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Allison Speigel’s Articles: Tips for Preventing Employee Fraud

An economic downturn, an existence based on disconnection, and the prevalence of working remotely have created the perfect storm for employee fraud during COVID-19.

It’s not hard to understand why: your employees may be under intense financial pressure; are more disconnected from you and your business (making it easier to rationalize hurting you); and are likely less supervised than ever before. The convergence of financial pressure, the ability to rationalize fraud, and the opportunity to commit employee fraud, is a recipe for disaster for business owners.

There are endless ways in which employee fraud can be perpetrated: skimming cash, submitting fake expenses, processing payments to non-existent suppliers, stealing inventory, or cooking the books (in some way or another).

The consequences of employee fraud can be devastating, particularly for a small business and its owners. I have seen my clients learn some of the following lessons the hard way.

You might not know people as well as you think you do.  The people that you trust the most are most capable of hurting you. Although being defrauded is never easy to stomach, the feelings of betrayal are amplified when the fraudster is not just an employee, but a trusted, inner-circle employee. And yet, it happens all the time. Defrauded clients have a common refrain: “I just didn’t believe it could happen – not to me – not by him (or her).” It can, and does, happen all the time.

You might not recover the money:  Business people who have been defrauded want “JUSTICE.” For most, this means, at a minimum, recovering the full amount.

The problem is that our civil justice system suffers from many shortcomings, making it all but impossible to deliver the type of justice that people feel they deserve. Recovering funds from a fraudster, to the extent it occurs, is a long, expensive, and frustrating process.

You may sue the fraudster, win the action, only to realize that the fraudster has no assets in his name. You then need to decide if you want to go double or nothing. If you do, you need to locate any hidden assets (no small feat) and, potentially, bring (and win) a second action to be able to realize on those assets.

The one thing of which you can be certain is that years will pass before this process is complete. Your business must be able to survive in the interim.

As a director, you might be on the hook personally: There is nothing worse than learning that you might actually be liable for the fraud.

Consider this real-life example: A business owner has been working with his accountant (turned friend) for 20+ years. The owner discovers that the accountant has been failing to remit payroll taxes to the Canada Revenue Agency (CRA) and has seemingly disappeared with the money. The owner’s lawyer discovers that the “accountant” was not actually an accountant – his designation was fake. The lawyer explains that the owner cannot just fold the corporation and walk; as a director, he may be personally liable for the missing payroll taxes. This adds insult to injury. While the lawyer can try to negotiate a resolution with the CRA, there are no guarantees.

Employee Fraud Prevention Tips
Although you may not be able to fully prevent fraud from occurring, these strategies can minimize your risk.

1. Pay attention. Are any of your employees going through tough financial times or seemingly living beyond their means? Is anyone acting strange? In hindsight, clients often relay having had a feeling that something was not right.

2. Institute checks and balances. Having different people with overlapping functions, though inefficient, makes it harder to commit fraud. If employees know that someone else will also be reviewing the books, they are less likely to engage in “creative accounting” practices.

3. Ensure employees are taking at least one vacation per year that exceeds five days: If an employee knows that another employee will be covering is his (or her) absence, he (or she) will be more fearful of getting caught and, thus, less likely to commit fraud.

4. Do your due diligence. When hiring, do not believe everything you read on a resumé. Basic Google searches are a good place to start. Searches on Facebook, Twitter, or even Google News may also yield fruit.

5. Routinely assess your fraud risk. Every business has a different fraud risk profile. Routinely assess where you are most vulnerable and devise policies to mitigate that risk. In deciding how heavily to invest in fraud prevention, keep in mind that an ounce of prevention is worth a pound of cure.

Read Allison’s article in Canadian HR Reporter here