Employers are often unsure what to do in the event that they discover an employee fraud. These can range from payroll fraud to false accounting and expense claims and they can have a devastating impact on the employer's financial stability, reputation and the morale of other employees. It is therefore important that businesses take precautionary measures rather than waiting until a fraud is uncovered. A plan of action to tackle employee fraud should be in place to reduce the impact of such frauds on the business and to maximise the chances of recovering any losses.
There are several components which create the perfect 'fraud storm'. Firstly, the employee in question is usually subject to pressure or motivation. This could be economical in the form of debts or excessive spending and will usually be kept secret from colleagues or family members. Secondly, the opportunity to commit the fraud either presents itself or can be exploited. Unscrupulous employees will look to commit frauds in departments where there are lax internal controls or an apparent lack of internal reporting structures. Employee fraud also tends to occur where the employee has wide discretion and minimal oversight. Finally, the employee will seek to rationalise their wrongdoing. For example, this could be in response to the employee feeling aggrieved after being overlooked for promotion or where their bonus was less than expected.
Unfortunately there is no silver bullet when it comes to completely removing one’s risk of becoming a victim of employee fraud. However, there are various steps that companies can take in order to reduce risk and maximise their prospects of recovering their assets – and their reputations. This begins by companies having in place an effective risk assessment policy covering prevention, detection and reaction to frauds.
Anna Storer, a Trainee Solicitor at Mishcon de Reya says on behalf of the Fraud Defence Group:
“Companies need to start by having in place clear whistleblowing and anti-fraud policies. It is important to set the tone from the top that fraud will not be tolerated and clearly detail what is deemed to be unacceptable conduct. First, companies should ensure that these policies are revisited annually and provide employees with regular training sessions so they know exactly what to do in the event of suspecting fraudulent behaviour. Second, companies would be well advised to establish a robust internal audit procedure that carries out both scheduled and random audits. According to CIFAS' latest report., effective internal audit controls were responsible for discovering nearly half of all employee frauds committed in 2016, so their value is immeasurable. Finally, ensuring that all invoice payments over a certain threshold require two signatories before being processed is an example of a simple and cost effective measure that can significantly reduce opportunities for fraud.”
Claire Broadbelt, a Partner in the Fraud Defence Group says:
“An often overlooked aspect of a risk assessment is the reaction stage. In our experience, companies often fail to consider their action plan in response to a fraud until the fraud is actually discovered. Unfortunately, this is too late. A company needs to know, and have in place details, of who to call when it finds itself the victim of fraud. Time is of the essence and action needs to be taken very quickly. Being slow off the mark can have disastrous consequences on both reputation and brand. On the other hand, by reacting quickly, the prospects of successfully recovering losses are increased dramatically. It is also important that companies are aware of the various legal issues they face when an internal fraud is discovered and before it starts to investigate. This includes understanding how best to retain privilege, as well as complying with its obligations under employment law and the Data Protection Act 1998."