FraudRecently, an already cash-strapped small California city realized that a finance employee embezzled $4.3 million over twelve months.  Multiple theories emerged about what would motivate an educated, professional with a clean employment history to steal money from his public employer, and from the unwitting citizens, who were impacted by the massive theft.  An interesting theory was that he wanted to help his parents, who were going through bankruptcy.  Does the motivation matter?  Not really.  Are there particular individuals who may be more likely to commit theft?  Probably.

Rather than worrying about the motivation, the employer’s attention should focus on the areas of high risk for embezzlement and theft.  In the Report to the Nations on Occupational Fraud and Abuse 2012 Global Fraud Student, the Association of Certified Fraud Examiners (ACFE) presented a comprehensive analysis of occupational fraud.  The study found that 77% of fraud occurred in the following departments: accounting, operations, sales, executive/upper management, customer service, and purchasing.  The study further noted that most perpetrators had clean records: 87% of the “fraudsters had never been charged or convicted of a fraud-related offense, and 84% had never been punished or terminated by an employer for fraud-related conduct.”  The embezzling city employee described above fell right into this profile.

In December 2014, the California State Auditor released its report on “Theft of State Funds, Waste of Public Resources, Improper Headquarters Designation and Improper Travel Expenses, Dishonesty, Incompatible Activities, and Other Violations of State Law.”  Some of the “highlights” from the report include:

  • “A manager embezzled $3,500 in state funds when she recycled surplus state property and kept the proceeds.”
  • “A full-time employee lied to his manager about the need to telecommute, and instead worked a second full-time job without his agency’s knowledge.”

Where do employers go wrong and what can they do proactively to reduce or eliminate employee theft?  Occasionally, fraud in the workplace is uncovered through outside reviews, such as audits.  While audits may be useful to detect fraud in some circumstances, employers should not rely on these outside reviews.  According to the ACFE, only 3% of reported fraud is found through an external audit.  The ACFE noted the highest percentage of fraud detection resulted from employee tips; this accounted for roughly 43% of detected frauds.  Since this likely is the most effective detection method, employers should have a policy or procedure in place that explains to employees how to report suspicious activity and includes a statement on anti-retaliation.  The policy’s existence alone, however, is not enough.  Employers need to take affirmative steps to inform employees of the policy and its importance.

Another area on which employers may focus to uncover or reduce employee fraud is plain and simple observation. The State Auditor’s report was particularly critical of a manager who failed adequately to monitor an employee’s telecommuting activity.  The manager was supposed to evaluate the employee’s job performance but concluded that as long as no one complained about the employee, the employee must have been performing well.  The manager failed in his duties to monitor his subordinates, which cost the public agency thousands of dollars.

As part of observing employees, the AFCE identified 16 common red flags that serve as warnings of employee fraud.  In 36% of the reported cases of employee fraud, the employer noted “living beyond means” as a red flag, which was the highest percentage of all potential red flags.  The second and third highest were financial difficulties and unusually close relationships with vendors or customers.  Educating management in recognizing red flags is an important way for employers to detect and prevent employee fraud.  Other than tips of fraud, attentive management is the most effective means for observing and recognizing fraudulent activity.

Employers would benefit from reviewing existing policies on reporting fraud and making any necessary adjustments.  If no policy currently exists, implementing one would be useful.  Then, training management and notifying all employees of the policy can follow to ensure the policies have their intended effect.