Carraghyn - Chartered Directors

Employee Fraud - Could It Happen To You?

No matter how carefully we recruit our employees, whatever techniques and diligence we use, there is always the potential for a bad apple to slip through. No criminal record? That simply means they haven't been caught yet. Or maybe they have, but the previous employer thought it better to quietly dismiss them rather than go through the hassle and potential embarrassment of involving the Police or courts.


What brought the subject to mind was a recent news item, we'll return to that later. My first encounter with employee fraud was in my first appointment as a director; one day the MD came into my office and said "Steve, can you deal with this please?". "This" was a cardboard box containing nearly a foot of paper and some computer disks, being the company's copy of the evidence used to convict a long-serving and trusted middle manager for fraud. He had set up a procurement scam with a director at one of our suppliers, whereby they charged us grossly inflated prices and our manager and the supplier's director split the excess profit they skimmed off the top. The successful scam ran for a couple of years before my co-directors became suspicious and engaged an investigator who secured the evidence needed for the Police to act. The two scammers each served around five years in jail before being released on probation, the length of their sentences reflecting the large amount of cash they had stripped from the company. 

We learned several lessons, not least of which were to control delegation of power, improve the robustness of our expenditure authorisation process, and to introduce systems, processes and reporting that would more effectively flag up discrepancies - such as unexpected changes in costs and margins.

The biggest lesson though was that we could not trust without supervision. We made the supervision, control and governance processes as unobtrusive as possible, we wanted to trust, but we had to face the reality that we could not, despite a stable, loyal and long-serving workforce, assume honesty.

So how did the senior executives of Lloyds TSB feel when they discovered the £2.5M fraud which was systematically perpetrated against them by the bank's own head of fraud and security

For such a fraud to have happened, involving such a significant amount of money, it is self-evident that the bank's monitoring and supervision processes failed, thwarted by a trusted senior manager.

Employee fraud is an unpleasant but common reality. As directors we can protect ourselves and the company to a significant extent by putting in place appropriate reporting systems. Simple measures such as using IT to check significant variations in supply pricing, monitoring the total amount of expenditure to each supplier against budget expectations, limiting the sign-off authority extended to senior individuals, introducing processes that require dual authorisation from people in different parts of the business, requiring multiple quotes to establish competitive pricing, and periodically taking the time to review transactions for irregularities. When we find the unexpected act quickly; investigate, gather evidence, demand explanation, and if fraud is found deal with the perpetrators harshly. Large companies often have an internal audit function whose job it is to ensure that all is kosher, but in most businesses the responsibility for the sometimes dirty and unpleasant work of combating fraud falls to the directors, and it is best to set out acknowledging the reality that it happens, and it could be happening to you.


+7 # MrsDebbieJ 2012-06-08 18:15
If there is an open culture within the company where employees are given bonuses for spotting gaps in procedures that could lead to fraud, then maybe the fraudster would go elsewhere. A culture of one department reviewing another's work may have have picked up the inflated prices earlier. It does take strong, confident people to allow their work to be reviewed, commented on and sent back with suggested changes for keeping the company safe from fraud. Maintaining an open-door policy to Non-Exec. Directors is one way of stopping one fraudulent event.
Sideways reviews can prevent intimidation of Managers under Board level. Instead of a climate of fear of losing one's job or annoying the boss, we could move to a positive position that would make fraud less likely to flourish. All major banks check for fraud so it follows that more than one person is guilty by covering up or doing nothing to stop it. It's also about looking at systems and how they benefit the company.
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+6 # RE: Employee Fraud - Could It Happen To You?John- 2012-06-07 11:06
When any fraud is discovered, it is always worth considering - and arguably is the fiduciary duty of a director - how to recover the misappropriated property. The police have very little interest in this, there role being investigating a case with a view to potential prosecution, not restitution
In circumstances where a fraud is discovered, its always worth contacting a lawyer to explore the civil remedies available.
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+5 # RE: Employee Fraud - Could It Happen To You?Nick 2012-06-06 00:13
Another informative post here. Having been a senior executive in a couple of large companies, though not at board level, I was always aware that there were gaps in our procedures which could have been exploited. The directors never seemed to be concerned about this - perhaps that was true of the directors of Barings and RBS - so our view was "it's their necks on the block" though in fact it was the guys below board level who got shafted in the end.
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+7 # RE: Employee Fraud - Could It Happen To You?David 2012-06-05 00:15
This is an interesting posting. I see you guys are based in the Isle of Man where you have a similar problem with Manx Telecom not to mention Manx Electricity. Sounds to me like your own government might benefit from your advice.
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+6 # RE: Employee Fraud - Could It Happen To You?Martyn 2012-06-05 11:24
Just for clarity David. Manx Telecom is a privately owned business and has never been part of the Isle of Man Government. The Manx Electricity Authority loan was entered into by a subsidiary of a statutory board which in itself is a legal entity. There never has been a clear decision as to the legality of their actions. There is also an interesting issue as to the fact that Mike Proffit as CEO of the MEA at the time was also on the board of Barclays who issued the loan.
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+3 # Regulator?Ashad 2012-06-16 17:16
Even if Manx Telecom is a private cpmpany doesn't the Isle of Man government have some responsilility to regulate telecoms never mind corporate governance in general?
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+4 # Conflict of InterestJohn Lane 2012-06-16 23:38
No doubt Mr Proffit will have declared his "interest" both on the Barclays and in particular the Electricity Authority boards? Has anyone checked? Mind you I think that all too often the simple "declaration of interest" required by law is just a fig-leaf. "I've declared a conflict of interest so that's allright then".
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+6 # RE: Employee Fraud - Could It Happen To You?Steve Burrows 2012-06-05 16:19
I hadn't picked up on the Manx Telecom fraud case when I wrote this post, but I've seen it in the paper recently, an alleged £1 Million employee fraud. It keeps on happening, and the underlying reasons are usually the same - directors allowing it to happen through inadequate governance and controls.
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