Conducting Dishonest Employee Investigations

When companies believe they have been taken advantage of by a potentially dishonest employee, many have no idea what to do next. Many times business owners or managers jump directly to what is perceived as being the easy solution; the employee in question is terminated. However, is that really the best action to take? Many forensic accountants and corporate investigators will say it is not.

The first thing the company needs do is verify that the employee in question is in fact dishonest. There are very few matters that can cause more unhappiness in a workplace, or amongst a workforce, than an employer targeting an employee that has done nothing wrong.

Companies often forget to determine if “predication” is present before any type of investigation begins or accusations of wrong doings are made. Predication is defined as being a set of circumstances that would lead a reasonable and professionally-trained person to believe that fraud has occurred, is occurring, or will occur in the future

Predication can be found to be present with the help of things such as tips, accounting anomalies, surveillance, etc. A fraud investigation should never be conducted without predication being present. In reality, the accused employee may have upset someone enough that false accusations are made to “get even” or to cause the employee suffering. The following are some of the questions the company’s management or company investigator can ask themselves and others before any accusations are made or an investigation begins:

  • Did someone tell you the employee was dishonest?
  • Is there evidence the employee is being dishonest?
  • If evidence is present, is the evidence being safe-guarded?
  • When and how should you talk with the employee?
  • If the employee is coming back from a Workers Compensation Claim, how should the interview be conducted?
  • Is the employee a female and does she happen to be pregnant?
  • If the employee is a female, should a male investigator interview her alone?
  • If a witness is to be involved in the interview, should the witness be male or female?
  • Is the employee under 18 years of age? If so, does one of their parents need to be present during the interview?
  • Are there any cultural issues that need to be taken into account before interviewing the individual?
  • Will the “opportunity” the employee took advantage of still exist after the employee in question is terminated, suspended, reassigned or resigns?
  • How do I keep this from happening again?
  • Will the matter be handled internally, through a civil proceeding, or in a criminal court?
  • If the matter is to be handled in a criminal court, when do the police need to be involved in the investigation?
  • Is the matter in question covered under the company’s insurance coverage and if so, what documentation or procedures need to be followed in order to file a timely claim?

Once predication is determined, it is best if the owners or managers bring in outside experts to assist with the investigation. Many fraud investigations handled “in-house” are not done correctly for many different reasons. Some of which are accusing or alerting the individual suspected of the fraud at the wrong time, mishandling evidence, assumptions of involvement, failure to obtain a verbal or written statement of involvement from the suspect(s) and/or personal emotions getting involved.

In fact, emotions may be the hardest aspect for the management to get over or deal with. The owners and/or managers may feel embarrassed that someone was allowed to steal from the company. They may feel they “should have known better” and if they had only done something differently, this matter would never have taken place.

Business owners and managers must work to move past the feeling of being embarrassed. Trusting their employees is not the reason they were taken advantage of or stolen from. People take advantage of situations for many different reasons. Some reasons make sense and actually seem like they may be justified but most make no sense at all.

People who steal from those who have entrusted them with the well-being of their company must be held accountable for their actions. If not, you are allowing this person to go somewhere else and potentially victimize another organization or individual. I would believe the majority of business owners and/or managers don’t wish to feel as if they could have done something to prevent another business and/or individual from suffering the same fate as they have. Hold dishonest employees accountable for their actions.

If something does not seem right in your business, contact your attorney, your banker, your local law enforcement agency, or a forensic accountant for expert assistance in determining if something dishonest took place. Make sure your internal controls work properly in order to avoid potential fraud and catastrophe. Remember: prevention is always cheaper than detection.

Fraud: Current Trends and Information

Trillions of dollars of revenue worldwide is lost due to fraud. According to the Association of Certified Fraud Examiners 2016 Report to the Nations on Occupational Fraud and Abuse, 5 percent of annual revenues are lost to fraud–that is $3.7 trillion worldwide. While the median loss was $150,000, 23 percent of cases involved losses of greater than $1 million. Typically, smaller organizations suffer the larger losses. It is important to be aware of the current trends in fraud so your company can avoid occupational fraud and abuse.

In 83 percent of fraud cases, the fraud involved asset misappropriation. Most frequently victimized were private companies and those in the banking and financial services industry. While employees were typically the perpetrators, owners and executives were the ones who generated the largest fraud losses. The primary weakness in many of these cases was lack of internal controls.

An example of poor controls in a small business can be seen in an actual fraud examination performed by Eide Bailly. The bookkeeper for a tile company was responsible for daily tasks including collecting sales receipts, completing deposit slips and making deposits. After a period of time, the bookkeeper began to remove checks and hid them in her desk. Later, when the daily sales included an amount of cash that matched one or several of the checks which had been set aside, the bookkeeper exchanged the cash for checks and made the daily deposit. No one in the company was aware the cash was missing until it was discovered revenue numbers would not reconcile. By the end of the scheme, the business lost more than $150,000.

Some simple controls could have prevented this scheme. Businesses should consider:

  • Using a hotline
    One way to stay on top of fraud cases is through the utilization of a hotline. More than a third—39.1 percent—of fraud cases were detected by a tip line, and in 51.5 percent of cases, employees were the source of the tip. Organizations with a hotline are 50 percent quicker at detecting fraud. Hotlines are beneficial for both the employer and the employee due to ease and anonymity.
  • Establishing preventative controls
    Preventive controls include deterring or preventing unauthorized transactions, requiring proper authorization, and instilling physical safeguards such as locks, keys and passwords. Another important preventative control is segregation of duties. Proper segregation of duties is imperative because when one person controls multiple phases of a transaction, the opportunity for fraud increases significantly. Nearly two-thirds of all frauds are committed by one person acting alone. By involving at least one other person, the risk of fraud can be greatly reduced. For example, having a second individual involved in documenting and verifying vendors can impact someone’s ability to introduce a false vendor into the company’s A/P process. One person documents the vendor’s information and a second individual then vets the vendors’ information prior to entering it into the company’s A/P system. This simple control can keep someone from submitting false invoices for services never rendered or requested. In one of our previous examinations, an A/P clerk used this specific scheme to embezzle $170,000.
  • Establishing detective controls
    Detective controls include independent checks to ensure that transactions have proper authority and are recorded correctly. For example, rotating job duties, a mandatory vacation requirement, and surprise audits are effective detective controls. Assuring adequate documentation and records are maintained is also an important detective control. Procedures should be implemented to ensure these detective controls are in place.

With appropriate measures in place, you can successfully decrease the risk of fraud in your workplace. While most frauds are uncovered by accident, it is important to remember to not overlook the most obvious signs. If you suspect fraudulent activity, employ the skills of a forensic accountant for detection and investigation.