Big brother or big bother

EMPLOYEE fraud is a potential risk at any time but the economic downturn is set to increase that risk significantly.

In this week’s Personal View, James Hamilton, forensic partner with accountants and business advisers PKF, offers his top 10 tips on spotting and preventing internal fraud.

Employee fraud prevention Top 10

1. If an initial objective assessment suggests a possible fraud, assemble an investigation team and put it to work without delay.
2. Involve as few people as possible in the investigation team.
3. But consider including outside experts, such as forensic accountants and IT specialists.
4. Consult lawyers, from the outset and throughout the investigation.
5. Ensure communication with investigators and advisers is regular, open and confidential.
6. Assess the impact of any fraud on your company’s reputation, finances and key stakeholders, who should be contacted regularly, from the earliest possible time.
7. Appoint a senior employee the sole media liaison officer for the case.
8. Review your insurance policies…they may cover you against fraud and the cost of its investigation.
9. Consider commercial, regulatory and legal factors in deciding desired punishments for guilty staff.
10. Take remedial action if frauds have exploited faults in internal control systems.

“The overriding principles of successful fraud investigations are stealth and speed, with perpetrators being given no indication of the net closing in. The first point can be observed by enquiries being conducted outside normal office hours, for example.

When management is assembling an investigation team, the general rule is the fewer people involved the better. The businesses should however consider making external forensic accountants, expert and experienced in handling such cases, part of the unit. It is worth introducing them to staff in a false guise, such as that of bank due diligence personnel, to avoid arousing suspicions.

One benefit of keeping the inner circle tight is it reduces the chances of the guilty being tipped off and then destroying evidence, by, for example, deleting incriminating computer files which can happen at the touch of a button. Many suspected modern frauds do involve computer systems and in such cases managers should also consider making forensic IT specialists, who can preserve files, part of the investigation team.

Lawyers should also be consulted during the investigation, from the earliest opportunity, as putting a foot wrong at any point could jeopardise future actions.
It is particularly vital that lawyers advise on interviews with staff members because great care is needed in gathering evidence. Interviews need to be planned and recorded properly in order to avoid infringements of employment and human rights.

Lawyers should also advise on any disciplinary measures against suspected staff, with decisions being taken quickly about whether to keep them in post or impose sanctions such as dismissal or suspension.

Communication between the investigators, advisers and senior management throughout the process needs to be regular, open and confidential.

If suspicions of fraud look to be confirmed, managers need to assess the impact on the organisation as a whole, considering factors such as its reputation, finances, staff, customers, suppliers, financiers and owners or shareholders.

You should communicate with these key stakeholders at the earliest appropriate time. Where relevant, managers should contact regulators promptly, for example, demonstrating they’re doing everything possible to resolve the problem, and not hesitating to seek their help and support.

It is often a mistake to imagine news of frauds will stay within organisations, so it is best to appoint a senior employee the sole media liaison officer. By doing this, all external messages can be consistent and positive.

Frauds can have a destabilising effect and regular announcements confirming that management is acting quickly, decisively and without tolerance can help to counter this significantly.

Affected businesses should also review their insurance arrangements, as some policies cover against fraud and the costs of related investigations.

Decisions regarding punishments need to be taken in the context of commercial, regulatory and legal considerations. Managers should consider civil recovery proceedings against those responsible, as well as contemplating criminal action, which will obviously need to involve the police.

Finally, most employee frauds exploit weaknesses in internal control systems and these should therefore be reviewed after any such cases, with a view to existing processes being tightened or new ones introduced.