The Enemy Within: How Should a Company Handle a Case of Suspected Fraud?

In Workplace Investigations,

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Research undertaken by Mazars Ireland in 2019 shows that Irish businesses are experiencing financial loss due to occupational fraud and abuse. Of the senior business leaders surveyed by Mazars Ireland, approximately 50% had experienced a loss due to occupational fraud and abuse over the past two years, with the average financial loss being between €10,000 and €20,000.

Ideally employee fraud, for example, financial irregularities or theft, would not happen.  And employers can work to prevent such fraud through a variety of methods.  For example, employers can strive to ensure that their employees are engaged – where employees intuitively think of the organisation’s welfare rather than simply viewing their employer with mercenary intent.  More engaged employees are less inclined to commit fraud.  Because they are heavily invested in their employer’s welfare, they strive to do what is best for their employer.

So – prevention is better than cure.  But if prevention fails and a fraud may have occurred, then what should an organisation do?  Because employee fraud does happen!  You may, for example, remember the case of John Rusnak.  He worked for an American bank in which AIB had a majority interest.  He was a currency trader – first losing his employers millions through bad judgement – but then committing fraud through trying to cover up further trades and losses.  The losses totalled $691 million!

Obviously the Rusnak case is an extreme case.  But, by definition, every incidence of fraud is a drain on profitability and carries with it the risk of reputational damage.   And the financial cost of fraud goes beyond the loss both from the fraud itself to include investigation, management time and potential prosecution.

How an organisation deals with an incidence of fraud can range from minimising their losses to exacerbating the situation. Of the senior business leaders surveyed by Mazars Ireland, approximately 34% of respondents reported that they did not have formal investigation procedures or anti-fraud policies in place and rely heavily on internal audits to catch such crimes.

Ideally when such issues occur the employer will recover their assets and protect their reputation.  However, care needs to be taken not to break the law and leave the organisation liable to prosecution by an aggrieved employee.  Employees have a right to privacy.  But employers have a right to protect their organisation.  It’s a delicate balancing act.  Employers are also now legally mandated to protect employees who have raised concerns over potential wrongdoing by others in the workplace.  The Protected Disclosures or Whistleblowing Act of 2014 became operational on July 15th 2014 and is intended to follow international best practice on whistleblower protection.

Should a company always investigate a fraud – or even a suspected fraud?  There is a cost to investigations.  But there are also benefits to carrying out an investigation.  Most obviously there is the potential of uncovering and stopping the fraud.  There is also the benefit of setting a visible precedent – that the company takes fraud extremely seriously.  And of course, there is the potential to rid the organisation of the fraudulent employee – thereby eliminating the risk of recidivism by that particular person.

If a company decides to investigate, then who should do the investigation?  The investigation must be unbiased and the people appointed to carry out the investigation ought to be trained and skilled at carrying out such investigations.  A team would normally be established – and could include a HR professional and a senior manager.  Many organisations have trained their own managers to carry out investigations but they will invariably be guided by HR professionals and employment law solicitors.  A knowledge of current employment legislation is crucial – it would be counter-productive for an investigation to run awry of employment legislation, for example, by impinging excessively on the suspected employee’s right to privacy.  Speed in investigating fraud is valuable – the speed heightens the chances of detection and reduces the potential loses.  And it is also highly desirable for someone on the investigation team to have reasonable knowledge of the subject matter.

Depending on the nature, severity and extent of the alleged fraud, an investigation could involve a number of departments.  This often includes finance – perhaps with the help of an external forensic accountant.  If IT equipment needs to be examined, an IT expert may need to be involved.  Perhaps the Gardaí may also be involved.

However, if the Gardaí are involved, control of the investigation may be ceded to them.  This could be problematic.  The employer may not agree with the direction or nature of their investigation.  Additionally, the employer’s case may not be as important to the Gardaí as it is to the employer.  The pace at which the Gardaí investigation will proceed is subject to its place among all the other cases that they are dealing with.  The Garda Bureau of Fraud Investigation “is not in a position to investigate every referred case of suspected fraud. For optimum resource utilisation, investigations are focused on major and complex fraud”.

It is important therefore that the employer carefully weigh up the level and extent of the suspected fraud and proceed cautiously with the advice of a HR professional, perhaps an employment law solicitor, and perhaps the Gardaí.  It can be helpful to liaise with the Gardaí if only to ensure that the workplace investigation does not accidentally compromise a later prosecution.

If fraud is proved to have occurred, then care is still needed before considering firing the employee.  For example, there is the possibility that the employee, through a failing of the organisation, may not have known that the fraudulent activity was actually fraudulent.  It is important to connect the fraudulent activity directly with one of the organisation’s policies and procedures – this allows the organisation to be specific in its reasoning for terminating the employment.

In conclusion, how an employer approaches an actual or suspected fraud is a specialised type of investigation.  There are particular procedural, tactical and legal elements to consider.  If you know or suspect that a fraud has taken place in your organisation, tread carefully.  To get expert guidance in this area, call Mary Cullen or Liam Barton on 056 770 1060 or email mcullen@insighthr.ie.

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