It seems to be that each week is busier than the last. Here are some of the things we blogged about this week- as well as some other pieces that caught our attention regarding internal investigation, human resources and ethics:

Monday:

• Blog Post- Integrating Ethics and Compliance Into the Entire Organization

“There’s no point investing in and implementing an ethics and compliance program unless the time is spent integrating the program into every aspect of an organization. The need for companies to develop effective ethics and compliance programs has been acknowledged by several government agencies- examples are the SEC in the US and the government in the United Kingdom. Both groups have recently passed legislation or made amendments to existing guidelines, focusing heavily on the importance of ethics and compliance at all levels of an organization- especially at the top. Employees at each level contribute to the success of a company’s ethics and compliance program. Integrating ethics and compliance at each level helps ensure the message from the top makes it all the way down to the lower levels of the organization. Training, messages and other ethics and compliance initiatives must be developed to evolve with employees as they move through the company. That being said, employees at various levels need to be prepared to address different ethical issues they may encounter based on the role they play in the organization.”

Tuesday:

• Blog Post- Reducing the Opportunity for Workplace Fraud

“The values associated with workplace fraud continue to rise- especially during economic downturns. Preventing workplace fraud begins on the inside of an organization. One of the largest fraud risks companies must address is the opportunity for fraud to occur. There are a number of anti-fraud techniques and systems that are easy to implement within any organization. When fraud grows out of control within an organization, reputations and public trust are destroyed. To reduce the opportunity for fraud to occur, accounting and money handling responsibilities must be divided. Monitoring and enforcement of anti-fraud programs is necessary in order for the program to be effective and for employees to take it seriously. When employees know they are being watched, their work is being reviewed on a consistent basis and punishments are administered to those who violate anti-fraud policies, there’s less room for fraud to go undetected.”

Wednesday:

• Blog Post- Recovering From Ethical Lapses and Investigations: Siemens

“The $1.6 billion fine handed down to Siemens in 2008 was much more than a record breaking fine, it was a lesson for other companies to learn from. Prior to the bribery scandal, Siemens had an ethics and compliance program in place, however, there was a missing link between leadership and the enforcement of the program. The company’s cooperation during the SEC investigation lead to a reduced penalty, but also gave way to a complete re-design of the company’s internal ethics and compliance controls. There are many lessons learned from the Siemens charges, the reaction to the investigation and the actions taken by Siemens to position the company as an ethics and compliance leader in the post-scandal era.”

Thursday:

• Blog Post- The Importance of Investigation Interview Credibility

“In order for a workplace investigation to be credible, investigators must deploy certain tactics to verify the accuracy of interview responses. In a previous post, Investigation Interview Questions to Determine Credibility, we reviewed the EEOC’s 5 factors to consider when determining statement credibility during investigation interviews. One of the toughest challenges to overcome during investigation interviews is the fact that witnesses may withhold or modify their responses to protect the subject- or the complainant and possibly even themselves. As investigators are often pressed for time when conducting internal investigations, they cannot afford to get hung up on determining who is correct in the “my story vs. their story” battle. We have compiled a list of simple tips and techniques investigators can use to determine investigation interview credibility.”

The values associated with workplace fraud continue to rise- especially during economic downturns. Preventing workplace fraud begins on the inside of an organization. One of the largest fraud risks companies must address is the opportunity for fraud to occur. There are a number of anti-fraud techniques and systems that are easy to implement within any organization. When fraud grows out of control within an organization, reputations and public trust are destroyed. To reduce the opportunity for fraud to occur, accounting and money handling responsibilities must be divided. Monitoring and enforcement of anti-fraud programs is necessary in order for the program to be effective and for employees to take it seriously. When employees know they are being watched, their work is being reviewed on a consistent basis and punishments are administered to those who violate anti-fraud policies, there’s less room for fraud to go undetected.

Fighting Fraud

An effective system of internal checks and balances greatly reduces and may even eliminate all opportunity for workplace fraud to occur. Here are 4 tips to help reduce the opportunity for fraud in the workplace:

1. Dividing Responsibility

Create a small team to handle the money handling and accounting responsibilities.  This makes it easier to identify any misallocated funds or errors that could lead to the discovery of a fraud scheme. Dividing responsibilities decreases the opportunity for fraud, as different employees are responsible for separate tasks, making it difficult to explain missing funds or expense forms. Make it known that all financial reports and corporate bank accounts are reviewed item by item- any expenses or charges out of the ordinary will be questioned and investigated. If employees are aware that bank statements and other documents are never reviewed, the opportunity to commit fraud is wide open.

2. Monitoring

Monitoring the anti-fraud program is one of the key success factors in reducing the opportunity for workplace fraud. Implementing anti-fraud systems to detect and deter fraud isn’t enough. Monitoring and assessing identified fraud risks must become an ongoing processes in order for employees to understand the company’s commitment to fighting fraud.  The article “The Importance of Antifraud Programs and Controls,” published by Deloitte Canada addresses the importance of monitoring anti-fraud programs:

“A final step for management and audit committees is the monitoring of the quality and effectiveness of an entity’s antifraud programs and controls. Monitoring can be done in two ways: through ongoing activities or separate evaluations. Separate evaluations can be performed by internal audit or other interested parties, such as business process owners. Monitoring activities can include timely reconciliations, confirmation of information by external parties, and periodic confirmations from personnel that they understand and comply with the company’s code of conduct.”

3. Anonymous Reporting System

A reporting system must be established in order to allow those who have observed fraud to report it. Reporting systems help reduce the opportunity for workplace fraud, as employees are less likely to commit fraudulent acts, knowing that their fellow employees are watching and are equipped with the proper resources for calling them out on their actions. Many companies receive tips related to workplace fraud through a whistleblower hotline or internal HR teams. Implement a system that provides the opportunity for anonymous reporting, as some individuals will be more apt to bring information forward if they don’t have to expose their identity. Opt for a case management software solution that can be easily integrated to work with existing hotline or reporting systems and platforms, allowing for simplified, multi-channel case entry.  A system that supports multi-channel case entry is important, as tips and reports of observed misconduct can be made via an Internet web form, company intranet and telephone hotline.

4. Effective Case Management

Effective case management reduces the opportunity for fraud within the workplace by providing managers with the ability to launch investigations into fraud-related incidents as soon as a new case is entered. i-Sight for Fraud Investigations uses automatic alerts to notify managers when a new case is entered. Reducing the time it takes to respond to cases, as well as conducting timely investigations, helps end fraudulent acts before they compromise the entire company.

i-Sight dashboards provide managers with the tools to identify common allegations or investigation types, analyze cases by geographic location or other relevant variable and spot patterns and emerging trends. Dashboards communicate complex information quickly. They translate corporate data into rich, graphical presentations using gauges, maps, charts, and other graphics to show multiple results together. Dynamic dashboards also let investigation managers drill-through to other data sources and reports for more detail about what the dashboard is communicating. This is useful for monitoring and tracking fraud related tips and investigations, as the ability to understand the frequency and location of fraudulent events within an organization allows managers to revisit these areas and make amendments to the anti-fraud program.

UK Public Sector Faces a Growing Fraud Risk- HeraldScotland

According to accountants at PricewaterhouseCoopers, public sector fraud in the United Kingdom is increasing. The article discusses the evidence supporting the increase in fraud over the past year and the reasons why it’s believed fraud will continue to increase.

In the article, they include results from the PricewaterhouseCoopers report “Fraud in the Public Sector,” in which the results show:

“More than half of the UK respondents (52%) said their organization had suffered economic crime in the last 12 months compared to a global average of 32%.

Of these, 80% reported mis-appropriation of company assets and 4 in 10 cited incidents of financial statement fraud.

Both of these measures are markedly higher in the UK than the global average, PWC said. A majority also said they thought economic crime in their organizations has risen in the last 12 months.”

Something Wicked This Way Comes- CFO Magazine

A new study from the Association of Certified Fraud Examiners (ACFE) has been released. The results of the study show that nearly “25% of the nearly 2,000 cases examined involved a loss of $1 million or more.” The study also concludes that cases are frequently identified by non-accounting controls, such as tips through hotlines and training and support programs for staff. What does this mean for your company? How can you save money by preventing theft/fraud?

It seems to be that each week is busier than the last. Here are some of the things we blogged about this week- as well as some other pieces that caught our attention regarding internal investigation, human resources and ethics:

Monday:

• Blog Post- Surveys Continue to Report Increases in Workplace Fraud

“The state of the economy and selecting countries to expand into are only two of the many factors raising questions related to the risks of workplace fraud. There have been a number of studies completed to determine changes in the levels of workplace fraud and the factors impacting them. In recent years, surveys and reports consistently conclude workplace fraud is increasing. The risks associated with fraud can be mitigated as ethics and compliance enforcement continues to grow. However, it’s important to remember the focus on ethics and compliance varies globally.”

Tuesday:

• Blog Post- Recognized For Ethics- CSR Press Release

“Good ethics pay off. Recently, Visa, Capital One, Best Buy, Carnial, DirecTv and Tawuniya were presented with OECG GRC Achievement Awards. These companies have each developed a project to better integrate governance, risk management and compliance into their respective companies. Projects such as employee blogs, defining risk structures and ditching spreadsheets for software are some of the solutions these companies have used to conduct consistent investigations and improve data analysis.”

Wednesday

• Blog Post- Thomson Reuters Media: Improving Business With Information

“Thomson Reuters is responsible for delivering current, accurate information to global decisions makers. Thomson Reuters is consistently recognized for commitments to ethics and social responsibility. Through securing spots on Ethisphere’s World’s Most Ethical Companies, Fortune’s World’s Most Admired Companies and Corporate Knight’s Best Corporate Citizens listings, Thomson Reuters demonstrates a commitment to developing innovative ways to improve business process through the use of information. Thomson Reuters brings information into emerging markets, helping breakdown social barriers.”

Thursday:

• Blog Post- Fighting Bribery in the UK

“Corruption and the bribery of foreign public officials has gained significant public attention- especially since the verdict in the Siemens case.  The company was fined $1.6 billion, which is the largest fine administered to-date for violating the FCPA. The severity of the fines handed out are intended to send a message to all corporations, informing them of the consequences they will face if found to be engaging in corrupt practices. According to the Ministry of Justice in the United Kingdom, bribery ” is a serious crime that destroys the integrity, accountability and honesty that underpins ethical standards both in public life and in the business community.” “

The state of the economy and selecting countries to expand into are only two of the many factors raising questions related to the risks of workplace fraud. There have been a number of studies completed to determine changes in the levels of workplace fraud and the factors impacting them. In recent years, surveys and reports consistently conclude workplace fraud is increasing. The risks associated with fraud can be mitigated as ethics and compliance enforcement continues to grow. However, it’s important to remember the focus on ethics and compliance varies globally.

As companies look to reduce costs by expanding overseas, it’s important to consider the risks organizations will face by making the move.

Fraudulent Findings

The 2009/2010 Annual Global Fraud Report published by Kroll, along with the Economist Intelligence Unit also concluded an increase in workplace fraud levels. Based on the responses gathered from the study:

“The economic crisis in isolation has raised some fraud risks. 30% of survey respondents say that the global financial crisis has increased the levels of fraud at their organizations, compared with just 5% who saw a decline. Lower profits heighten some risks. 1 in 6 companies are seeing greater vulnerability from reducing internal controls to save money, 1 in 7 from pay restraint, and one in eight from reduced revenues overall.”

Ernst and Young released their 11th Global Fraud Survey on May 19th. Many of the conclusions drawn from this report are similar to the findings in other studies published since the start of 2010.

Ernst and Young’s Global Fraud Survey

Ernst and Young sought out Chief Financial Officers (CFO), as well as heads of legal, compliance and internal auditing departments to report on managing fraud, bribery and corruption risks. The respondents come from 36 countries, providing excellent insight into the risks and occurrences of fraud around the globe. In the press release for the study, Ernst and Young report:

“Despite the significant time and money already spent by many companies, our respondents’ confidence in the effectiveness and level of adherence to internal compliance programs varied widely, both by geography and role.”

Some of the conclusions generated from the survey are:

In the past year, fraudulent acts have increased globally, while they have decreased in the United States.

Senior level executives are increasingly concerned about personal liability as opposed to the financial hit taken by the company as a result of fraud.

Corporate boards in Latin America (95%), the Middle East and Africa (87%), Central and Eastern Europe (84%) and Australia (81%) are concerned about personal liability for company fraud, bribery or corruption.

72% of directors in North America are concerned about these risks.

More than half of the North American compliance officers see data security as the most significant compliance concern in the next 18 months, followed by concerns over unethical business conduct and health and safety.

1 out of 7 respondents has never formally conducted a fraud risk assessment.

Moving Forward

Understanding cultural differences and evaluating the level of risk in each country are considerations that must be made if a company wishes to reduce the risk of fraud. Overcoming the risks associated with expanding business operations overseas will continue to take time. In North America, there have been significant resources devoted to fighting workplace fraud. Companies are responsible for complying with a number of laws and regulations involving workplace fraud that have yet to be adopted on a global scale.

There have been cases of fraud in the US where control person liability has been used, holding supervisors or managers responsible for unethical employee actions. This remains inline with the growing personal concerns faced by CFOs, compliance professionals and auditors, as it’s possible for them to be held accountable for fraudulent acts they were not aware of. Control person liability requires stricter controls and oversight within the workplace in order to ensure company policies and laws are abided by.

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.”

Hiring Decisions

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.