THE OTHER PANDEMIC - EMPLOYEE FRAUD
THE OTHER PANDEMIC – EMPLOYEE FRAUD
I’m writing this to raise a red flag to employers in regards to the amount of employee fraud occurring during the Covid 19 pandemic. Last year we worked on three large employee frauds, all well over a hundred thousand dollars (I am being vague because these are all active cases). Two were accounting frauds and one was embezzlement of an organizations assets. I am also aware of two other companies that had a large employee frauds that we were not involved in.
You’re probably thinking that three frauds do not make a pandemic, but consider we are just one local company and though we specialize in accounting and financial fraud, we normally only know about the frauds we work on or read about. I’m also not including the smaller employee frauds that we worked on such as expense account fraud, payroll fraud, and asset misappropriation fraud to just name a few.
There are also a lot of frauds that go unreported for various reasons by organizations. Research has shown that for every fraud that is discovered there are three additional frauds that go undetected. This means that based on just our own experience there are nine additional frauds out there that have not been discovered. Could your organization be one of them?
Some facts about the frauds;
• All of the frauds were perpetrated by productive and highly regarded employees that had never been in any kind of trouble before.
• One fraud was discovered by a CPA, one was discovered by an employee and one was discovered by a customer.
• The length of the frauds were three to four years.
• All employees had been with the company for at least five years.
• Two of the employees were working from home because of Covid. Although the fraud began before Covid there was increased activity while working from home.
• Two of the employees admitted that they committed the fraud because of an online gambling addiction and while we suspect that was the motive for the third employee, they never did admit it.
Just to illustrate my point further about an employee fraud pandemic, after completing this article on January 27. I checked the news sites and one of the headline is “Halifax Accountant charged in $1.5 million dollar fraud against his employer”. Of course in this great country of ours, one of the fundamental cornerstones of our legal system is you are innocent until proven guilty, but still $1.5 million.
According to the Association of Certified Fraud Examiners, organizations lose an average five percent of their assets to fraud annually, I will repeat that five percent. To put it into perspective a small business with one million dollars in sales will lose on average fifty-thousand dollars a year to all types of fraud, that includes employee, customer, vendor and external fraud such as credit card, bad cheques, online and telephone scams.
So what has changed? Personally, I think there are a number of factors. The ACFE says that there must be three things present for fraud to occur, they call it the fraud triangle; Motive + Opportunity + Justification = Fraud.
Let’s look at the fraud triangle to help answer what has changed?
MOTIVE: Is simply the reason the employee needs or wants the money. It could be financial distress because of debt or living beyond their means or it could be because of addictions such as drugs, alcohol or gambling.
OPPORTUNITY: This is a key factor, many employees have a need for money but if they feel that the internal controls are in place and they will get caught this may be a deterrence to commit the fraud. However, if the internal controls are weak or not being audited and monitored this is a strong motivator for fraud to occur?
JUSTIFICATION: Is how the employee justifies in their own mind to commit the fraud. It could be because they feel they are not being treated fairly or are underpaid. It could also be because they think the company owes them or they justify it because they say they will pay it back. I have interviewed many fraud suspects who have high moral and god fearing values. But are able to justify their own actions.
So to answer the question what has changed? I believe that there are increased pressures for people to come up with more money either to sustain their lifestyle or support an addiction such as gambling. With more people working from home this gives them more privacy or a comfort zone, to plan and execute their fraud schemes.
I also believe and this is the main point I’m trying to make with this article, is that many organizations have weak or non-existent internal controls and most important those internal controls are not being monitored and tested properly. Essentially, most frauds occur not because there is systemic failure in the internal controls system, but because two or three of the smaller systems in the larger system have failed. This is usually a human failure, as computers don’t commit fraud unless they are told to.
This is where I see the reason for many frauds, organizations have internal controls in place, but someone or several people are not doing their job in monitoring the internal control process. It could be because of too much work to do, someone on vacation or off sick, we don’t need to review them all the time or it is someone’s else’s responsibility. With many of the overseers of internal controls also working from home, this makes it more difficult to monitor them and stay in the loop. Let’s face it, sometimes the cost of monitoring internal controls can be a factor, it means for a small business or non-profit to have to hire another staff member for segregation of duties or to monitor the internal controls by hiring an external consultant such as a CPA or Certified Fraud Examiner. But what are the costs if you don’t do this?
As human beings we want to see the good in people. They start working for us and we get to know them and trust them, some become friends and we think of them like family. We give them more responsibility and because they have proven themselves trustworthy we relax a little and become complacent when it comes to enforcing controls.
Normally, at this stage I offer tips on preventing fraud, however I’m going to suggest you take the fraud risk assessment below from the Association of Certified Fraud Examiners Training Manual - Employee Risk Assessment Questions. Answer yes or no to the ten questions on your organization.
EMPLOYEE FRAUD SURVEY QUESTIONS
1. Does the company have a written fraud policy?
2. Are the duties related to authorization, custody of assets and recording or reporting of transactions segregated?
3. Is compliance with internal controls audited periodically?
4. Do employees have large personal debts or credit problems?
5. Do employees appear to be spending more than they are earning?
6. Do employees gamble excessively?
7. Do any employees have close associations with venders or competitors?
8. Is the company experiencing high employee turnover?
9. Are employees required to take annual vacations?
10. Is the company dominated by a small group of employees?
Depending on your answers to the above questions, your organization may be at risk for employee fraud. If you are, then my recommendation is to take a proactive approach and have a Fraud Risk Assessment done on your company. Which includes the following five steps;
1. The organization develops and communicates a Fraud Risk Management Program that demonstrates the expectations of senior management and the board of directors.
2. The organization performs detailed fraud risk assessments to identify specific fraud schemes and risks and to evaluate existing fraud control activities.
3. The organization develops and implements preventive and detective fraud control activities.
4. The organization develops a communication process to obtain information about potential fraud and investigating it.
5. The organization develops and performs ongoing evaluations to ensure the fraud risk management program is being followed.
So in closing, the one take away I want to leave you with. Is whether it’s the Accounting Department, Sales, Purchasing, Accounts Payable, Accounts Receivable, Payroll, Inventory, Expense Claims, Cash, Point of Sale, Returns, or any other department? Don’t assume that your internal controls are being followed and there are no weaknesses or gaps. Get evidence not explanations.
Remember, when it comes to small business, employee fraud is BIG BUSINESS.