How to prevent and deal with employee theft and fraud

Anecdotally, there’s concern that there may be a rise in fraudulent conduct by employees.   

With the increased cost of living, people are struggling to make ends meet. With the changes to the ways people are working this can mean previously used checks and balances may no longer be in place or relevant to the way the work is being performed. People under stress can make foolish decisions. Employers are wise to have processes and systems in place to mitigate the risk of employee theft/fraud. This article covers some of the ways in which employee theft/fraud may occur, and an overview of the process an employer may take if suspicion arises or an allegation is made. 

What are the circumstances in which employee theft occurs? 

The Association of Certified Fraud Examiners identifies three factors that typically drive workplace crime. These are: motive (greed, financial strife, unexpected bills, addiction); opportunity (weak financial controls or cash management processes); and rationalisation (where the employee internalises excuses for their behaviour).   

There are a number of ways an employee may engage in theft/fraudulent behaviour including falsification of timesheets, payroll irregularities including overpayments to self and others who may be involved, false invoicing, and the theft of data/IP/confidential information. 

How can businesses mitigate the risk of employee theft or fraud? 

Theft from an employer may be committed by a trusted employee, who has garnered trust from co-workers and managers. Managing an employee’s leave, including who has access to an employee’s system while they are on leave may assist with uncovering such conduct. There have been several instances through the Courts where an employee in charge of payroll has fraudulently paid themselves, or where an employee has falsified invoices and paid themselves/their (or a related persons) company for work that has not been performed by that person/company. This is also likely to otherwise be in breach of an employer’s policies and the employee’s obligations to act in the best interests of the employer.    

Proper ‘book keeping’ should be practiced to minimise the risk of theft by administrative staff. No single person should control too many parts of any financial transaction. Purchases, payroll, reimbursements and the processing of disbursements should require review and sign off by another (senior) employee. Reconciliation of bank statements and a review of any business credit card statements or company staff/benefit accounts should be undertaken (ordinarily monthly).   

Where businesses deal in cash, clear tracking of who has access to cash drawers and use of modern point-of-sales systems that monitor employee transactions (including staff discounts) should be used. Employees shouldn’t be processing transactions for friends or relatives. Any cash on site should be regularly counted under supervision and balanced, preventing ‘borrowing’ of petty cash. Regular audit of refunds and product returns should be undertaken. 

Regular inventory monitoring should be in place, including tracking damaged goods and changes in store purchase and stock management trends. It is not uncommon for employees to misuse assets or take property (sometimes for sale). 

Monitoring such as the use of security cameras (installed and operated consistently with privacy obligations) as well as financial and computer audits are worthy of consideration, depending on the type of business.  

It is critical that an organisation has checks and balances in place to prevent fraud/theft occurring, and that these processes are followed and audited (rather than it being a box-ticking exercise) to assist with uncovering it at the earliest stage possible. While business/managers being present and working alongside staff, including taking an active role in processing transactions is a good preventative measure, this isn’t always possible, and additional risk mitigation is prudent.  

As with knowing your people, knowing your business partners – customers and suppliers, is effective in minimising the risk of false invoicing. 

Like all risk, prevention is better than cure. Sound recruitment policies, including reference checks that explicitly ask about an applicant’s honesty should be followed. Annual employee checks to update any changes in personal circumstances such as emergency contacts, are a good time to check any changes, such requesting confirmation whether employees have any civil or criminal matters pending or in process that may impact on their employment. Employees have a good faith obligation to answer these questions honestly, provided they are relevant to the employee’s employment relationship.   

Businesses should put in place simple ways in which to report concerns about suspicious activity, and to seek help. 

What can you do if you suspect fraud or theft by an employee? 

An employer can take quick action where fraud/theft is suspected, and it has sufficient information to raise that as a concern. More than mere suspicion is required. It is imperative that a fair process is followed, and we recommend seeking expert professional advice at the outset of any process.  

An employer is entitled to protect its interests prior to raising a concern with the employee, which may include documenting the information that the employer has to hand and reducing/removing access to relevant systems, implementing an interim audit process, and/or putting appropriate surveillance/supervision in place.  

An employer must act in good faith and in accordance with the test of justification set out in section 103A of the Employment Relations Act 2000. That requires an employer to raise issues of concern with the employee in a timely manner, to provide the employee with all the relevant information, to allow the employee an opportunity to comment on the issues, and to genuinely consider those responses/comments prior to making any decisions about their employment.  

In giving written notice of the allegations, and potential disciplinary outcomes, an employer will need to let the employee know that it is investigating the concerns (and specifically what those concerns are). An employee is also entitled to independent representation or support from a support person throughout the process. An employee has the right to silence in any investigation, but if this right is invoked, should be advised of the consequences for any employment process. 

If the employment agreement provides for the ability to suspend the employee, then that may be proposed where theft/fraud is suspected and raised as a concern with the employee. That is because an allegation of theft/fraud goes to the fundamental basis of the employment relationship – trust and confidence. An employer needs to give the employee an opportunity to comment on a suspension proposal (even if this is brief in certain circumstances), and genuinely consider any comments the employee makes prior to making the decision to suspend.  

Once the investigation into the allegations has been completed, and the employee has had a fair opportunity to respond to those concerns, the employer’s decision on any disciplinary outcome must be one that a fair and reasonable employer could make in all the circumstances.  

What about reporting to the Police? 

It is open to the employer to report to the Police on the conduct and its findings. This is generally undertaken once the employer has completed its employment process. There may be a mandatory requirement to report such conduct (or the matter of an investigation into such conduct) to a professional regulatory body too. Where there is a mandatory requirement to report, an employer must follow the process for reporting and cannot ‘contract out’ of that obligation. 

Any process undertaken fairly by the employer is its own to follow, and any criminal process is separate.   

An employer may be reluctant to report to the Police, due to the fear of negative reporting and subsequent further detrimental effects on the business, which may be significant. While the starting point is open justice and the ability to report on these cases, it is possible to seek non-publication/name suppression orders to protect the business going forward.These have been ordered in cases of employee theft/fraud in the past.  

Employee theft and employee fraud is underreported, and commonly underestimated. Business owners, in particular small business owners extend trust to employees, become complacent or distracted by daily operations of the business, or can feel uncomfortable monitoring employees. However, dishonesty can and does happen. Reporting to the Police is one means of addressing the misconduct and reducing the risk of recurrence.  

Questions 

The earlier theft, fraud or other improper conduct in your business is uncovered, the better for you and the employee involved. If you have concerns or suspect that an employee may be engaging in this type of conduct – seek advice early.

The specialist employment team at DTI Lawyers are experienced in managing these scenarios and would be happy to assist. You are welcome to call your trusted employment law advisor on 07 282 0174 or email us directly.