Dealing with employee fraud

Anthony Drake, Senior Associate | March 2005

Employee fraud has long been a concern for business.  Fraud can include embezzlement and all other kinds of financial fraud, but perhaps the most common kind is employee theft.

Recently released Government figures for the 2003/2004 year indicate seven employees were caught stealing $1.98 million from the Ministry of Social Development.

In another example last year, a finance assistant was jailed for 28 months for defrauding his employer of more than $440,000.  The employee was said to have led an extravagant lifestyle and spent the money on an apartment, cars and overseas holidays.

What causes someone to risk their job or even their career, resulting in prosecution and potential imprisonment?  The reasons are numerous and complex but there is usually one simple reason - they believe they will not get caught.

Most employers who fall victim to employee fraud make the mistake of believing that these things only happen to other people.  They believe that their long-term employees are loyal and would never commit such a crime.  That may or may not be true.

Don't lull yourself into a false sense of security.  Exercise a healthy dose of scepticism, and keep your eyes and ears open for signs of potential problems.  Also, take steps to remove the temptation of committing fraud. 

This article sets out some tips which can help prevent your business from becoming a victim.

Don't be a victim

First of all, be alert to the conduct of those who are most likely to commit embezzlement or fraud.  The following behaviour, patterns and events can be early-warning signs:

• An extravagant lifestyle;
• Signs of heavy debt burden;
• Reluctance to take a vacation or be away from the office;
• Significant changes in behaviour, including unexplained mood swings (which may indicate a drug dependency problem);
• Resentment of management/owners, job frustration, adversarial relationships with groups within as well as outside organisations, particularly auditors;
• A desire to control operations and safeguard assets and disregard for the segregation of duties, structure, control and procedures. 

As well as watching for these types of behaviour, employers should minimise opportunities for fraud to be committed. 

If financial and stock controls are weak, fraud can occur with little chance of detection.  Any advantage gained in time savings, convenience and perks of ownership can easily be overshadowed by undetected fraud or embezzlement.

Surveys indicate the employee most likely to commit fraud is not someone you hire who is yet to develop loyalty to the organisation; rather the perpetrator is likely to be in the organisation long enough to be trusted, to become familiar with the operations and to get close to key clients. 

When interviewing prospective employees, try to judge their personal integrity (which is never an easy task). 

Here are some of the steps you can take to prevent fraud and embezzlement:

• Reference and background checks should always be meticulously carried out;
• Be alert to characteristic signs and opportunities;
• Require each employee to take vacation time;
• Don't allow employees to control all phases of a transaction cycle - ensure transaction functions are segregated;
• Scrutinize expense reports, credit card charges, telephone bills and employee overtime payments;
• Safeguard cheques, credit cards and bank statements; and
• Ensure procedures are followed.

Procedures

It is fundamentally important that the employer acts in a procedurally fair and a reasonable manner in any potential dismissal situation.  This rule applies to all actions taken under the dismissal procedure.

The dismissal procedure can be broken down into various steps:

• complaint;
• interview;
• investigation; and
• decision.

As an employer, you must follow the procedures listed below when taking action against any employee whose conduct may amount to fraud or embezzlement.

Complaint

Where either a complaint is made about the conduct of a particular employee or you become aware that the employee's conduct may amount to fraud or embezzlement, you must decide whether the allegation has any substance and ought to be taken further.

If you decide the allegation is well founded, you will need to check any existing employee agreements or company policies to ensure that any disciplinary action that is taken is consistent with those documents or any prior company practices to ensure that there will be no disparity of treatment of employees who act in a similar manner.

You should carry out a full investigation of all relevant facts prior to confronting the employee.  This includes checking the employee's personnel file to see whether there are any other matters that should be taken into account. 

Having carried out a preliminary investigation, arrange an interview with the employee to discuss the matter before deciding what action should be taken in respect of the employee's conduct.

The employee should be informed in advance of the meeting and should be given specific details of the allegations they are required to answer in order to give him or her a chance to consider the allegations prior to the interview.

It is worth noting that the Employment Relations Authority takes a favourable view when an employee who is the subject of an investigation is suspended on full pay.  Such an action allows the employer to investigate the matter fully and properly and consider its decision.  It should be noted, however, that suspension is not appropriate in every case.

Interview

The interview must be carried out in a fair and reasonable manner.

The employee must be advised of all matters and all evidence that you have accumulated.  The employee should then be asked their version or account of the events.

You must ensure that you are not relying on facts that you have not put to the employee.  If this is the case, then those facts cannot usually be relied upon later if the employee challenges the dismissal.  The employee should be given a full and proper opportunity to answer and explain any allegations or to mitigate his or her conduct.

You must conduct the interview with an unbiased attitude, an open mind and must listen to the employee with the genuine intention of taking account of what the employee has said. 

You must also give adequate consideration to the employee's explanation if one is offered.  Any consideration given to the employee's comments must be free from pre-determined judgment and uninfluenced by irrelevant considerations.

The employee must be given an adequate time period in which to respond to the allegations.  If necessary allow for an adjournment or for consultation with a representative.

Investigation

You should follow up any explanation given by the employee and give consideration to its validity. 

Reconvene the meeting and explain to the employee the results of any considerations or investigations.  Ask the employee if he or she has anything further to add and investigate any further explanations that are raised.  If the employee does not raise any further explanations then the employer is entitled to proceed to make its decision.

Decision

The employer must evaluate both the evidence and the employee's response.  If, at the end of the investigation process, the employer finds the allegation proven, then the employer is entitled to consider a range of disciplinary responses, which could include a final warning, demotion, reduction in pay, and, of course, dismissal.  The penalty chosen by the employer must not have been so disproportionate as to be considered unduly oppressive.

Advice and information

Bell Gully's Employment Team can advise you on all types of issues, including preventing and dealing with employee fraud.  Contact the team at the numbers below for more information.