Knowledge is Power When it Comes to Fraud Prevention

Workplace fraud is on the rise, sucking up an estimated 5 per cent of company revenue.

Posted by Joe Gerard in on May 20th, 2011

Workplace fraud is on the rise, sucking up an estimated 5 per cent of company revenue. And while many organizations have implemented background checks as a requirement for employment, most employees who steal have no prior criminal record, making it difficult to screen out the bad apples from the start.

We spoke to fraud expert Stephen Pedneault, author of Anatomy of a Fraud Investigation, and founder of Forensic Accounting Services, LLC, about how to prevent workplace fraud. He outlined some steps that every organization should take, starting with establishing a company policy.

Make it Clear

Every company should have an overall statement that explains the expected culture of the company. “What is their position on fraud? (It should be) something like zero tolerance. They should have a mission statement, a corporate culture that says that we’re a company that operates in an ethical fashion,” he says.

FREE Investigation Report Template

Prepare thorough, consistent investigation reports with our free report template.

Download Template

Since more than 40 per cent of frauds are reported by tips or anonymous information, Pedneault stresses that every company should have education and anonymous reporting mechanisms in place. “Starting from the time of recruiting, through hiring and orientation as well as for existing employees, ensure everyone understands the means available to them to tell you anonymously if fraud is occurring.”

Pay Attention

Knowing your employees allows you to see changes in their behaviour or lifestyle and notice when things don’t make sense. But how, in an organization of thousands, can executives be expected to know their employees?

Internal controls can be broken down by levels, says Pedneault. Employees at every level, from the volunteers in a non-profit organization to the middle management and beyond, have somebody that they’re reporting to. “I don’t look at it as there are 1,000 employees and the CFO should know all their employees. It’s just not possible. What’s more realistic is that the CFO should know their direct reports, the direct reports should know all the people below them who directly report to them, and so on, all the way down to the rank-and-file and volunteers,” he says.

“You don’t have to take all your employees out every weekend to find out what’s going on in their lives,” says Pedneault. Just talk to them, he advises. When conducting investigations, he finds that many employees know that one of their co-workers has a lifestyle that isn’t sustainable under their circumstances, or has financial troubles that don’t seem to be affecting their lives.

“It’s in their behaviour, it’s in their lifestyle; it’s in the computers they’re working on when they’re supposed to be on other computers… They’re typically doing things that tell you there’s something going on.” Many people don’t pick up on it or they just don’t consider fraud. They’re in denial. Or sometimes they know exactly what’s going on, but don’t have a means to provide the information, he says. So it’s up to you to listen to your employees, get to know them, and make your own judgments.

Knowing your employees starts from the hiring process. “One of the statistics that I found consistent when I was doing the work for my third book was that two-thirds of every resume or job application has some sort of falsehood on it,” says Pedneault.

Check, Check, Check

“After 23 years of doing mainly fraud and embezzlements, I can safely say pretty much all those people are somewhere right now. They all get re-hired, they’re all back to work doing something. How did they get that next job?”

The answer is that many employers don’t check thoroughly when screening new employees. Most people just go through the process, without digging deeper. Pedneault has a lot to say on this subject. But that’s a topic for another post.

Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

Visit Website