John Carroll University: How to react when you suspect an employee of fraud

No company is immune to fraud. You may have stringent internal controls, and rigorous hiring and training programs, but still employees may find ways to violate standards.

“It is not enough to have a strong personal ethical code. It needs to be communicated and enforced to become corporate culture,” says Mariah Webinger, Ph.D., an assistant professor of accountancy at John Carroll University. “When it comes to enforcement, you need to proceed cautiously to make sure you are achieving your goals.”

Smart Business spoke with Webinger about dealing with employee fraud.

What should you do if you suspect an employee of fraud?

First, sit down, take a deep breath and think. It is never a good idea to confront a suspected employee right away. You probably don’t have the evidence you need to prove either innocence or guilt. Confronting the employee puts them on guard and makes it even less likely you can get that evidence. 

Secondly, you could be wrong. Accusing a suspected employee can be very demoralizing to your workforce and creates an atmosphere of suspicion, forcing bystanders to choose sides.

Third, you never want to interview a suspect when you are emotional. Acting on emotion rarely makes good business sense, so give yourself a break to cool down before you make any decisions.

Finally, communicate the issue and the consequence internally, and perhaps to external stakeholders. When you do, try to stick to the facts and avoid value statements about the employee or the situation.

Does the type of employee misconduct affect consequences and communication?

All types of employee misconduct should be handled thoughtfully and not emotionally. However, the type of conduct will influence the consequence, which in turn will influence how it is communicated. If it is a minor policy infringement, it may be acceptable to have a reprimand as a consequence and an internal memo for communication.

Embezzlement or fraud should result in termination, regardless of size, since these violations are willful and never accidental. Also, fraud indicates an internal control weakness. These weaknesses need to be rectified and should be communicated.

Should a fraud perpetrator ever be retained as an employee?

The short answer is ‘no.’ Usually two reasons are given for wanting to retain an employee after a fraud: The fraud was a small amount or the person is a great employee. All frauds start small.  Keeping a dishonest employee on the payroll sends a message to your other employees that fraud is acceptable as long as it is small or if you are a valuable employee. No employee is as irreplaceable as your corporate culture. If they are a good person and a talented employee they will have a great career elsewhere. The consequences of violating an ethical code might be the most important business lesson they will ever learn.

When should you pursue legal action?

Collect your evidence first. Law enforcement is usually overworked and generally not an expert in business. It is unlikely that they will pursue something unless there is a very tight case.

When do you need to hire a forensic investigator?

Generally your current employees will be more efficient at collecting evidence than an external expert because they are more familiar with your company. However, if the issue is contentious or involves office politics, it is helpful to have an independent investigation.

Also, that the fraud was perpetrated suggests there is a weakness in the internal skill set. Usually fraud involves accounting and/or information technology. If you don’t have internal experts in those fields, try to hire a forensic investigator with that expertise.

Where can you find a forensic investigator?

Avoid the yellow pages. It is hard to differentiate between a good forensic investigator and an imposter. Ask your auditor or accountant. They may not be able to do the work for you because of independence issue, but they can usually refer you to someone who can. Also ask your attorney. Most likely they have worked with forensic accountants or business experts and can recommend someone. If all you have is a Web search or the phone book, ask for references and check them.

Mariah Webinger, Ph.D. is an assistant professor of accountancy at John Carroll University. Reach her at (216) 397-4225 or [email protected].

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