Is there a thief or fraudster in your business?

employee-dishonesty

“I take full responsibility for what happened at Enron. But saying that, I know in my mind that I did nothing criminal”

Kenneth Lay – disgraced criminal former CEO of Enron

Normally my blog is released every month on 21st day except for Christmas and when I am away overseas. This is one of those blogs. It was prompted by a conversation with a friend whose business did not get paid because their IT system was hacked, diverting the payment to a fictitious bank account. Their customer did not have the checks and balances in their accounts payable department. However, most fraud is internal.

Is there a fraudster or thief in your business?

In the media headlines, we regularly hear about business fraud from chief executives defrauding the company to cover gambling debts, to public servants giving contracts to family friends and associates, and to senior managers being appointed on false resumes.

However, fraud and theft in organisations are more widespread than the media portrays and are often hidden as it is embarrassing to the organisation and its management. Most theft and fraud occurs within an organisation and not outside the organisation. In Australia, theft in retail by employees is far higher than theft from shop lifting.

Every organisation needs to be vigilant where ever possible against theft and fraud and have the appropriate systems in place to prevent it occurring. I once worked for a company where it was rumoured several of the senior managers were perpetuating fraud. The clue was that they were living beyond their means. An alert CFO decided to engage forensic accountants. The subsequent investigation found fraud extended back over a decade and involved millions of dollars. The culprits were sacked and it was never reported to shareholders.

For fraud or theft to occur there needs to be three conditions. This is often called the fraud triangle.

  • Motivation – this is often related to personal financial situation and living beyond their means. For example, gambling debts. When I was in business we had a customer who was defrauded for over $1m by a ‘trusted’ employee who had gambling debts
  • Opportunity – access to cash or goods and understanding of the company’s systems. For example, truck drivers and dispatch staff in a warehouse colluding to steal stock
  • Rationalisation – where employees often feel justified in their actions. For example, an employee who feels aggrieved by their salary or envious of the business or owner making a profit.

Most fraud or theft is result of a lack of segregation of duties, inadequate check and balance systems and inadequate supervision.

In reducing the opportunity to steal or defraud where do you start?

Like most things in an organisation it starts at the top. The first step is the culture.

  • set the right ethical tone from the top of the organisation
  • communicate no tolerance of unethical behavior
  • walk the talk and set the right example

As a business owner or manager…………….

“You own the business; you own the risk. Identify it and manage it.”

The second step is to ensure internal accounting controls are in place. Identify the areas of the business most at risk of fraud and focus your attention in improving controls in those areas, especially the ones relating to how money is moved around the business. For example, when paying suppliers and wages separate out who can raise an invoice and who can pay it. Create a system where a second person is responsible for authorising payments that have been approved before the money leaves the organisation’s bank account.

The final step is to have a system that will uncover fraud and theft. Two examples are:

  • whistle blower policy that protects the whistle blower. For example, it may be a phone number an employee can call such as the Chief Financial Officer. Most fraud is uncovered by employees
  • regularly and systematically analyse the data in high risk areas such as payroll and procurement and investigate transactions that do not look right

As well as being a management distraction when discovered, serious fraud and theft can destroy a company and jobs (http://www.dolmanbateman.com.au/604/internet-banking-fraud-clive-peters-case/)

Unfortunately, in over 30 years of life in business I have witnessed too many acts of theft and fraud. In most cases, they continued until discovered and were the result of poor systems and supervisory management. Generally, theft and fraud starts small and then as the perpetrators become more bold and greedy they become careless. Often it’s a small indiscretion that tips a manager off and often it is the ‘tip of the iceberg’.

In my work experience two examples spring to mind. Personal items from motor vehicles were being stolen in transit. When the employees were caught the police found an ‘Aladdin’s Cave’ of stolen items. In another example, a supplier was randomly checked and it was found to be owned by two managers who were directing non-existent services and collecting the money.

In conclusion, in your organisation are you vigilant about theft and fraud?

Do you have the necessary systems in place that discourage it?

More importantly do you set the moral tone and walk the talk and set the standard that theft and fraud at any level is unacceptable and will be dealt with accordingly?

Remember, a fish goes rotten from the head first.

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