Employee Fraud – Trust, But Verify

 During the Cold War arms control treaty negotiations with Mikhail Gorbachev President Ronald Regan became famous for a saying based on an old Russian proverb, “Trust, but verify”. He used the adage to describe the need for transparency in political relationships. But, today it has a broader meaning and can be used as a guideline for establishing trust between an employer and employee.

Many business owners, executives and managers don’t like to face the fact that some of their employees have, are or will be committing fraud – that product, materials and/or money has, is and will be walking out the door. For a variety of reasons they choose denial as their policy for employee theft and don’t address it. Unfortunately, employees take advantage of this and their employer’s trust.

One of the main reasons employee theft can be difficult for owners and managers is that they feel it’s a personal affront. They feel betrayed and believe it’s a personal issue, not a business or legal issue. It’s important for them to understand that it’s an operational and legal issue, not a personal attack.

The “Trust, but verify” concept can be used to develop a strategy. Managers can trust their employees, as a whole, while establishing transparency and accountability in daily business operations. The Association of Certified Fraud Examiners 2012 Report to the Nations on Occupational Fraud and Abuse (ACFE 2012 Report) makes several recommendations on how to minimize fraud.

* Anti-fraud training – Organizations who have training programs for employees, managers and executives have less costly losses and shorter durations of fraud.

* Means to report – Providing people with ways to report suspicious activity is a critical part of prevention. Fraud is almost 3 times more likely to be detected through employee tips than any other method of detection.

* Controls – Companies should establish, monitor and maintain 3 areas of controls – general internal, physical and computer/technology based.

* Screening new employees – This is an area where employers can be lazy. Many times hiring is done by the “I like him, he’s hired.” method. This is an important area to do the due diligence.

* Division of responsibilities and oversight – Don’t give too much responsibility to one person and establish checks and balances in everyone’s job. Fraud is committed by a person who the employer trusts, that’s how they’re able to get away with it. In small      businesses it’s most commonly perpetrated by a family member or friend.

* Pay attention – 81% of fraud perpetrators display obvious red flags: living beyond their means, financial difficulties, unusually close ties with vendors or customers and unnecessary controlling/secret behavior (ACFE 2012 Report).

Employees will steal from their employers, it’s not a matter of “if or maybe”, it’s a matter of “when and how”. A responsible company manager will accept their personal and fiduciary responsibility to protect the company, its profits and the honest employees by establishing and following firm guidelines which don’t enable fraud.

Nicole Abbott – writer, educator and psycho-therapist