Theft and Fraud Risk in the Workplace

One of the often overlooked risks to a company is the risk of employee crime. Employee crime can be classified in to a number of categories including theft and fraud. These two can take on many different forms.

Theft is the general term used for crimes by employees when they intentionally and dishonestly take property of the company without proper authorization and approval, whether it is for the benefit of themselves or others. Risk managers often focus on the prevention of theft of stock or supplies from the company. The frequently overlooked offence is the crime of fraud. Fraud can often have a more serious and a much bigger impact on a company than theft. Fraud is explained as a false portrayal of the details of a subject or set of circumstances. Fraud can be either through expression or behaviour. It is the false or misleading presentation or concealment of facts with the intention to deceive the company.

This implies that, in addition to theft of inventory, the risk of employees acting fraudulently should also be considered. These fraudulent acts can include employees submitting phoney invoices, redirect disbursements or issuing fraudulent checks. It is a fact that criminal incidents of employees stealing or fraudulently gaining benefits will occur in any organization. Like with most other risks, employee theft and fraud can be anticipated and predicted. It can largely be prevented if the circumstances conducive to these crimes are understood and prevented.

The potential for crime will exists where the conditions favourable for the crime is present. This includes the following:

A motive to commit the crime

Any crime is preceded by a motive to commit the crime. The motive may vary widely depending on the background and culture of the individual committing the crime. The motive may be an economic need, a psychological or emotional deviance. It may be a desire for revenge, greed or the result of political extremist behaviour. The risk of crime can be reduced by reducing the likelihood of a strong motive. To achieve this there is a wide variety of actions that can be taken. These actions include the implementation of a good industrial relations program, reasonable salary scales and acceptable working conditions. This will go a long way to solve some problems, however, prevention is better than cure, and a comprehensive background checking system of all employees is a critical component of a successful prevention program. Companies can screen present and prospective employees as well as vendors to reduce the risk of theft and fraud. It is however important to eliminate applicants with undesirable prior employment record, even if they look like the ideal candidate for the job as far as the other factors are concerned.

Moral justification

Moral justification is normally used by the criminal to overcome any ethical barriers or inhibitions that may be present in the makeup of such individual. One of the few methodologies to reduce this type of risk is to ensure that an open and transparent organisational culture is the norm rather than the exception. If the company executives and other senior staff openly supports and recognizes a positive and sound value system, it is realistic to expect that these values would filter down to all parts of the company.

The opportunity to commit the crime

It stands to reason that the opportunity to commit the crime must be present in order for the employee to be able commit the crime. In order to minimise this risk it may be necessary to reduce the access of unnecessary people to high value items in the organisation. This can be achieved through access control to areas where high value items are kept or reducing the number of high value items available on site. An often overlooked source of value is the intellectual property of the company. Only selected staff members should have access to key aspects of the company intellectual property. To prevent fraudulent activities the policies and procedures should be simple and clear. It should be communicated widely and correct implementation should be enforced consistently.

A low probability of detection

If the employee perceives that the probability of detection of the crime is low, the probability of the crime being attempted will increase. In order to increase the probability of detection the company should introduce a comprehensive set of control measures. If the control measures are designed to increase the probability of detecting anticipated employee theft or fraud activities it will lead to the reduction of this type of risk.

Conducting unannounced, surprise audits if often the preferred deterrent methodology. It should be noted that the employee who is attempting the theft or fraud usually knows the system and will try to make use of systems on an effort to hide the criminal act. It may be necessary to use audits systems such as the forensic audit technique to uncover the offence if it is suspected that a crime was committed.

In addition to the introduction of the control measures it is also critical to develop and communicate the procedure that the company will follow on the discovery of employee theft or fraud activities. Once the crime has been discovered and the offender has been identified, it is of absolute importance to swiftly and consistently deal with the matter in the manner exactly as communicated. Any deviation from the communicated procedure for whatever reason will send a signal to other potential offenders to challenge the system. Investigation and follow-up actions are often poorly handled, compounding the damage suffered by the company.

There is no scientific evidence to confirm that the severity of the consequences of being caught for a crime has a relationship with the tendency to commit the crime. The latest research on this subject indicate that the behaviour of individuals are more influenced by the consequence being soon certain and meaningful than being harsh.

Conclusion

It is often the major theft and fraud cases that make the headlines around the world, however apart from these high profile cases there are billions lost daily as a result of hundreds of thousands of smaller cases that does not make the headlines or even worse that goes undetected.

Regardless of the type of business one look at, studies show that employee theft and fraud by far exceeds any other single loss a company can have.

Employee theft and fraud prevention, detection and response can be improved if the conditions for the crime are better understood by the executives and the risk manager of the company.

(C) 2009 Carl Marx