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Peter Lilley’s Expert Opinion on Employee Fraud

Employee fraud is a recurrent theme in business but one that seems to be strangely neglected. As Peter Lilley explains: business owners forget or possibly shy away from this topic but they do so at their own peril.

Numerous recent events have made me focus yet again on the problem of employee fraud. It has reared its ugly head in numerous locations – from high profile corporate failures to the activities of the EU – and not a month goes by without a new survey being published highlighting the risks and consequences of this fraud type.

I was recently asked to provide expert opinion in an interview on such a survey for BBC Radio 5 Live – and what struck me about the relevant survey (and almost all of the others) was that it said nothing new, and could have been compiled at any time over the last 20 years. No wait – I’m wrong there – it could have been written at any time as one human being worked for another in which the work entailed dealing with something of value.

The only positive effect of these surveys is that they bring this subject to people’s attention for the umpteenth time – and it is then promptly forgotten. You forget them at your own peril though, because like it or not, if you run or own a business of any size, the greatest risk you face is from the people who work for you. The history of business is littered with companies that have been severely or fatally damaged by a successful fraud perpetrated by one of their own. Why then are staff so dishonest? Detailed research has suggested a variety of reasons including:

  • Staff who commit fraud feel unfairly treated by management.
  • They feel that management has not listened to their complaints or suggestions.
  • They sense that their contributions and efforts have not been appreciated, recognised or/and rewarded.
  • They are reacting against favouritism shown to other team members (but not them!).
  • Their activities are a result of an autocratic management style.
  • They have identified internal control weaknesses which “deserve to be exploited”.

Dishonesty: A Work Place Policy

Yet we should not forget the most basic of all motives: pure greed. One of the aforementioned surveys claimed that 25% of all small businesses in the UK had suffered from staff fraud in the last year. I suggest that this figure would have been substantially lower (or the frauds identified much earlier) if the victim organisations had been looking out for the classic ‘red flags’ of employee fraud such as:

  • A staff member who had a sudden unexplained (or unverifiable) change in lifestyle – usually, of course, for the better!
  • Excessive use of drugs and/or alcohol.
  • Abnormal and unhealthy relationships with suppliers and/or customers.
  • A refusal to take holidays – or the opposite end of the spectrum: taking frequent, expensive, exotic holidays.
  • A refusal to let a fellow worker do their job.

Staff fraud is nothing if not sadly predictable, and the organisation responses (or lack of them) are exactly the same. One recent survey concluded that only 33% of companies surveyed had a policy of reporting crimes to the police. The same survey discovered that 46% of the frauds were discovered by accident. Yet neither of these findings are new – similar surveys have been saying exactly the same thing for the last 15 years (at least). I would also guess that many of the respondent firms did little – if no – checking of staff before they took up their position. A state of denial still seems to pervade the corporate world in respect of this ever present problem. My expert advice is very simple and hinges on three basic principles:

  • When staff are taken on make sure that they are vetted. Vetting doesn’t only apply to jobs in the security service – your assets are probably more important to you than state secrets. A simple credit check, residency check, criminal check (if possible) and previous employer references may produce surprising results.
  • Establish suitable and secure procedures and controls but simultaneously realise that a fraudster seeks out any existing gaps which can be exploited, as opposed to focusing on the controls already in place. Thus you must continually monitor the following areas:
    • non-existent controls;
    • where controls are being sidestepped;
    • or where controls have broken down completely.
  • Continually monitor your staff, their activities and the controls that you have in place. If in doubt, change the controls and the staff.

If you follow these basic guidelines you should then be able to target specific proven high risk areas of activity, some of which are so basic they are almost insulting. Try answering the following questions as a starting point:

  • Classic number one: Where is the company cheque book – and who can gain access to that and the company bank account(s)? – particularly via online facilities.
  • Classic number two: Who opens the post? I bet that even if your procedures state that two people should open it, it very rarely happens.

Other Considerations

  • Are financial reconciliations actioned on a regular and ongoing basis?
  • Are your accounting records always in chaos?
  • Do you have a suspense account that is never checked – which doesn’t balance?
  • Are some transactions or contractor relationships too unrealistic to be true?
  • Have you noticed any behavioural changes in your staff?
  • What about information security – the most valuable asset your business has may not be money but information. What are you doing to secure it?
  • What do you do if a staff member “tips you off” or raises suspicions?

Whilst I’m on my soapbox, could I suggest that we do away with the terms that some “experts” have attached to this type of crime. “Asset Misappropriation” is the latest buzz term, which has no relevant or specific meaning; before it was “Staff Defalcation” with a few more classics in between. In the final analysis, even the term “Employee Fraud” is a polite way of describing out and out theft.


Author:  Peter Lilley

Original publication date: 2002


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