You’ve Discovered a Case of Employee Fraud: Now What?

A metal fabricating company that supplies the automotive manufacturing industry receives a call from a vendor: “You’re past due on your invoice with us. Please pay immediately or we will have to freeze your account.” Red flags go up. Could it be employee fraud? You quickly check your online accounting system, and it shows that the invoice has been paid. You then check your banking records, and the corresponding check number has cleared. As you’re trying to determine what you’ve missed, you notice Pat, one of your accounts payable clerks, pulling into the parking lot in a brand new Mercedes.

What Went Wrong?

With the increasing use of technology to perform financial transactions, banks have made it easier for companies to pay vendors and receive payments from customers. However, this modern technology also means that Pat doesn’t have to be Frank Abagnale to divert funds to purchase his Mercedes. What’s becoming more prevalent in modern-day fraudster schemes is to use the banks’ technologies against their employers. Online ACH clearing houses, such as the systems in use at most major American banks, currently allow users to edit vendor details for any single transaction without changing the underlying vendor database. Additionally, the ACH clearing houses typically don’t maintain records beyond six months. Even more perilous, bank statements that are directly downloaded from a bank’s online portal in PDF form are unlocked and editable. This means that an employee who is stealing money and performing the bank reconciliation can easily edit the text and amounts shown on a bank statement using nothing more than a common PDF file editor. And, these are just some examples of how the fraudster is able to thrive in today’s electronic commerce environment.

Take Action to Combat Employee Fraud

So you think your trusted employee stole (or is stealing) from you. Now what? In a perfect world, you would take action in the following ways:

1. Review your general business policy for “fidelity” coverage.

“Fidelity” coverage is the industry terminology for employee theft coverage. These are the pertinent items you want to be aware of:

a. What is your coverage limit?

b. What is your retention?
Retention is a fancy word for deductible. Simply put, how much would have to be stolen before your insurance will actually pay on the loss? If you have a $50,000 retention and you believe your loss might be $10,000, filing an insurance claim would not be beneficial or recommended.

c. Do you have claim preparation expense coverage?
Many policies will reimburse the insured upon incurring out-of-pocket expenses for someone like a forensic accountant to assist them in determining the extent of the loss and presenting the claim. These expenses are reimbursed by the insurer, to the extent of the expense limit.

2. Put your insurance company on notice.

Your insurance policy will likely state terms, particularly as to timing, by which you are to give them notice. If you do not appropriately provide notice, you can be denied coverage.

3. Don’t rush to terminate your employee.

You feel betrayed, hurt and scorned. You want nothing more than to send the employee packing that instant. And why not? You can. They stole from you and you’re in an at-will state. Resist the urge. Consider placing them on paid leave while you perform an internal investigation to find the facts. Once you have gathered your evidence, take the time to interview the employee in question. Use these interview techniques:

a. Have someone else in the room with you.
It’s a good idea to have a representative from HR in the room to witness the conversation, in case it becomes a he-said/she-said situation down the road.

b. Set the room.
Make sure the room is private. Close the door, but do not lock it. Do not position yourself or any other object, such as the table, between your interviewee and the door. These things might not seem like much, but they are non-verbal actions that will help the interviewee feel more at ease.

c. Don’t be accusatory.
Ask open-ended questions. Be inquisitive. Many times, individuals who commit employee fraud want to tell someone what they’ve done. They feel guilty and had reasons that, in their mind, justified their actions. Remember, you will often catch more flies with honey than with vinegar.

d. Document your conversation.
This is where the second member of your interview team comes in handy. Have them take notes — or, with permission, record the conversation so you can refer back to it later.

4. If you now believe your employee did steal from you, decide what the best next employment steps are for you.

Depending on your level of comfort or feelings toward the employee and their actions, you may decide to notify law enforcement and press charges. However, if you are going to press charges and you have put your carrier on notice, do make sure to keep the carrier involved in the process, so as to not prejudice their rights. At this time, after information has been obtained from the employee, you may decide to terminate the employee. In the rare occasion that your employee admits to all their improprieties, you may obtain a signed confession, in which case the best recourse may be a restitution payment plan.

5. Ascertain a general idea of the extent of the theft.

After the internal accounting reviews, ascertain the extent of the theft. Based on the specifics of your insurance coverage, you can make an educated decision as to whether to file a claim or not. If your policy permits claim expense, you should engage an outside third party, such as a forensic accountant, to help you document your claim. Many insurance companies require high levels of proof and support for fidelity claims prior to payments, and the right outside third party will have the experience to help you navigate those waters, provide an independent report of findings to the insurance company on your behalf and work with the adjuster to secure payment on your loss.

6. Determine how to prevent this from happening again.

If you’ve hired an outside third-party accountant, they can also help you review your internal policies and procedures around the functions that permitted the theft to occur in the first place. One of the main reasons employees steal is simply because they can. This breakdown in process can be identified and remediated to give you more peace of mind.

Navigating the waters of filing an insurance claim can be a daunting proposition if you don’t have an action plan in place. Understanding what action items are needed when will lessen the financial and human resources challenges you might face. Once the internal steps have been taken, hire an outside forensic accountant. The services of the forensic accountant may help you recover your financial losses and can also help improve the internal processes and procedures around the theft that took place.