The Association of Certified Fraud Examiners recently released its 2014 Report to the Nations on Occupational Fraud and Abuse (the “Report”), which provides interesting statistics and insights for HR professionals hoping to better understand and combat occupational fraud.

The Report is based on a global study of 1,483 cases of occupational fraud, which occurred in over 100 countries, including Canada. First published in 1996 and biennially since 2002, similar reports reveal fairly consistent patterns about how fraud is prevented, committed and detected – useful information for HR professionals and their lawyers.

At the front-line of fraud prevention efforts, HR professionals often create anti-fraud policies, investigate fraud allegations and discipline/terminate fraudsters. Labour and employment lawyers often assist with any wrongful termination or human rights claims that may ensue in the aftermath of investigations or terminations.

Useful and interesting statistics and insight from the Report include the following:

• The impact of fraud is very significant: Estimates are that a typical organization loses as much as 5% its annual revenue to fraud. The Canadian companies in the study experienced a median loss of US $250,000. This is in addition to other losses, including reputational losses and damage to the morale of other employees.
• A whistleblower policy is one of the most effective tools in combating fraud: Globally, “tips” continued to be the most common method of initially detecting fraud, accounting for 42.2% of frauds detected. Its relative effectiveness is evident in the fact that the second most common initial detection method was management review, which trailed at 16%. Over half of the tips were provided by employees and the tips were more effective in organizations with a hotline.

Despite the benefits of whistleblower policies and hotlines, according to the Report, of the organizations victimised by fraud, only 54% had a hotline mechanism and less than 11% provided rewards for whistleblowers. Based on the Report, employers should give careful consideration to implementing an effective whistleblower policy. Among other features, an effective whistleblower policy should include a hotline mechanism and should assure employees that they can speak up if something seems amiss without fear of reprisals.

• It may be hard to see it coming: Only 5% of fraudsters in the study had been convicted of a previous fraud-related offence. 85.6% of all fraudsters in the study had never been criminally charged. Of the organizations that were able to provide data from past employment history, 81.7% of all fraudsters had never been previously punished or terminated because of a fraud. This means that the effectiveness of screening methods like criminal background checks and employment history screenings, while still useful best practices for many other reasons, may not be particularly effective for screening out fraudsters during the hiring process.
• On the other hand, it may be easy to see it coming: Fraudsters in the study exhibited several behavioural clues which are “red flags” to the trained eye. Approximately 44% of fraudsters were living beyond their means while the fraud was ongoing, and 33% were experiencing known financial difficulties. The ability to identify these red flags may provide an early warning to victim organizations, and this in turn will limit the duration and impact of frauds.

This finding in particular indicates that there is solid business justification in HR strategies and training for promoting organizational cultures like “knowing one’s people” or “management by walking around”, because among other good reasons for these philosophies, they provide excellent opportunities to identify red flags.

• Investigations and disciplinary procedures cannot be carried out in silos or in isolation: The Report seems to confirm what many experienced lawyers and HR professionals know anecdotally – one disciplinary issue is often the tip of the proverbial iceberg. If for example an employee has significant attendance issues, it is not uncommon to also find shoddy work and slippages in the employee’s record-keeping. The latter is often associated in one form or another with expense claim frauds or unintentional errors, for example. Where study participants were able to provide this type of data, 38% of fraudsters also engaged in at least one other type of misbehaviour, for example bullying, intimidation or excessive absenteeism – behaviours which are generally on HR’s radar. In addition, from the responses received, 25% of fraudsters had experienced one of several HR-related events immediately before or during the commission of fraud. The most common was a poor performance appraisal, which occurred in 11% of all cases.

The lesson for HR professionals and lawyers is that it is generally important that investigations be comprehensive, and this can be particularly important where fraud is alleged or suspected. A siloed approach to investigations can lead to late-in-the-game evidentiary surprises during investigations, disciplinary procedures or any ensuing legal proceedings.

Overall the Report provides insight which can help lawyers and HR professionals avoid some of the challenges associated with combatting occupational fraud and abuse.

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