Tips on preventing employee fraud

With many people working from home, the possibility of employee fraud is that much higher

Tips on 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: Employees may be under intense financial pressure, they are more disconnected from their place of work (making it easier to rationalize hurting their employer), and they are likely less supervised than ever before. The convergence of these three factors is a recipe for disaster for employers.

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 an employer. Here are some lessons to be learned about employee fraud:

You might not know people as well as you think you do: The people employers trust the most are also the most capable of hurting them. 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 them.” It can, and does, happen all the time.

You might not recover the money: Businesspeople who have been defrauded want justice. For most, this means, at a minimum, recovering the full amount. The problem is that Canada’s civil justice system suffers from many shortcomings, making it all but impossible to deliver the type of justice people feel they deserve.

Recovering funds from a fraudster is a long, expensive and frustrating process. An employer may sue the fraudster and win the action, only to realize that the fraudster has no assets in their name. The employer then needs to decide if it wants to go double or nothing. If it does, it needs to locate any hidden assets (no small feat) and potentially bring (and win) a second action to be able to realize on those assets.

However, it’s certain that years will pass before this process is complete. The employer must be able to survive in the interim.

Directors might be on the hook personally: Many directors might not be aware they could be liable for the fraud. Consider this real-life example: A business owner had worked with his accountant (turned friend) for more than 20 years. The owner then discovered that the accountant had been failing to remit payroll taxes to the Canada Revenue Agency (CRA) and had seemingly disappeared with the money. The owner’s lawyer discovered that the “accountant” was not actually an accountant — his designation was fake.

The lawyer explained that the owner cannot just fold the corporation and walk; as a director, he may be personally liable for the missing payroll taxes. This added insult to injury. While the lawyer could try to negotiate a resolution with the CRA, there are no guarantees.

Employee fraud prevention tips

Although employers might not be able to fully prevent fraud from occurring, these strategies can minimize their risk.

Pay attention: Are any employees going through tough financial times or seemingly living beyond their means? Is anyone acting strange? In hindsight, employers often relay having had a feeling that something wasn’t right.

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.

Ensure employees are taking at least one vacation per year that exceeds five days: If an employee knows that another employee will be covering their absence, they will be more fearful of getting caught and thus less likely to commit fraud.

Carry out due diligence: When hiring, don’t believe everything that’s presented on a résumé. Basic Google searches are a good place to start. Searches on Facebook, Twitter or even Google News may also yield fruit.

Routinely assess your fraud risk: Every employer has a different fraud risk profile. They should routinely assess where they 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. 

Allison Speigel is a commercial litigator with experience in fraud-related litigation at Mississauga, Ont.-based Speigel Nichols Fox. For more information, visit www.ontlaw.com.

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