest ways to determine if something strange is happening is to look for changes in employee behaviour. Hubert Klein, a partner in the litigation and valuation group at Amper, Politziner & Mattia states that “in addition to behavioral changes—use of drugs or alcohol, gambling, or a sudden change in lifestyle (either living beyond one’s needs or economic distress)—there are other signs an employee might be committing fraud.” Here are some of the warning signs, recommended by Klein, in the SHRM article “Fraud by Employees Is Common, Difficult to Detect“, that one should pay attention to:
- They often operate in “crisis” or “fire drill” mode, like the accounts receivable clerk who “always seems to come up with excuses about why a large payment due was misapplied to a different customer account,” Klein said.
- They never take days off for fear that their fraud could be discovered, or they might resign unexpectedly or abruptly when they believe that they can no longer conceal the fraud. “The worst employee is one who is there 365 days a year, because it takes a lot of mental energy to perpetrate and conceal the fraud,” Klein said.
- They have pressure to meet certain financial targets on the job or in their personal lives. Watch out for the person who declares that “by the time I’m 30, I’m going to have the million-dollar house, the BMW and the perfect package,” Klein warned.