Workplace fraud: on the fiddle

Headlines such as ‘Rogue Trader to cost SocGen $7bn’ are not commonplace and
so attract considerable attention. Less well known are the thousands of frauds
that cost British companies billions of pounds each year.

The typical fraudster is male, aged between 36 and 55, operates on his own
and works in the finance department. That said, it is dangerous to rely on
stereotypes. Joyti De-Laurey was a 31-year-old PA when she embarked on a fraud
that cost her bosses at Goldman Sachs £4.3 million.

As in the case of De-Laurey, most frauds start off as small-scale
misappropriations or misrepresentations and grow over time, sometimes becoming
big enough to threaten the continuing existence of the business.

Frequently, the origin of large-scale fraudulent activity can be traced back
to small-scale expenses fiddles that, having gone unnoticed, have escalated
through a combination of opportunism and greed. The case study (see box) based
on a real fraud within a British company, illustrates how this may occur.
Here are a few tips finance directors might use to help prevent such scenarios
happening.

The four eyes principle: Most internal fraudsters work alone. A managerial or
peer review of financial decisions, including expenses, will make life harder
for a fraudster.

Line management authorisation of expenses: All expense claims should be
approved by a more senior member of staff. There should be no exceptions. The
CEO should have the chairman approve his expenses and the chairman’s should be
approved by a member of the audit committee. Managers with sign-off
responsibility must be expected to review and consider expense and not merely
rubber stamp the claim.

Overt dip sample testing: Expense claims should be tested by internal
auditors on a random basis. Making all employees aware that this test is carried
out frequently and backing it up with a zero tolerance policy on fraudulent
claims will send a clear message to staff.

Clearly defined policies: Businesses should have clearly defined policies in
respect of expenses and should stick to them. If managerial discretion is
permitted in respect of expenses claims there should be a requirement that this
is documented and subject to peer or line management review.

Procurement policies: Businesses should not only have clear procurement
procedures, but they should also be rigorously enforced. Junior staff
responsible for maintaining procurement systems should be trained not to allow
more senior staff to use their authority to circumvent procurement policies.

Two weeks’ continuous holiday: Ensure staff, particularly those with
fiduciary responsibilities, take a two week holiday duration every year. Their
responsibilities should be taken over by somebody else for that period.

Check your suppliers: Treat any change of details of suppliers as a new
supplier and undertake the usual due diligence. This is particularly important
if bank details are being changed.

Listen to office chatter: Are there rumours that the lad in finance has a
gambling problem? Does a new Porsche fit in with the salesman’s salary? Although
not a definitive pointer to fraud, it may be worth further examination.

It is also important to have a plan ready to effect when suspicions first
arise. If you do have concerns about possible fraudulent activity, call in the
professionals. All too often evidence and the means to recover misappropriated
funds are lost because expert help was not sought at the earliest possible
opportunity.

In today’s technological age there will undoubtedly be evidence contained in
electronic formats such as emails, SMS messages and so on. It is important to
search for and preserve this evidence. Many fraud cases rest on evidence
obtained from deleted documents and emails that can be recovered by experts from
a computer’s hard disk.

There is also the question of undertaking interviews. Again, these are best
done by specialists. In one case I’m familiar with, a procurement manager was
interviewed at an early stage of an investigation while his computer was being
remotely imaged.

The image taken provided evidence demonstrating that the manager had set up a
cleaning business to which he had awarded his company’s office cleaning contract
and that he was ‘ghosting’ cleaners under this contract at a cost of £3,500 per
month. Further incriminating evidence was obtained when, following the
interview, the manager logged into his computer and attempted to delete the
incriminating documents.

In this case, a decision had been made to carry out an early interview to
obtain the manager’s account of the cleaning contract without having any
evidence to challenge this account and then to examine the electronic files in
the light of his account. His attempt to delete the relevant files provided
clear evidence of malicious intent in respect of the contract. This led to the
manager agreeing to repay his employer a substantial sum of money.

The first 48 hours of any investigation are the most important, ensure your
company has a plan in place to enable you to react quickly and effectively.

You must understand your objectives and how you will achieve them.

Case study – opportunism knocks

John Smith was the procurement manager at a small commercial printing
company. In June 2004,he found a receipt in his wallet for a lunch that he could
not remember.

Thinking that it must have been a client lunch, he made up the details and
submitted it with his expenses in the normal way.

After he had been paid, he realised that it was in fact a lunch he had with
his wife.

He said nothing, but realised that he could claim for personal expenses
through his company account.

The following month, he claimed for an anniversary dinner and again nothing
was said. Over the following six months Smith claimed a total of £5,750 of
personal expenses.

Clearly, Smith’s manager was merely rubberstamping his claims and therefore
he continued to make fraudulent expense claims. Opportunity had turned to greed
and Smith looked for further opportunities to capitalise from the company’s lax
controls.

His company was sold printing ink by an approved supplier called CPS Printing
Supplies Limited. Smith incorporated a company called CPS Printing Supplies
Group Limited. He changed the name on the approved suppliers list and amended
the bank details to an account that he had set up in the name of the newly
incorporated company. Smith then commenced supplying ink and other materials to
his employer always winning competitive quotes.

He was the person responsible for arranging the tender process and through a
combination of bribing employees of potential suppliers to provide inflated
quotes and by submitting high tenders from fictitious companies Smith was able
to ensure that his company won tenders at prices that guaranteed a healthy
profit.

Smith’s activities were only discovered when he was hospitalised following an
accident and his manager temporarily took over his role.

Ian Brown is an associate director in the disputes and
investigations practice of Navigant Consulting