Cleaning up the business

Fraud perpetrated by employees is perhaps the worst kind, but it is important to set emotion to one side when suspicions are raised.

There are three main causes of internal fraud. In some cases the employee will have financial difficulties, either through unfortunate circumstances (such as an ill child requiring expensive treatment) or an addiction to gambling. These situations can be hard to detect.

In cases of opportunistic fraud employers can protect themselves by enforcing proper controls around the authorisation of payments.

Others will believe their employer somehow owes them (beyond paying them a salary) for their contribution to the success of the business – the classic ‘disgruntled’ employee scenario.

Don’t charge in

You might be tempted to angrily confront someone who has been accused of defrauding your business, but this approach has a number of drawbacks.

Firstly, it might enable the person or persons to cover their tracks before a proper investigation can be conducted and/or move assets that could be confiscated to cover some or all of the monies stolen.

Secondly, a more measured approach may persuade the employee to co-operate by admitting to their actions and making reparation and thirdly, if allegations are thrown around but not proven the business might find itself in breach of employment laws.

Likewise, evidence should be collected carefully.

Building your case

Talking to your bank is an important part of this process. One company that fell victim to employee fraud found that its bank had set up an online payment system that was supposed to reduce the scope for fraud, but actually reduced visibility on payments by batching them together so it was impossible to see exactly who was being paid.

You may choose to engage a fraud investigator, whose job it will be to establish all the facts and present an opinion on whether the case merits internal disciplinary measures or should be flagged up to the police.

No one likes to throw good money after bad, so if the police choose not to prosecute and you decide to pursue a civil case you need to work out much time and money you are willing to spend. Legal fees can mount up quickly and the services of specialists such as forensic accountants don’t come cheap.

Forewarned is forearmed

If you are looking to appoint a new finance manager or financial controller, you might consider running a background check. This will help you determine that the candidate is who they say they are and verify the experience they have set out in their application.

Additional elements to a background check include checking whether an individual has been convicted of fraud in the past and/or has any unspent convictions.

The key to identifying employee fraud lies not just in following processes, but in following the financial data. Users of cloud-based accounting packages such as Big Red Cloud can use the information generated to highlight disparities between incomings and outgoings and strengthen the case for taking action.