Employee Theft and Fraud: How Did That Happen?!?

LOS ANGELES - Oct. 9, 2013 - PRLog -- EMPLOYEE THEFT AND FRAUD: HOW DID THAT HAPPEN?!?

         That’s a question no company wants to ask.  To avoid having to ask that question, most businesses—small, large and in-between—have policies, procedures and internal controls designed to deter and detect employee fraud.  Your company, no doubt, has policies and procedures to make sure your employees properly record income and expenses, don’t keep a double set of books, don’t skim, properly record inventory and otherwise promote and protect the interests of the company.  You watch your inventory to make sure it doesn’t mysteriously walk out the back door; you have expense account procedures; you make sure your vendors don’t bribe employees to order more than necessary.  You probably have other controls as well, because you know you need them.

         You may have also seen the statistics that most business fraud (up to 60%) is perpetrated by long-time senior executives, and that total business fraud losses in this Country are estimated in the hundreds of billions of dollars, that's right, billions per year! Indeed, if you run a small company, you may already know that average losses in companies like yours are approximately $200,000 per incident.

         You know—just about every businessperson knows—there’s a big problem out there.  No one wants to have to ask how and why that embezzlement or fraud happened, right?  So why do hundreds of billions of dollars walk out the door of American businesses—in the pockets of crooked employees and executives—every year?

         Permit me to offer three observations that might help you avoid having to ask that dreaded question:

1.         FRAUD OCCURS IN THE PRESENCE OF CONTROLS—NOT IN THEIR ABSENCE

         Don’t fall into the trap of thinking that just because you have lots of good controls, policies and procedures you don’t have to worry anymore about employee fraud.  You do.  Combating employee fraud, unlike publishing an Employee Handbook, is not something you can check off a “To-Do List” and forget about.  And remember the statistic from above: don’t focus your controls only on low-level employee pilfering; senior executives cause much more damage.

2.         TONE AT THE TOP CAN HELP COMBAT FRAUD THROUGHOUT THE COMPANY

         OK, so you promise not to be too lax or too rigid in implementing and maintaining fraud controls.  That’s fine, but there are still traps to avoid.  Sometimes, companies get rigid in another way and defeat the benefit of fraud controls by becoming paranoid and suspicious.  That’s the opposite of what a company should do.  Don’t suspect everyone, but do make sure that everyone, from the president to the lowest paid clerk, follows the policies and procedures that are in place.  “Tone at the Top” is an overused phrase, but when employees see their bosses and supervisors rigorously following the same procedures they have to follow, there’s more “buy in” to the company’s program.  Employees, all of us, have a well-developed sense of right/wrong and fairness, and if they see a supervisor, or even the president, not following company policies, or too frequently benefiting from exceptions to the rules, they see little need to follow them either.

3.         ASSUME NOTHING!  YOU MUST PREVENT AND DETECT FRAUD

         Don’t assume your controls will prevent all employee fraud.  Trying to prevent every fraud is a “fool’s errand” anyway because it won’t work, and will lead you into the rigidity and paranoia traps.  Actually, many of the prevention techniques mentioned above (training, tone at the top, review and updating of policies) are all important in helping to detect ongoing fraud.  Whistleblower hotlines are easy to implement and very cost effective.  Another common sense, but sometimes forgotten measure (witness the California CFO) is to insure that managers, at whatever level, do not accumulate extra (and usually unnecessary) authority either vertically or horizontally in the corporate structure.  Employing one person in two or three job functions may save some money in the short run but lose it in the long run.

CONCLUSION

         There are certainly other ways to detect and prevent fraud and I’m sure you can come up with some beyond what is discussed here.  And that’s the whole point of this little article.  You have to think about employee/executive fraud in terms that fit your company’s situation.  Trade associations are a useful resource with industry-specific ideas.  Being conscious of the problem and continually working on it is half the battle.

         It’s worth some effort and creative thinking to help you avoid having to ask the question:

         “How did that happen and why didn’t I discover it sooner?”


This is an excerpt of an article by Eric L. Dobberteen, white collar crime attorney at Clark & Trevithick, PLC.  To read the complete article, please visit <a href = "http://www.clarktrev.com/currents/Vol-5-2.html"> Employee Theft and Fraud article by Eric L. Dobberteen</a>. Contact Eric Dobberteen at EDobberteen@ClarkTrev.com.