Why boardrooms must get a grip on occupational fraud

In light of the malicious payroll data breach at Morrisons carried out by a disgruntled employee in 2014, and more recent alleged employee sabotage at US electric car manufacturer Tesla, David Kearns, a specialist in employee dishonesty, looks at why it's time for boardrooms to act to protect themselves from the "internal threat".

It's a simple fact that there will never be an end to employee theft and fraud as long as staff have the opportunity, are able to rationalise their dishonest actions and are motivated by financial gain.

The average loss for a UK company with fewer than 100 employees from a single incident of fraud is £150,000 and companies with more than 100 employees are hit by average losses of £78,000 from a single fraud event, according to the ACFE Report to the Nations Global Fraud Study 2018.

There were 34 recorded cases of occupational fraud in the UK in 2016 (figures collated in a 2017 survey), the highest figure in western Europe. There were 16 cases in Germany and four in France. The report classifies occupational fraud as including the likes of expense reimbursements, corruption and cash larceny.

Despite the fact that the financial and reputational damage to an organisation caused by dishonest employees is incalculable and a major risk to the bottom line, employee dishonesty is not particularly high up on the boardroom agenda. Directors want to believe that the people they recruit are honest and that theft and fraud only happen to other businesses and never to them.

Hard truths

Employee dishonesty isn't just confined to theft or fraud as it also encompasses criminal activities, such as making or cultivating drugs, aggression and violence. On the HR side, there is absenteeism, IP theft or data theft; the latter being more prevalent when an employee leaves an organisation.

Frequently, businesses are not keen for the fraud or theft to be made public and will, therefore, dismiss a dishonest employee. However, wielding the axe quietly doesn't tackle employee dishonesty directly and senior management needs to recognise the issue and to take responsibility for making the changes needed within the organisation to prevent, detect and disrupt the internal threat.

Donald Cressey, a US author, criminologist and professor created the Fraud Triangle concept, which is an established model used to explain the reasons behind theft and fraud in the workplace. It consists of three elements that lead to fraudulent behaviour when they come together. These are:

• Non-sharable financial need
• Opportunity, and thirdly
• Rationalisation.

According to Cressey, a potential fraudster will act when they have the opportunity at work, are able to rationalise their actions and are motivated by financial gain. The Fraud Triangle was devised in the 1950s; however, the model still endures today and is used to prevent, detect and investigate fraud, among other crimes.

Echoing Cressey's model, Expert Investigations' findings show that almost half of dishonest employees stated lack of internal controls enabled them to commit fraud.

Measures to implement

Although employee dishonesty is a major issue facing businesses, tackling it is tough for time-strapped directors. Preventing, detecting and disrupting fraud or theft in the first instance involves pushing the issue up the boardroom agenda to ensure that protocols are established, action plans are created, the investigative process is mapped accurately. Directors will need to have a clear understanding of the issue and what it entails to assist them with decision-making. Only then can they take real control of the risks associated with employee dishonesty.

Preventing, detecting and disrupting employee dishonesty will involve nominating a director to take responsibility for the issue and to effect change across the organisation. This person can then put measures in place to strengthen the company's position.

These should include:

• Undertaking a vulnerability assessment of the business where weaknesses are identified and opportunities for theft or fraud are prevented
• Training all employees involved in the investigation process. The correct processes should be followed to ensure that the best evidence is gathered for any type of investigation. A one or three-day basic investigation course followed by a two-day interview course will boost the confidence of any investigator, enabling them to conduct thorough investigations
• Basic internal training for the person and/or team that will be involved in conducting investigations, including how to gather, preserve and present evidence. This should also include how to conduct thorough interviews of suspect employees and witnesses.

In addition, it's vital to understand the range of investigative capabilities lawfully available to help with detecting where prevention and disruption have failed or have been not addressed. Methods used to investigate employees suspected of fraud may include:

• Computer forensics or the lawful retrieval of data from employees or former employees' devices to identify whether an employee has stolen data, is altering documents or reconciling documents for fraud or is running a business in company time
• Pre-employment checks on job applicants, social media and business checks on employees who may be selling company goods, products or materials
• Covert vehicle tracking or lawfully tracking vehicles to confirm movements and whether any dishonest activity is involved.

When suspicion is aroused, the business needs to take the decision to investigate quickly. Being proactive and identifying risk will lessen the opportunity for dishonest employees, the financial loss and the reputational damage to a company.

Prevention and disruption methods that are introduced to an organisation will also assist in making the detection process swifter and more conclusive as well as serving as a deterrent to potential fraudsters.