Deterring employee fraud

Date Published: 
June, 2005
Original Author: 
Bob Garvey
McLean, Koehler, Sparks & Hammond
Original Publication: 
ICFM Magazine, June 2005

Adapted from a presentation at the 2005 ICFA Annual Convention

Owners and senior managers set the moral and ethical path for your organization. Your mid-level and lower-level employees are going to take their lead from the company owners.

The CFO of World Com instructed his employees to cook the books and because of the environment, they did it. He could have never done it himself; he didn't post the books. The environment in which WorldCom was operating made it possible for these things to occur.

Creating a positive environment
So let's talk about creating a positive environment. Is it obvious that you as management care about your employees? The employee needs to feel part of the team; you need to get them to think "this is my company, too." It is less likely you will steal from yourself.

Are your financial targets reasonable?
In an entrepreneurial environment like I'm sure most of us in this room are in, it's not hard to get from a stretch goal to something that's totally ridiculous. And once you get into totally ridiculous, it's hard to get anyone on the team.

Is your management style participative rather than autocratic? In today's world, I can assure you young people only like to work in a flat organization chart. This autocratic thing, the boss on the top and everyone else on the bottom, doesn't work today. It doesn't get them on the team; they won't feel like they're a part of your organization.

Do you have different discipline standards for executives and employees? This is a very big one. There's no way that "Do as I say, not as I do" is going to work. Your employees will pick up on this and they will not be happy.

Ultimately, the greatest fraud deterrence is when every employee from the top to the bottom makes a conscious decision to conduct their business in an honest and an ethical manner.

Sounds like common sense, but as managers you need to ask yourself, "Am I perceived as an honest person by my employees?" In the probably 200 fraud deterrence programs I've done, the answer is always, "But of course."

And then we get into a few things. Do I have the grounds people occasionally throw a bag of seed in my car to take home? People are watching. Do I use the petty cash fund as my personal slush fund? Do I use the company credit card for non-business purposes?

You might think "Hey, it's my company, I can do anything I want." That's true, but if you're looking for honest employees, remember the rationalization, "everybody else does it." People say, "I know the boss has done it."
Do I hold the books up to allow for a few extra contracts to get booked? That's fraudulent. That's a bad message to send to your accounting team: It's OK to do fraud. That's what was going on at Enron and plenty of others.

Do I allow bad debts to remain on the books when I should write them off? What are we doing: We're pumping up our bottom line. That's fraud. And your employees are going to pick up on that.

Use hotlines. I'm a big believer in hotlines. One of the problems they had at WorldCom is that there was no venue for the employee to go to. There was no safe place for a person who wants to be honest to report what they saw. At WorldCom it was even worse—the external auditors were reporting to the CFO. That was a no win situation.

In my experience, people will use a hotline. And if employees know that other employees who see them doing something can report it upstream, anonymously, it's a very good part of a fraud deterrence program. It's very reasonably priced; there are a number of companies that offer this. The association of certified fraud examiners has a hotline you can look at.

Don't hire crooks
We've all hired crooks at one time or another, and we may have some crooks on our payroll today. You want to get criminal conviction and credit checks. Hire a private investigation firm to do this; don't waste your time trying to do it yourself.

Check references. It's amazing how few people actually call references. They say, "I'm always going to get good references."
You never know; it's better to call. They may not exist—they may be fake.

Call the last two employers. At a minimum you are able to verify the position and duties and dates. That tells you something about how puffed up the resume is. Always ask this question: "Is he eligible for rehire?" and listen for the tone of voice.

What you're looking for is "Yeah, I'd love to have him back. He did a great job for me, etc." That's a good response. What you will hear if they are not so happy with this character or if they fired them is a lot of silence, or stumbling or mumbling, "Well, I've gotta check with my HR director and we don't give out that information," Be wary; that is a big red flag.

The last thing is drug screening. This is new for our profession, but it's been going on in general for a long time. Given the fact that financial pressure is caused more and more today by drugs, you should do it. You don't want a drug addict on your payroll. You're opening the door to all kinds of problems, not the least of which is financial.

Get your attorney to sign off on all this. You can do it as long as you follow the rules.