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Fraud Prevention Tip #49: How to Deal with Employee Theft

Fraud Prevention Tip #49: How to Deal with Employee Theft

Anti-fraud efforts usually lean towards managing external threats. But your largest exposure is from employees simply because they are already inside your circle of trust.

When we find out that a trusted employee has been stealing from the organization, it can be really difficult to know how to proceed. The theft in question could be anything from taking inventory or supplies for personal use or for resale, adding fictitious costs to travel and other out of pocket reimbursement requests, putting false information on time sheets, engaging in intellectual property theft, or profiting from shadow deals with suppliers, customers or contractors.

Fraud Prevention Tip #49: How to Deal with Employee Theft

THE ANTI-FRAUD TOOLKIT
Let’s be honest. The simple fact that you are considering The Anti-Fraud Toolkit says a lot. It tells me that you are a special person. A true leader in the anti-fraud effort – regardless of your position in the organization chart, your length of service in the business environment, or what your technical specialty areas might be. You are unique in your intention to attack fraud risks – and to do something about it.

Simply put, there’s no one size fits all solution to addressing theft and other fraud by employees. But you have to act. You simply can’t allow the disease of deception to take root in your business.

Here are three suggestions to get you pointed in the right direction.

• Get Help. It’s a rare business leader who has sufficient background in fraud issues to handle cases of employee theft by themselves. Get the help you need to protect all involved, including honest employees. Start with the legal, accounting, human resources and technology experts who are already part of your core business support team. Get advise from qualified professionals – ideally before you’re faced with a fraud event. Outline a comprehensive response plan now before it’s needed. Then execute it objectively should an event be detected.

• Don’t Delay. It’s time to park your disbelief and anger, and get started on taking care of the problem. Employees who steal have no place in your organization. It’s time to stand behind your policies of zero tolerance for cheaters. You’ll need to proceed efficiently and professionally towards a solution that balances the facts of the case with the desire to get it all behind you. But be careful not to let uncertainty and indecision get in the way of what needs to be done. Get help, then take action.

• Learn from What Happened. OK, you got taken by a trusted staff member or manager. It happens, so it’s important to get past the issue at hand and move forward having learned important lessons. Think about how controls could be tweaked without getting in the way of efficient business practices. Analyze how you could be a better overseer of transactions and activity without holding up progress. Recruit your honest employees into a stepped up campaign to make sure it never happens to you again.

When trusted employees steal from the organization, it violates everything you and the many other honest team members hold dear. Out of respect for the honest majority, get help, take action, and adjust daily practices based on lessons learned.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 38-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

November 16, 2015 | John Hall | • • • • • • • • • • • • | Anti-Fraud |
preparation for fraud incident

Fraud Prevention Tip #43: Build The Response Team Before It’s Needed

Near our home, there’s a city firehouse. Inside 24 hours a day are trained professionals ready to go when the alarm sounds. Their equipment is maintained in outstanding condition, their trucks are fueled, and their protective jackets, boots and helmets are already in place. They don’t wait for the alarm to go off before thinking through what they might need, recruiting their staff, buying equipment and getting their training. That’s already done.

That’s exactly the way you should look at you ability to respond to fraud incidents. Evaluate your fraud response needs during periods of calm. Not crisis.

Gaps in capabilities should be addressed before a fraud incident is being pursued.

As part of fraud risk brainstorming, think through what skills might be needed later if identified risks become reality. In many organizations, these skills do not necessarily need to be available in-house. But you should know exactly who to call if you need them in a hurry. Assess internal capabilities. Build relationships with outsiders before they are needed.

Here is a list of good places to start.

Legal Oversight

At the center of the response team are lawyers skilled in criminal matters. These attorneys should be able to provide quick response guidance to members of the investigative team. They should be available when needed, and provide oversight of the investigative process. Consider other legal needs that may arise, such as employment law, government contracting, procurement, international commerce, real estate, technology, intellectual property, and environmental law.

Investigators, Fraud Examiners, and Forensic Accountants

This group will comprise the core investigative team. While the roles of the three groups mentioned in the title above are similar, the specific subspecialties of each are important to have available. These skills may all be found in one person, or we may need multiple experts to fill the investigative needs.

Certified Fraud Examiners

While there are many sources of help, many Certified Fraud Examiners (Association of Certified Fraud Examiners, Austin, TX www.acfe.com) are experts in fraud issues and can bring first-hand experience to your fraud incidents. In many organizations, CFEs are an integral part of the investigative team.

Internal Auditors

If your organization has a formal internal audit function, this resource should be utilized in pursuing reported suspicions. Internal auditors have the capability to review issues from the inside: that is, they can often pull data, double check facts and interview employees quietly. This allows the organization to take initial steps in the incident response process without attracting a lot of attention.

Experienced internal auditors have expertise in internal controls as a core skill. They should be an active part of efforts to identify fraud risks and assess the adequacy of prevention and detection controls. Using auditing analytical procedures and tools (including computer-assisted audit techniques), internal audit can also surface fraud indicators for further investigation. Last, they are a critical resource to management in efforts to strengthen controls after a fraud incident has surfaced.

Information Technology and Computer Forensics

Few business fraud cases fail to touch on electronic records. Information technology expertise is needed to assess the risks to these records and to assist in the collection of necessary data stored in electronic form.

Computer forensics expertise is often necessary to preserve data that will be used as evidence in legal proceedings. Qualified experts in these fields should be formally on call if not on staff. These skills should be found before you need them, as response time to collect and protect critical data may be very short.

Human Resources

The response team should include human resources specialists with fraud background. Fraud involves people, and often those people are employees.

Rights and obligations need to be honored. Laws and employment contracts must be respected. Decisions must be adequately and appropriately documented. Mistakes must be avoided. The qualified HR representative can assist in all of these concerns, and should be a core member of the response team.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

October 26, 2015 | John Hall | • • • • • • • • • • • • • • • • • | Anti-Fraud |
board members

Fraud Prevention Tip #41: Train Your Board Members

There is an assumption that once an individual is accepted into a Board position, they are qualified to provide governance oversight of the organization’s anti-fraud efforts. But for most Board members, nothing could be further from the truth.

History is filled with examples of corporate corruption and fraud at the highest levels that occurred right under the noses of the Board. And it’s not just highly-publicized for-profit organizations that are at risk. School districts, not-for-profits, municipalities, credit unions, universities, private foundations, family run businesses and dozens of others are at risk due to inadequate fraud risk management skills at the Board level.

Whose job is it to train Board members and bring their Fraud Risk Management skills up to speed? Strange as it may sound, it’s management’s job.

The Anti-Fraud Toolkit Structure

The Anti-Fraud Toolkit Structure | Module 2 – Leadership

The message of this module is simple: Nothing will happen without strong, visible, vocal executive leadership. And by ‘executive’ I mean the Chief Executive Officer – whatever their title may be in your organization.
The #1 executive must lead the anti-fraud charge. They must be willing to speak publicly and enthusiastically. They must provide you with the resources you need to initiate and sustain your anti-fraud initiative. They must embrace that fighting wrongdoing and fraud is a campaign waged over time with their continued support. It is not a once and done event that receives encouraging words but no meaningful follow-though. Your #1 job as an anti-fraud leader is to recruit and secure meaningful executive leadership support. Module 2 – Leadership will give you the specifics details of what you will need from the executive management team.

Here are three specific areas where the Board must be up to the task.

1. Oversight of the Organization’s Anti-Fraud Efforts

The Board must ensure that management has done a competent job of identifying fraud risks and putting into place effective controls and behaviors to mitigate those risks. And not just the risk of financial misstatement that consumes so much of Board and management efforts. They must also monitor the risks of significant misappropriation, misstatement of non-financial results, and corruption and shadow deals – especially where it relates to bribery of domestic and foreign officials. Of course the recent uptick in cybercrime and other exposures in the technology arena has even the best anti-fraud Board members squirming in the seats.

2. The Risk of Senior Management Override of Controls

It’s been proven too many times to count that no one in the employee ranks can survive taking on senior management when collusion at the top causes controls to be overridden and fraud to be perpetrated. Not even the Chief Internal Auditor or Chief Counsel. They may have legal remedies when they are fired for challenging the CEO, but no one I’ve ever encountered who has taken this route would do it again willingly. Only the Board can step in when the most senior executives are determined to cheat. That’s one of their key governance roles, and one of the fundamental reasons why the Board exists. To monitor and counterbalance senior management when needed.

3. The Risk of Fraud For the Organization

Not all fraud directly harms the organization, at least initially. Some schemes actually bring substantial benefit to the organization and its leaders. Intentionally misstating the safe use of products, illegally dumping toxic substances, and hiding the harmful effects of food additives and chemicals used in the home are just three examples. Board members must be aware of fraud and other wrongdoing that benefits the organization, and be willing to take effective steps to prevent these risks from ever happening.

Of course, there are many other Fraud Risk Management challenges that all Board members must accept. You can help by teaching them what they need to know and do.

We can help as well. Take a look at our strategic partner for Board quality and effectiveness. The Center for Strategic Business Integrity was recently formed specifically to improve the quality of oversight by Board members and their Trusted Advisors. Take a quick look: www.CenterSBI.com. Might be just what you need.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

October 19, 2015 | John Hall | • • • • • • • • • • • • • | Anti-Fraud |
Avoid Form Over Substance in Managing Risks

Fraud Prevention Tip #39: Avoid Form Over Substance in Managing Risks

I’ve been a professional auditor for almost 40 years. And I’ve seen it over and over and over again – hundreds if not thousands of times. Form over substance controls and behaviors targeting fraud risks.

Here’s what I mean:

• Two signatures are required on transactions over a threshold like $5,000. But neither signer knows what to look for. And each signs simply because the other did.

• Inventory policies require a wall-to-wall count at least once each year. Staff see several years of dust piling up on boxes along the back wall, but don’t bother asking, “What’s really in those boxes – if anything?”

• Managers approve monthly invoices from service providers, but never get out from behind their desk to find out if the service is being provided in accordance with agreements.

• Property housekeeping supervisors work from 9 to 5, and never show up unannounced in the middle of the night to observe when the work is actually being performed.

• Because it’s hot out on the docks, receiving personnel just initial bills of lading from trucking companies instead of counting the number of boxes received. They haven’t opened and inspected the contents of boxes in over a year.

• Managers are surprised when their month-end budget reports show unexplained spending, unknown vendors, and other variances. But they just assume ‘it’s probably OK’ and fail to double-check details.

• Payroll department supervisors see unusual patterns of overtime in two or three employees, but don’t take the time to verify that the reported hours are accurate.

• The assistant controller approves any journal entry placed on his desk for processing. He blindly trusts his staff to make sure that the entries are correct. And everybody in the department takes advantage of it.

• An executive knows one of her managers is extremely cozy with a key supplier and is living well beyond his means. But she shies away from determining if the source of the manager’s ‘income’ is actually a side-deal they have with the supplier.

• The New York based manager who oversees four company locations in Africa has never left the US to inspect these critical overseas operations.

Avoid form over substance. Insist on quality – especially in anti-fraud controls. Hold your people accountable for their signature and results. Refuse to be an easy target for wrongdoing and fraud.

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

October 8, 2015 | John Hall | • • • • • • • • • • • • | Anti-Fraud |
Approving Travel and Entertainment Expenses

Fraud Prevention Tip #37: Approving Travel and Entertainment Expenses – Good Questions to Ask

Many employees, contractors and consultants incur travel, entertainment and other out of pocket costs while on business trips. And fraud and abuse in out of pocket reimbursement is a well-known concern.

We’re expected to know the details of these trips in sufficient depth to be able to competently review the expenses submitted for reimbursement. That’s great in theory, but the process breaks down when supervisors, managers and executives aren’t taught what to look for at the moment of approval.

Here’s a list of questions to get you started. It comes from a survey of over 300 auditors and fraud experts who attended a recent conference presentation I provided.

Take a quick look at this long list and pick out the eight or ten items that relate to your unique business environment. Consider creating a checklist to keep close at hand the next time you are tasked with approving someones expenses. And share your checklist with others.

Managing Fraud Risks in Procurement and Contracting

Managing Fraud Risks in Procurement and Contracting

All business entities have fraud risks. But exposures in procurement and contracting often top the list of what can go wrong. Among the many fraud risks that must be proactively managed is the possibility that third party suppliers and contractors will take unfair advantage of the relationship, entice employees into questionable practices, and commit wrongful acts or outright fraud. This program addresses the fraud risks inherent in procurement and contracting, and will present solutions for managers and auditors interested in guarding their organizations against the costs and other negative consequences of misconduct and fraud. Short on theory and long on practical ideas, the program will give participants the tools and techniques they need “on the job”. Case examples will highlight not only what can go wrong, but what participants can do about it in their own organizations.


1. What is the business purpose of the expense? Is it reasonable for the person claiming the expense?
2. Are original receipts or other support attached for every item claimed (as required by policy)?
3. Is the expense allowable under organization policies?
4. Are the costs claimed ‘reasonable’ considering organization culture, policy, locations, etc?
5. Does the type of expense make sense given the type of travel?
6. Is per diem being abused (compare with dates and times of travel)?
7. Is there an unusual volume of ‘cash paid’ transactions normally charged to credit cards?
8. Are hand written receipts appropriate and reasonable (taxis, minor meals, supplies)?
9. Is this a duplicate expense (check prior expense reports and direct bill items such as conferences)?
10. Are meal receipts itemized (showing food, alcohol and entertainment charges separately)?
11. Were items claimed for reimbursement that are specifically prohibited by policy (alcohol, dry cleaning, hotel room movies, cover charges at clubs, first class air)?
12. Is the expense report ‘sloppy’ – a possible sign of attempt to mask unreasonable or unallowable charges?
13. Is the stated business purpose valid?
14. Is normal commuting mileage deducted (if required by policy)?
15. Were any costs split to avoid allowable maximum?
16. Where appropriate, verify that the place of business actually exists (for example, call the phone number printed on the receipt).
17. Recalculate tips and taxes on meals. For unreasonable low tips or taxes, ensure that the base amount of the receipt has not been inflated.
18. Verify charges for entertainment, checking who was entertained, business purpose and actual type of entertainment provided.
19. Spot check charges that fall below the threshold where receipts are required.
20. Verify that cash advances are reconciled to actual expenses on a regular and timely basis.
21. Compare dates with weekend days, local holidays and special events (Super Bowl, NASCAR, Wimbledon, World Cup, other sports playoffs, football bowl games).
22. For attendance at conferences and all day meetings where per diem or meal charges were also claimed, verify whether meals were provided directly by the host organization.
23. Compare date, time and address on machine printed receipts – compare to person’s calendar or electronic meeting schedule (air, hotel, time-stamps on parking receipts, tolls and taxi receipts).
24. Tie mileage to vehicle logs (where applicable) or map programs (MapQuest, etc.).
25. Were preferred travel partners utilized? If not, why not?
26. Are the charges allowable and properly reported under FCPA and international gift and entertainment regulations?
27. Are currency exchange calculations accurate and consistent with organization policies?
28. Has anything on the receipts been altered or ‘whited-out’ (dates, amounts, vendor name, other fields).
29. Review the detailed bill (restaurant receipt evidencing what was ordered), not just the credit card slip.
30. Verify tolls. Insist on statements for ‘EZ Pass’ and similar toll transponders.

 

John J. Hall, CPA

John J. Hall, CPA

John J. Hall, CPA, is an author, speaker and results expert who presents around the world at conventions, corporate meetings and association events. Throughout his 35-year career as a business consultant, corporate executive and professional speaker, John has helped organizations and individuals achieve measurable results. He inspires audience members in corporations, not-for-profit organizations and professional associations to step up, take action and “do what you can.”

 

 

October 1, 2015 | John Hall | • • • • • • | Anti-Fraud |
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