Motivation, Detection and Prevention of Employee Fraud

Employee fraud is on the rise. Recent high-profile examples, such as the $105 million Plutus payroll tax fraud, demonstrate the catastrophic impacts of employee fraud on businesses and organisations. Understanding the motivators for employee fraud and how to detect and prevent damage and loss is increasingly necessary.

Following the launch of Bartier Perry’s multi-disciplined organisational fraud and corruption practice, we hosted a panel event in August to discuss the motivation, detection and prevention of employee fraud.

In recognition of International Fraud Awareness Week (12 to 18 November 2023), this article outlines some of the lessons learned for employers to detect and prevent employee fraud.

The panel 

The expert panel, moderated by Bartier Perry partner and workplace law & culture practice head, Darren Gardner, consisted of the following experts:

• Sean Wengel - Director, Restructuring & Insolvency, William Buck

• Kathryn Degotardi - Head of Legal & Compliance - Australasia, JLL

• Dr Jennifer Wilson - Psychologist, Accountant and Behavioural Scientist

Motivation

To understand the motivations behind employee fraud, it’s important to first contextualise the types of fraud and corporate factors enabling them to occur. Types of employee fraud include:

• asset misappropriation (for example, theft of funds or company devices)

• financial statement fraud (deliberate manipulation of corporate records including financial statements, invoices, claims etc)

• corruption, bribery and extortion (less commonly seen in employee fraud matters than in public/governmental bodies).

Factors contributing to employee fraud may be:

• lack of oversight and managerial control over systems and processes

• lack of supervision of employees with important responsibilities and access to sensitive information

• high pressure environments (such as ambitious budget targets, competitive team structures and end of year reporting obligations).

While noting that every case is different, Dr Wilson’s research which included interviews with fraud perpetrators, identified from a psychological perspective motivations including:

• lifestyle, personal greed, ambition to have and maintain lavish lifestyles

• compulsive behaviors including gambling, drug and shopping addictions

• altruistic reasons (robbing the rich to give to the poor). 

From a corporate compliance perspective, some of the motivations and causes of employee fraud are:

• gaps in segregation of tasks whereby key personnel with high degrees of responsibility and trust are in good positions to enact employee fraud

• lack of fraud awareness training

• underutilisation of both internal and external regular audits.

Recent interest rate rises and increased economic pressures, as well as decommissioned / unmonitored IT servers / technological devices both also present opportunities for employee fraud.

Detection

With the shift towards greater remote working with associated use of out of office technology come greater detection challenges. Increased reliance on technology in remote working necessitates greater surveillance and supervision mechanisms. Cultural and employee engagement factors with declining in person face-to-face collaboration and accountability, longer working hours and a lack of physical employee interaction are emerging obstacles to early detection of employee fraud.

Regular internal and external audits are an important aspect of detecting (and ultimately preventing) employee fraud. Other detection measures discussed include:

• updated whistleblower policies and confidential whistleblower hotlines

• staff fraud and reporting education/training

• cultural training and facilitating safe workplaces to promote disclosures.

Prevention / recovery

Recovery actions following fraud events are expensive, time consuming and never guaranteed. 

Complicating factors such as lack of documents and uncooperative staff heighten expense and delays. 

Kathryn Degotardi shared that 5% of yearly revenue or approximately $5 trillion per year world-wide is lost to employee fraud. 

From a psychological and workplace health & safety perspective, employers have a duty to protect staff from negative cultural impacts, PTSD and morale decline which are affected by employee fraud.

Many organisations, especially in government and the public sector, have mandatory reporting and other regulatory obligations. Hence, employee fraud can have catastrophic flow-on effects at all levels.

Prevention is of course better than a cure. Prevalent prevention and recovery considerations include:

• regularly seeking up-to-date advice from qualified professionals (lawyers, auditors, accountants)

• adequate fraud insurance

• sophisticated document management systems allowing data to be produced and collated on short notice (which is critical to allow quick recovery steps)

• limiting outsourcing for payroll and auditing

• sharing staff responsibility and delegations

• implementing checks and balances for accounts and payment processes

Ultimately, sophisticated frauds haven taken place despite the most robust prevention regimes. 

In our experience, recovery prospects depend on:

• the speed in which recovery action is commenced; and

• the reliability and availability of documentary and other admissible evidence. 

Where employee fraud cannot be prevented, the measures outlined above should be relied on to bolster recovery efforts. 

An organisation’s ability to act quickly (by avoiding the delay of reconstructing document records and gathering evidence from unorganized sources) and arm advisers with necessary evidence increases the chances of:

• obtaining freezing orders

• tracing funds

• recovering stolen funds and assets.

Lessons learnt

This event was a timely reminder that employee fraud events are on the rise given current economic factors.  

At Bartier Perry, we know from first-hand client experience that prevention is better than the cure. We help organisations to:

• connect with leading industry professionals, such as the panelists named above, as well as fraud examiners, retired NSW Police fraud squad members and forensic accountants to act when fraud events are detected

• manage employee and workplace relations

• implement productive and down to earth workplace culture

• understand and comply with their regulatory and reporting obligations (especially for public, government and regulated organisations)

• implement, review and reform policies and controls to prevent employee fraud

• devise and execute data and document management strategies, in collaboration with IT and other professional consultants, to avoid document manipulation and increase the availability of evidence if required

• understand insurance coverage both prior to and following fraud events

• take action to quickly freeze assets and recover funds.

Bartier Perry’s organisational fraud and corruption practice group is comprised of experts from each practice area in the firm, ensuring that a full-service is provided to our clients. We can assist with both front and back-end advisory and dispute resolution.

Please contact one of our experts for assistance with detecting, preventing or responding to employee fraud.

 

Authors: Gavin Stuart, Darren Gardner, David De Mestre