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Putting a stop to fraud by employees

15 June 2006
Putting a stop to fraud by employees

The value of reported fraud reached £1b last year, according to BDO Stoy Hayward's latest Fraud Track Survey - more than three times the amount of £331m revealed in 2003.

One of the most significant trends highlighted in the report is that UK businesses are losing more and more at the hands of their own workers - about 85% of all corporate fraud was committed by past or present employees. But although one of your employees is the most likely source of fraud in your company, another is your most likely way of finding out about it.

"If there's something going on in a business, there's already someone who knows about it, but they may not have the opportunity or the channels through which to report it," says Bob Dulieu, a former police officer, who investigates corporate fraud for Capcon, a firm providing risk management, auditing and stocktaking to a number of hospitality employers. "This applies not just to fraud but also bullying, sexual harassment and all potential risks to the business."

For large organisations operating across multiple sites, Dulieu says it's vital to have anti-fraud policies in place. The good news is that the vast majority of employees would want to speak out if they discovered their boss had committed a serious fraud.

Employees can be your eyes and ears in the workplace, but only if they know what to report, to whom, and that it will be taken seriously. Whitbread, for example, has a 24-hour whistle-blower helpline staffed by an outside agency. Employees can call anonymously if they believe another member of their team is acting dishonestly. Calls are relayed to Whitbread and the matter is assigned to a relevant person. An investigation must be initiated within 48 hours, and a report submitted after 10 days.

Whitbread will know the identity of the caller only if it's absolutely necessary to the investigation. The outside agency has the task of informing the whistle-blower how the investigation is progressing.

A number of factors put the hospitality sector at high risk from fraud. Employees have ready access to cash-rich businesses; the raw materials - food and drink - are easily accessible and easy to dispose of; the workforce is often transient, and the rates of pay are not high. It may be common, for example, to have temporary staff on short-term contracts working in a city-centre bar handling thousands of pounds in cash each day.

A typical scenario is the restaurant or bar manager, employed by a chain, chiselling away at revenue. This may be directly from the till or through purchasing fraud. If more people get involved, then the losses can become considerable. "One or two dishonest employees can hit a site's operating profit by at least 5%," says Dulieu.

A recent retail case concerned employees who had found a glitch in the EPoS system and were voiding high-value items as they went through the till and pocketing the cash. An investigation of sales records led to three employees being interviewed, reported to police and sacked. The losses had stacked up to £300,000, over two years.

The higher in an organisation the individual stealing, the worse is the overall impact. If that person is a manager or a regional manager, then the culture being spread to employees below him is not one of financial control. The impact of fraud on the honest employees must also be considered. If someone knows that someone else is stealing and nothing is done about it, it can make them feel vulnerable.

Employers must have an honest awareness of the potential for fraud. "You may get a site where systematic theft has been going on for some time but, because it's a flagship site or it does well in other areas, it's left alone," says Dulieu. "Sometimes, there's a reluctance to confront reality."

What, then, are the telltale signs that fraud is being committed? Andrew Durant of BDO Stoy Hayward recommends looking out for the following:

  • Lifestyle issues: if someone is living at the top end of what they can afford, or beyond, directors should query how the member of staff can afford it.
  • Are employees taking all their holiday entitlement? Fraudsters won't want to be away, as there's a chance they'll be discovered.
  • Are employees working overtime? It takes time to cover up a fraud, so a fraudster will need to work long hours.
  • Look out for strange behaviour. The stress of carrying out and covering up the fraud may show itself.
  • Look out for high staff turnover. Other staff may be aware of what's going on and, rather than work alongside a fraudster, resign to find new jobs.

Companies and their management must be willing to take action when it's needed. But take heed: when fraudsters think they're likely to be discovered, the first thing they will do is destroy the evidence. Make sure you don't alert them to your suspicions, and secure potential evidence immediately.

If you don't have experience in this area, call in fraud investigators, as the early stages of an investigation are crucial.

Case studies

  • The finance director of a restaurant chain identified discrepancies in the expenses claims of a regional director. Items such as plasma-screen TVs, hi-fis and boxes of Champagne had been purchased as performance bonuses for managers, and had been delivered to the regional director's home address.

    Further investigation revealed that two members of his family were on the payroll but no one in the business had ever seen them or was aware of what they did. They were recruited into spurious administration support roles.

    The regional director was sacked. It was reported to the police, but the CPS declined to prosecute.

  • The MD of a subsidiary was recruited and paid an £80,000-a-year salary, but was rarely seen in his office. When he had been in the post for six months, head office believed he may have been liaising with a competitor. However, surveillance revealed that his working day consisted of one short meeting at 11am with the rest of the day spent relaxing in a hotel.

    A review of his CV found that his degree qualification was false, and his previous employer wouldn't give him a reference. He was sacked.

  • A restaurant chain noted discrepancies in the bank deposits at one unit. An investigation found that a number of deposits had gone missing, totalling several thousand pounds. A burglary and an armed robbery had been reported at the site by the same deputy manager, but there was no evidence of them. Witnesses were reinterviewed and one became an informer.

    The deputy manager was arrested and convicted of conspiracy to rob. No armed robbery had taken place - and the deputy manager had been the only person on duty at the time.

    Source: Capcon

Preventing fraud

  • Take pre-employee screening seriously; conduct background checks and follow up references for all employees and suppliers.
  • Have a fraud policy, and strategy and procedures for managing prevention and detection. This needs to be at board level, and communicated to all new employees as part of your overall risk strategy.
  • Have a whistle-blowing policy. Make a hotline available through which staff can make calls anonymously. You may want to use an external company to handle such calls.
  • Consider adequate fraud insurance cover.

When fraud is detected

  • Act quickly and discreetly if you suspect fraud.
  • Secure all evidence.
  • Don't limit scope of investigation.
  • Don't make emotional or hasty decisions.

Recovering assets

  • Follow the cash. Identify where the money has gone.
  • Consult with your legal advisers regarding tracing and freezing assets.
  • Don't be afraid to call the police when necessary.
  • Don't give up. Investigate all possible avenues.

ContactsAndrew Durant
BDO Stoy Hayward
020 7893 2562
andrew.durant@bdo.co.uk

Andrew Witts
Lawrence Graham
020 7759 6728
andrew.witts@lawgram.com

Bob Dulieu Capcon Investigations 0870 067 5040
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