When a business loses money to an act or acts of fraud, questions must be asked. Many businesses rely on trust, and the truth is, the cost of misplaced trust could be your entire business. In fact, over the last decade in the retail industry, at least four separate high profile instances have occurred where an employee stole an amount exceeding $1 million. Only the banking industry overtakes the retail industry in terms of the largest totals defrauded. There are a few main types of fraud
affecting retailers. Questions typically asked by an organisation after it has been the victim of fraud include how do I identify or uncover fraud, how do I stop it happening again, and how do I deal with the fraudster?
What is fraud?
Combating fraud presents a huge challenge because the crime itself comes in many guises. In its most basic form, fraud can manifest as internal fraud or corporate fraud.
In a retail business – to name only some examples – internal fraud usually involves cash register transactions, fraudulent refunds, gift certificates, false vendors and vendor collusion. Virtually all shop staff have access to your register and stock; hence greater opportunity exists for this type of fraud and also greater difficulty in preventing and controlling it.
Corporate fraud describes what we have come to know more generally as ‘white collar’ crime and typically involves office/payroll staff, accountants, and managers manipulating financial records.
Generally speaking, less opportunity exists to commit this type of fraud because fewer employees have access to the financial or payroll records of the business.
Identifying fraud
Detecting fraud can be incredibly difficult. The reality is that employees engaged in fraud are (usually) actively trying to hide their deception, and because fraud can be hidden in complex ways, it often goes undetected unless or until a change occurs in the fraudster’s routine.
Businesses should be alert to the key signs that may indicate fraud, such as:
The employee rarely takes personal leave or annual leave and/or regularly works outside business hours;
Results are inconsistent with your expectations or industry trends (without reasonable explanation);
A lack of documentation over key transactions;
The employee is reluctant to allow others to help with work or train others in their role;
The employee fails to follow company procedures, particularly when ordering stock and
inventory;
Possible gambling or drug addictions;
The employee seems to be spending or living beyond their
means;
The employee makes expense claims that are significantly greater than those of other employees in a similar role or their expense
claims increase considerably; and/or
The employee fails to provide reports or reconciliations (for whatever reason) or the reports are often late and/or lacking in detail.
One of the most effective ways to discover fraud is to educate your employees on these key signs and provide a mechanism for employees to report fraud (for example, by way of fraud awareness training coupled with a whistleblowing policy). Training staff on the ‘red flags’ of fraud might prove an invaluable exercise in both discovering and mitigating fraud.
You are also more likely to detect employee fraud if you engage an external accountant to audit your books, periodically compare payroll payees with employee records, regularly review financial statements, implement systems that report on employee activity (such as when an employee has viewed or altered data in your database), control physical access to cash registers and stock, and regularly perform reconciliations of accounts and inventory/stock.
Dealing with a fraudster
Upon detecting fraudulent activities, many businesses act quickly to terminate the offenders, however, it is important that you do not shoot first and ask questions later.
Carefully consider how and when to deal with the fraudster, and adopt strategies that maximise your chance of recovering losses.
If you detect employee fraud, seek advice immediately.
The usual next step is to collect facts. This is critical for many reasons, including providing evidence to your insurer or the police, and uncovering the true extent of the fraud and any others involved.
Depending on the type of fraud or the amounts involved, you may also engage forensic accountants to investigate your IT systems.
Managers tasked with investigating or terminating employees suspected of fraud should be appropriately trained.
A well-handled interview of the employee regarding the suspected fraud can often lead to admissions that may be useful in later civil or criminal proceedings against the fraudster.
Managers also need training on the termination process to limit the risk of unfair dismissal claims. Generally speaking, the Fair Work Commission has been critical of dismissals on the basis of fraud where insufficient evidence exists to support the termination.
It is recommended that businesses contact their legal advisor in situations where they are considering terminating an employee’s employment in circumstances involving fraud allegations.
It may also be appropriate to report any fraud to the local police station. This may help prevent the employee from defrauding another business and also increase your chances of recovering the amounts or property taken (for example, if a fraudster is convicted of the offence, the court may make an order for restitution).
Stop it happening again
Employees defraud organisations for many reasons, including weak internal controls, insufficient supervision, opportunity and work pressure.
If a business is lacking in any of these areas or allows a situation where an employee can rationalise such behaviour in the form of entitlement (i.e he or she is not being adequately remunerated, or is angry about being poorly treated), this will help create
an environment where employees can take advantage. Hence, to reduce potential fraud, businesses should try to limit the opportunities available.
It may sound frivolous, but creating a positive work environment encourages employees to follow policies and procedures and act in the best interests of your business.
Employees tend to respond well when their job responsibilities are clear, their contributions are recognised, and when fair employment practices are in place, reducing your overall risk of fraud.
Businesses can deploy many strategies to combat fraud.
As a starting point, review your internal controls. The types of protocols that might be implemented include clearly drawn authorisation controls.
For example, adopt policies that articulate which roles within the company can undertake particular transactions on behalf of the business, and who is responsible for each step of a transaction.
Ideally, no single person should be responsible for a complete transaction from start to finish (although for smaller businesses, this may not be practical, in which case, employees handling finances should be appropriately supervised).
Make clear to employees that any fraudulent activity, even ‘small fry’ activity such as unauthorised stock discounting, will not be tolerated, and that any individual caught engaging in fraudulent activities may be disciplined, including termination of their employment and reporting to police.
A code of conduct can be adopted, which may also be helpful in illustrating what constitutes fraud within the workplace.
Other strategies to dissuade potential fraud within the business include performing regular accounting reconciliations; this should (most importantly) include an analysis between the revenue on the books and the actual figures.
Further, every time an incident occurs such as missing stock or where the books do not balance, conduct a thorough investigation and ensure that your employees see this investigation taking place.
Retailers may also better protect themselves by introducing physical restrictions over the control of assets and inventory. For example, by locking up inventory and stock and having managers control access to stock rooms.
Review recruitment processes. Perform adequate background checks, including national name checks and credit checks for those working in finance roles within the company, and investigate any irregularities within a potential employee’s work history.
The way that you mitigate the risks of employee fraud will be particular to your organisation. Some further examples that we have come
across include employers who have introduced policies to manage annual leave to ensure that employees take their leave throughout the year, as well as ensuring cross training programs are in place so that one employee is never the only person capable of a particular role.
The impacts of fraud
The effects of fraud can be substantial and in some cases are the major cause of corporate collapses.
To a lesser extent, such activity within a business can also impact on staff morale and the reputation of both the company among potential employees and business partners, suppliers and customers, and of the individuals who supervised those guilty of fraud.
The media tends to be interested in employee fraud involving significant sums of money, and the negative publicity associated with fraud (and the associated perception of deficient controls) can damage your brand and image at a cost that is indeterminable.
While fraud within the retail industry cannot be wholly extinguished, with the correct measures in place directing management towards a considered loss prevention strategy, you may lessen instances of fraud and mitigate the risk that your business will be unable to withstand any losses.
Louise Houlihan is partner and head of employment and industrial relations at Cornwall Stodart. To create an employee fraud policy or for employment advice generally, she can be contacted on (03) 9608 2273 or l.houlihan@cornwalls.com.au.
This story first appeared in Inside Retail Magazine December/January 2014. To subscribe, click here.