How to spot fraudsters who look just like us

Identifying fraud committed by members of staff is far from straightforward but, as Guy Clapperton discovers, there may be tell-tale signs of dishonesty

The thing about fraud is that “good” people do it too. That’s according to Charlotte Haslam, of RGL Forensics, who says attempts at pinning down what an employee about to commit fraud will look like can be pretty futile. Fraudsters look just like us – although there are some generalities.

What really matters is the so-called “fraud triangle”. Three points – opportunity, motive and rationalisation – join up to make a fraud. “Some people feel entitled to extras and fiddle expenses, or that they’re OK to take stuff from the stationery cupboard because it’s only a few notebooks,” says Ms Haslam. “But it’s still wrong.”

A company is only as strong as its weakest link. Given the motivation – debt, mounting family obligations – anyone can rationalise a few extra pounds in what they perceive as their pay packet.

But employers can do a lot to minimise opportunity. John Cassey, of risk management specialist Protiviti, says employee fraud is most common when someone has fiduciary responsibility and insufficient oversight from employers.

“A lot has to do with the tone from the top,” he says. “Any fraud management has to start with engaging with the culture. Rewarding proper management and good conduct can be a start.”

UK fraud prevention service CIFAS reported a 14.5 per cent increase in reported employee fraud during 2010-11

The ultimate rationalisation seemed to be present among those MPs in the House of Commons who, because a pay rise was politically unacceptable, decided to boost their income by making fraudulent expenses claims. This looked like institutionalised fiddling by Britain’s law makers.

Mr Cassey describes a possible fraud scenario in a company setting. “You might find a regular supplier, who bills monthly for a small amount, suddenly invoices for something much larger,” he says. This might be entirely legitimate or it might be because a dishonest employee is getting a kickback.

A lot of these cases are coming under scrutiny because of the economic downturn, says Simon Bevan, partner and head of fraud investigations at consultants BDO. When things were booming, if sales went up 10 per cent and marketing did the same, it might have gone unnoticed. However, in the current climate, where everything is analysed, it will be noticed if marketing’s outgoings have actually gone up only 5 per cent when invoice totals have increased by 10 per cent.

Sometimes employees make themselves easy to spot. “If someone’s claiming a load of money through fraud and on a low income, they should drive a suitable car,” says Mr Bevan. “I’ve seen people coming to work in a Porsche – it’s a bit like Bill Clinton, who had to wear the tie Monica Lewinsky gave him – they feel they have to dare.”

The size of the problem is difficult to track. Every report you see – including this one – will deal with reported fraud. Mr Cassey confirms that this doesn’t cover the whole area. “I’ve published reports, but they all refer to criminal cases, which get as far as the police,” he says. “The majority don’t.”

Businesses are shy of the publicity and indeed efficacy of going to a stretched police force, which rightly perceives its time better spent hunting thieves and murderers. And undetected fraud is by definition unrecorded. What’s certain is that UK fraud prevention service CIFAS reported a 14.5 per cent increase in reported employee fraud during 2010-11.

There are practical steps for employers. A handful of employees are daft enough to boast about what they’ve done on Facebook, forgetting that they’re leaving behind a digital footprint. Forensic accounting is another instrument which can be used.

And don’t forget unwitting complicity. Ben Knieff, director of product marketing at NICE Actimize has seen examples of employees accepting calls apparently from clients about changing bank details; only once the details are changed and payments have been made does it become apparent that the money has been going to a fraudster. These fraudsters often research their victim first, so they’ll ask for the account manager by name, sounding knowledgeable and credible.

Ms Haslam points to other practical ideas for prevention. Dual keys to open cupboards with valuables would make it impossible for a rogue to take something independently, she says. Discretionary sign-off of expenses that require two signatures would mean a single manager or employee couldn’t saddle the company with fraudulent claims.

Overall, transparency is the way forward. This is down to good governance, but more particularly to a healthy corporate culture. The business that rewards good conduct will ultimately benefit from it – and case studies over the last decade, from Enron to the Houses of Parliament, show that poor governance, however well intentioned, has a habit of coming out in public.

When it’s right to call ‘foul’

So you’re an employee spotting something is wrong at your company. Should you pick up the phone to report it or have a word with a manager?

David Lewis, professor of employment law at Middlesex University and a specialist in whistleblowing, says the 1998 Public Disclosure Act enshrines the protection of employees who do so, but adds that this may not be enough.

He points to two things that make people reluctant to report wrongdoing. “One is the fear of retaliation; the second is that it won’t make a great difference – the Act protects the employee, but doesn’t oblige the employer to investigate.”

Professor Lewis says an employee considering whistleblowing has to establish whether fraudulence or corruption is structural or an aberration. The Act protects the employee as long as the company itself is law-abiding.

However, had a business like Enron or any Ponzi scheme – not that these would be covered by UK legislation – found an employee reporting on wrongdoing, it’s unlikely they would have rewarded the whistleblower as the managers themselves were in on the deal. “There can be circumstances in which the only real option is to go and get another job,” he says.