HUMAN RESOURCES: Employee Fraud – how to avoid hiring trouble

Frauds against businesses are responsible for an estimated annual loss of over $400 billion dollars, and knowledgeable sources believe this loss is growing at 5-10 percent per year. One in five businesses fail in the first five years of startup due to fraud.

Employee fraud is the most common! Most of these business losses are attributable to some level of thievery by one or more of its employees. They occur through theft or misuse of company assets, unethical/unlawful use of influence in any number of ways, and through falsified statements prepared by employees who are looking to steal something of value.

Minimizing fraud

Many small- and medium-sized business owners/managers invest little up front in their hiring process. Most feel it’s money that cannot be recovered. In fact, this expenditure will provide savings many times over, and it can make a real difference to any business performing in a mediocre fashion and/or failing.

Effective employee screening inquiries help avoid liability, guard against hiring unqualified individuals, aid in performing risk assessments relative to liabilities of candidates, and assist in determining eligibility for promotions.

What happens when the fraudsters go undiscovered, come on board as new employees and commit fraud?

From an investigation, termination and/or prosecution standpoint, it is difficult to overcome such a problem in today’s regulatory environment. For instance, 10 years ago, the debate was whether an employee’s locker or desk could be searched. Today, the arguments are over the sanctity of hard drives, e-mail messages and voicemail. Employment litigation can have a tremendous effect on an company’s bottom line, and even when a firm prevails in court, the cost of managers tied up in depositions and trial preparations can be substantial.

Business owners should seek advice from attorneys who specialize in business law. They can define and address the hiring process, employment relationships, statements with regard to proprietary information and materials in employee handbooks, and practices to follow in employer/employee relationships.

Much of the emotional upset and financial costs regarding the foregoing can be eliminated, however, if employers establish hiring practices that will not allow fraudsters to slip through the screening process.

Screen for quality

Thorough employment screening is the primary way to safeguard against hiring a troublesome employee–someone who may not only be unqualified for your job, but perhaps prone to disrupting your workforce, and/or engaging in fraudulent activities.

Many human resource directors are not provided with sufficient budget to conduct a thorough inquiry. As a result, either no independent verification is performed, or the inquiry will be limited to a telephone call to the previous employer.

Sometimes, inquiries are restricted to so called “national” screening services offering low cost options. Many times these inquiries provide information that is misleading, putting the employer at risk. For instance, a low-cost screening service may report a “no record found” relative to court record checks.

But many charged with the responsibility of verifying information on employment applications are unaware that most county and state, civil and criminal records still cannot be accessed online in Michigan and many other states. They require either an in person or an in writing search request. The “no record found” misleads the customers of screening services to believe that a search was performed, and no record was found. Instead, no record was found because no search could be performed on line or by phone.

What to check

Since 1997, with the promulgation of amendments to the Fair Credit Report Act (FCRA), there is a more defined process for gathering data relative to hiring. Any screening inquiry performed by a reputable private detective and/or human resource personnel should be approved in advance by a qualified business attorney.

The following information should be examined with regard to all employees:

· Address history and social security verification

· Credit history (where necessary)

· Driving history (where necessary)

· College/degree verification

· Resume verification

· Court record checks

· Workers’ disability compensation checks

· Criminal conviction record checks

Management checks should also include:

· Interviews with former co-workers and managers for details about performance, competence and reputation.

· Neighborhood interviews for information regarding reputation and character.

· Contacts with sources of information in the community who may want to remain anonymous, but who may have knowledge of the applicant’s reputation. These sources may include local police, former co-workers or public officials.

Deliberate misstatements or material omissions by candidates in required written application and history forms or in oral interviews should be considered disqualifying. Through an interview, gaps in employment can be determined, and questions about the candidate’s education resolved (for instance, does self-employed mean unemployed, etc.)

In oral interviews, a candidate must demonstrate his/her ability to organize, orient and express their thoughts orally. Through proper questioning (and again this format should be reviewed and approved by a qualified business attorney), the candidate’s professional philosophy, goals, strengths and weaknesses may be revealed. Further, personal appearance can be evaluated.

Be proactive

Business fraud happens when internal controls fail. It occurs and grows as a result of ignorance and also attitudes of tolerance and/or indifference. The key to deterrence is to develop a top-down strategy of zero tolerance, effective processes within the business which provide checks and balances and to convey a “trust but verify” attitude. Most importantly, the behavior must be modeled and encouraged by all key employees.

Charles W. Rettstadt is a certified fraud examiner and licensed insurance adjuster. He founded Research North Inc. (RNI) in 1981. In Michigan, RNI has offices in Detroit, Lansing, Traverse City, Petoskey, Alpena and Marquette. He has written manuals on public and private investigations and is currently writing a book, to be published this year, on business fraud. BN

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