Fraud in the Workplace

By Christine Devin, CPA

Have you ever said these words: “I trust her; she would never steal from the company,” or “he is so honest, he would never do that.”

A small-business owner I recently spoke with said those same words. The owner was busy with the daily operations of her cash-lucrative business. The business had less than 10 employees, including a few service employees and a bookkeeper. The business owner had outstanding relationships with all of the employees. She even referred to them as family. Business was booming. What could possibly go wrong?

The owner confidently handed over her financial information for annual review and preparation of the company’s tax return to a hired professional. She was sure that her hard work looked impressive on paper. After all, she worked countless hours to make it all happen. Little did she know that the words she spoke earlier would haunt her. She could not have been more wrong.

During the annual review of the financial statements, some disbursements were flagged as unusual or suspect. The professional contacted the owner to investigate these payments. After further review, it was discovered that the bookkeeper was writing checks for personal expenses out of the company’s checking account by forging the owner’s signature. This was devastating news.

Fraud in the workplace is a serious topic and should be considered in any size business. What is fraud? Who is likely to commit fraud and what can be done to prevent or detect fraud? These are all great questions that this small-business owner wished she had addressed long before she ever hired her first employee.

What is fraud? Fraud is a broad term often used to describe when someone intentionally cheats another out of money or property for personal gain and then conceals it. In a business environment, fraud can occur by theft, misappropriation of assets, or financial-statement fraud. Some common fraud schemes are check forging (theft of cash), skimming (accounts receivable), dummy vendors (accounts payable), ghost employees (payroll), and falsifying records (financial statement). Whatever the scheme, are you prepared in your business to eliminate the possibility of fraud?

Who is likely to commit fraud? Most employees are honest when hired. However, you may on occasion hire a person that intentionally wants to get the job just to steal from you.

The ‘fraud triangle,’ originated by American sociologist Donald Cressey, created the framework to describe the reasoning by an employee to commit fraud. The fraud triangle describes the three stages an individual goes through when contemplating fraud. These are personal pressure or financial need, opportunity, and their ability to rationalize the crime. Per Cressey, once all these stages are met, even your most honest and trusted employee can commit fraud.

In the example above, the bookkeeper had a need (a drug addiction which was later revealed in court), the means (her direct access to the checks and the ability to reconcile), and rationalization of the crime (she thought she deserved more of the profit). All stages of the fraud triangle are important and should be considered in your risk assessment.

Of the three stages, we are going to focus on the second stage, opportunity. If there is no opportunity, the employee cannot commit fraud regardless of what they think, how they feel, or what they are going through personally.

When seeking to eliminate the opportunity for fraud, one of the best places to start is the transaction cycle. Take the time to walk through each transaction process, from start to finish. During the walkthrough, identify key points in the process where review, approval, or dual controls should be present to eliminate sole control over the function.

Consider this example: an accounts-payable clerk sets up new vendors, vouchers invoices, and processes checks for the company each week. The same clerk also reconciles the activity at the end of the month and posts all necessary reconciling journal entries. She even offers to mail the checks, as it is on her way home.

In this example, there is clear lack of segregation of duties. The clerk has too much control, and ‘opportunity’ exists. If the other two stages of Cressey’s framework — a financial need and rationalization — were present, then it would be possible for fraud to occur. Taking the time to evaluate processes such as these will help greatly in eliminating the risk of fraud.

There are a number of other steps that a business can take to prevent or detect fraud. They include:

• Conducting background checks on new hires;

• Implementing dual controls over assets such as cash and inventory;

• Separating key functions such as check preparer and check signer;

• Reconciling all accounts to the general ledger each month;

• Requiring approval of all time sheets by a supervisor;

• Requiring mandatory vacation for payroll or other key personnel;

• Establishing budgets and projections to benchmark to financial results;

• Rotating duties of accounts payable and accounts receivable (this process can also achieve cross-training needs);

• Verifying new vendor information, including tax ID address and phone number;

• Conducting internal audits;

• Establishing formal policies and procedures, including code of ethics;

• Setting up an employee hotline; and

• Disciplining for violation of established policies.

If a company has fewer employees, like the owner in the first example, then direct review and monitoring will serve as mitigating controls to prevent and detect fraud. Luckily, the owner had a detection control in place (she had someone else look at her records). However, even with the help of a third party, there is no guarantee that fraud will be detected, if it exists. So what else could have been done?

The owner could have had the bank statements mailed directly to her home address for review before handing off to the bookkeeper. Just opening the statement sends a clear message. In our original example, it was later discovered that the bookkeeper forged checks for more than a year. A simple review of the monthly bank statement by the owner would have uncovered the fraud much sooner, just by noticing the signature on the check images were not her own.

The time it would take to perform these steps would be far less than the time the owner spent investigating the records and pursuing the prosecution of the employee.

In the end, it takes time to review processes and procedures, identify key controls, and implement safeguards where needed. I can assure you, it is time well-spent. If you don’t have the time or resources to conduct a review of your business processes, you can call a professional to assist you.

This small-business owner changed the way she conducts business so this never happens again. Will you?

Christine Devin, CPA is a senior associate with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3480; [email protected]

Employees Want to Feel That They’re Making a Difference

By BILL SIMS Jr.

Creating a positive workplace culture is extremely important to cultivating a productive and profitable company. The quality of work we do depends on the quality of our workplace culture. When the environment we work in is positive, we become more engaged and committed employees.

By definition, workplace culture is a pattern of behaviors that are supported by a management system over time. Harnessing the power of positive reinforcement is the quickest and most efficient way to a better workplace culture.

The first step in creating a more positive workplace culture is recognizing that your current culture is not where you want it to be. It can be difficult to define your culture — almost like nailing Jell-O to a wall — because it is made up of many small behaviors. But it starts at the top with company leaders. The way they act and behave will be mirrored by employees. So if you want to change the behavior of your employees, start by changing the behavior of your leaders.

Leaders can start doing this by listening to their employees and understanding what motivates them. Get to know them, ask them their opinions, and share yours in return. I think the most powerful things that bosses can do are communicate, be transparent, and tell people where the ship is headed. Bosses should be asking questions like, “what are we doing that we could be doing better? What’s broken, and how can we fix it?” Ask those questions, listen to the employees, and, most importantly, empower the employees to go fix the problems.

Research tells us that that, more than money, employees want to feel like they are making a difference at work and getting recognized by their boss for making that difference.

As employees, we want the ability to do things, to change things. So often, employees’ ideas are not listened to or acted upon. It is the boss’s responsibility to provide the money, time, and resources for employees to complete tasks and make improvements, and then to celebrate and recognize those people for their contributions.

Now, this goes against many traditional management styles — the command-in-control, my-way-or-the-highway mindsets of old. The majority of bosses do what I call ‘leave alone/zap’ management. Simply put, it means that we leave employees alone and say nothing when they do something right, but we are quick to ‘zap,’ or punish, them when they make a mistake.

This kind of aggressive management style might get the job done temporarily, but it doesn’t create an environment where employees will take initiative to do things when their supervisor isn’t watching. And it will not produce the highest-performing culture possible.

Rosabeth Moss-Kanter, a professor at the Harvard Business School and an author of numerous books on business-management techniques, said, “compensation is a right; recognition is a gift.” In other words, paychecks get people to show up at work. But getting more from people than just average performance requires you as a leader to provide additional coaching and feedback when people demonstrate the behaviors that drive results in your company.

Bosses who think they don’t need to tell their employees they are doing a good job are not fully engaging them. It doesn’t cost you any money to tell somebody they did a great job. Believe it or not, saying ‘thank you’ for doing a good job is a much more powerful motivator than a paycheck.

Bosses should give employees immediate, sincere feedback when they demonstrate desired behaviors. That way, employees will be more likely to repeat those behaviors in the future. That’s the power of positive reinforcement. If you don’t do that, then you won’t get those extra behaviors.

For four decades, my company has designed and implemented behavior-based systems and approaches that bring continual improvement with positive reinforcement. In my work as a business consultant, I have built more than 1,000 recognition programs for companies including DuPont, Coca-Cola, and Ford. They recognized that their work environments could be better and sought help and ways to fix it.

What I’ve learned from helping so many companies is that, without positive reinforcement, you are getting less performance from your team than you could be, and your workplace culture will suffer. It’s only a matter of time before some other company does it better and leaves you in the dust, taking your good employees with them.

In my workshops, I frequently ask bosses, “is culture change fast or slow?” Most people think it’s slow, but in reality, you can change culture in one day, if you know how. Culture change is as simple as changing the behavior of the leadership team. By inverting the leadership structure and delegating responsibility to employees, culture can shift dramatically and quickly. Move too slow, and employees might think you are not taking their ideas and suggestions seriously. But, like going on a diet, culture change is something you must continue to work at day in and day out.

So there you have it. When a workplace culture is positive and happy, the employees are happy, and they work harder to make their clients happy. The end result will be that profitability will increase and turnover will decrease.

But remember: creating a positive work culture starts at the top. If you want a positive team, you must be a positive leader. And the best leaders are those who truly harness the power of positive reinforcement to create high-performing teams who do the right thing even when leaders aren’t watching.

Bill Sims Jr. is President of the Bill Sims Co. Inc. For nearly 40 years, Sims has created behavior-based recognition programs that have helped large and small firms to deliver positive reinforcement to inspire better performance from employees and increase bottom-line profits. A sought-after speaker, he has delivered leadership workshops and keynote speeches around the globe, and has built more than 1,000 positive-reinforcement systems at firms including DuPont, Siemens VDO, Coca-Cola, and Disney; www.greenbeanbook.com; www.greenbeanleadership.com

How to Build a Culture of Ethics Inside Your Company

By CHUCK GALLAGHER

Roger, a good friend and an ethical individual, was at a business conference recently with a co-worker, Sam, who decided to take a few of his subordinates out for an evening of entertainment — that is, entertainment not sanctioned by the company. The next day, as Sam was preparing to submit his receipts for his expense report, Roger noticed that he was submitting the receipts for his prior night’s activities. More importantly, Roger noticed that Sam’s description on the receipts was inaccurate. Sam flat-out lied on his expense report.
Roger wondered what would be the ethical thing to do. On one hand, he could ignore what he saw and just let it pass, rationalizing that it was not his business. Or he could confront Sam and encourage him to reconsider his choice, suggesting that following the ethics policy of his company would create better consequences. Or, lastly, Roger could comply with the company’s guidelines and report the ethical lapse.
The question isn’t what did Roger do. The question to consider is, what would you do?
If you chose the third option — the one that is expected as part of compliance with most organizational ethics guidelines — you would be labeled a ‘whistleblower.’ Who wants to be called that? Snitch, tattletale, and other negative words from childhood come to mind when someone is called a whistleblower. Yet, if your company or association is committed to creating a culture of ethical behavior, the term ‘whistleblower’ is the number-one key to ethical success.

How Can That Be?
Statistics indicate that, 42% of the time, someone tipping off an employer about an ethical lapse or potential fraud is the number-one way companies maintain ethics and prevent fraud. Amazing as it may seem, internal staff is the best police system for maintaining ethical behavior.
Most are amazed that it is that high; all too often, we want to look the other way, or are afraid to confront those committing ethical blunders. It’s easy to understand the hesitancy; many of us are afraid to rock the boat. Often, what we fail to realize is that the person committing an ethical blunder is putting the company in danger. So, how do we create a culture of ethical actions? Here are five ways to start.

1. Recognize that unethical choices never start large. The ‘unethical continuum’ is a natural progression of what many call a slippery slope of human action. This progression allows small infractions to go unnoticed or unreported until the day people or companies are in the midst of a full-fledged ethics disaster. Sam didn’t intend to act unethically; he felt that he was doing the right thing by treating his subordinates to something beyond the norm at the company function. His challenge was figuring out who would be responsible for the expense. The challenge with his ethical choice was a common problem: rationalization.

2. Understand the three components of human behavior that lead to ethical lapses. When a human makes a choice, any choice, there are typically three components that come together that allow a choice to be made and move forward: need, opportunity, and rationalization. While, as employers, we have little control over an individual’s need, we do have some level of control over the opportunity to make ethical choices and how one might rationalize behavior.

3. Be clear about what ethical behavior looks like. Large companies have clearly drafted ethics and compliance policies that employees are expected to understand and follow. The smaller the company, the less likely there will be a clearly written ethics policy. But large or small, the challenge for all companies is communication about what is acceptable and unacceptable. Creating an ethics policy and training it effectively are keys to exposing rationalization and improving ethical behavior within an organization.

4. Train, train, train! Let’s be honest: most ethics training is boring. It centers on the rules and never gets to the heart of what motivates human behavior. And, frankly, if we don’t understand what starts folks on that slippery slope downward into the unethical realm, then we miss the opportunity to change behavior before it is too late. Effective training should move beyond just what’s included in the ethics and compliance policy and delve into why people make unethical choices, what can be done to prevent unethical choices, and what motivates our behavior. Telling someone what to do is far less effective than helping them see the value in consistently making ethical choices.

5. Encourage accountability. What keeps people between the ethical lines is shared accountability. We are our brother’s keeper. If one is to be kept within the ethical lines, then we must have not only the roadsigns (ethics policy), but the practical means to correct behavior. As stated earlier, 42% of the time, ethical blunders are reported by co-workers or those who witness the issue. And while the term ‘whistleblower’ sometimes carries a negative connotation, the reality is that someone who cares enough to call ‘foul’ on unethical actions is the most valuable ethics asset an organization has.

When in Doubt, Do the Right Thing
Ethical missteps are all the same; they will eventually lead to a negative outcome. Little infractions that go undetected or unreported often lead to larger infractions until unethical becomes illegal. Perhaps we should reframe or replace the word ‘whistleblower’ with ‘ethical partner.’
One thing is certain: ethical choices are empowered choices, and that is certainly one critical component of business success.

Chuck Gallagher is the president of the Ethics Resource Group and an international expert in business ethics. He provides training, presentations, and consultations with associations and companies on ethics and creating ethical cultures; [email protected]

A chart of area office equipment dealers

Click here to download the PDF

A chart of area office equipment companies

Download here