Working Backwards to Root Out Workplace Fraud

Tracking deviant behavior can be an effective tool for uncovering other crimes, including fraud, says this experienced fraud investigator

Posted by Joe Gerard in on June 3rd, 2011

Yesterday we talked about finding workplace fraud using expert investigator Ryan Hubbs’ theory that there is a correlation between deviant behavior in the workplace and fraud. He has developed this hypothesis after discovering that so many of the fraud suspects he investigates also exhibit deviant behavior. Hubbs, who is Senior Manager at forensic accounting firm Matson, Driscoll & Damico, cites a recent example of an HR investigation that led directly from a deviant behavior to a fraud case.

“The article research for this hypothesis was just being finished in April 2011 when I worked on a case where an employee alleged sexual harassment,” he says. “Once the investigation began, it was quickly identified that the employee had lied about the behavior and was actually having an inter-office affair with the alleged harasser. We decided to test the hypothesis and sample a few of the employee’s expense reports. Much to our surprise, we found fraud, lots of it, spanning nearly two years.”

Sounds simple, but there’s more to it than that. There are other, less obvious, connections between deviant behavior and fraud, and these may require more investigation.

Indirect Influence

FREE Investigation Report Template

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

Download Template

“There may be instances where the workplace deviant behaviors are so pervasive that they have a negative impact on the control environment downstream,” says Hubbs. He gives an example of a billing specialist who wastes so much time looking at pornography that he just “rubber stamps” incoming bills, allowing fraudulent transactions to slip through. Or an employee who is bullied by management so much that she decides to do the bare minimum or take short cuts.

“In the years leading up to Madoff’s Ponzi scheme being uncovered, the SEC inspector general handled an increasing number of investigations of pornography being viewed by senior officials in the SEC,” says Hubbs. “It’s too difficult to make an official determination if these workplace deviant behaviors helped Madoff fly under the radar for so many years. One has to ask the question though, what could these senior SEC officials have found if they weren’t staring at porn for hours a day?”

Finding Deviant Behavior

Most organizations already have policies and procedures in place to prevent or deter deviant behavior in the workplace. They are the harassment policy, computer use policy, code of ethics and code of conduct. “So from a privacy standpoint, companies and organizations are already asking their employees to report deviant behaviors,” says Hubbs. “The problem comes when organizations do not give a lot of weight to these workplace discrepancies, or they are not investigated properly, and the wrongdoers are allowed to stay in their positions with minor slaps on their wrists.”

Hubbs also points out that getting buy-in from the legal department and management can be a challenge, but it’s important in order to prevent these investigations from becoming fishing expeditions.

“Anyone using the hypothesis must also be careful with over-reaching and claiming there is a correlation before any evidence has been found,” says Hubbs. “This could give rise to a defamation case.”

Move ahead with caution

Once deviant behavior has been identified, Hubbs recommends that the investigator take discreetly a small sample of transactions conducted by the suspect employee, such as credit card transactions, expense reports, payment requests or invoices.

“If the sample check come backs clean, then move on,” says Hubbs. “But if anomalies present themselves in the sample, the investigator may want to open a more formal case in order to conduct a more thorough review.”

Handled correctly, deviant behavior tracking can be an effective tool for uncovering and stopping workplace fraud, whether it’s direct or indirect, but it must be done carefully, without violating the rights of employees and risking a costly lawsuit.

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