Tag Archives: Employee Theft

Better Call Saul

As reported so often in the press these last few years, even when well-intentioned employees feel they’re doing the right thing by reporting acts of wrongdoing, their reports aren’t always well received. Numerous studies conducted by the ACFE strikingly bear this out. And this is so much the case that any employee (public or private) who witnesses acts of wrongdoing and decides to report them is well advised to seek legal counsel before doing so. When a whistle-blower also happens to be a CFE, the same advice applies. Every CFE should learn just when, where, and how to report fraudulent acts before blowing the whistle, if only so they can comply with the often complex procedures required to receive any available protections against retaliation.

All the U.S. states have laws to protect public sector employees from retaliation for whistle-blowing. Indeed, most of the state whistle-blowing laws were enacted specifically to actively encourage public sector employees to report fraud, waste, and abuse both in and without government agencies. Some state laws protect only public employees; others include government contractors and private-sector employees as well. Many of the laws protecting private sector employees involve workplace safety. They were designed and enacted decades ago to protect employees from retaliation when reporting occupational safety issues. Public and private employees can use them, but they might not apply in all situations. Over the years, reporting in some other specific situations has also received protection.

Facts to keep in mind. Whistle-blowing, as it relates to fraud, is the act of reporting fraud, waste, and abuse. Reporting any act of wrongdoing is considered whistle-blowing, regardless if it’s reported by a public or private employee or to persons inside or outside of the victim organization. Anyone can report wrongdoing, but the subsequent level of protection against retaliation an employee will receive will differ depending on whether they’re public or private, to whom they report, the manner in which they report, the type of wrongdoing they report, and the law(s) under which they report. The ACFE tells us that a majority of unprotected whistle-blowers end up being terminated. Among those unterminated, some are suspended, some transferred against their wishes and some are given poor performance evaluations, demoted or harassed. To address their situation, some choose recourse to the courts. The rub here is that to prevail, the employee will probably have to link their whistleblowing directly to the retaliation. This can be difficult for the employee experiencing any kind of current problem in the workplace because employers will claim their adverse personnel actions were based on the employees’ poor performance and not on the employees’ decision to blow the whistle. It’s especially easy for employers to assert this claim if the person who conducted the retaliation claims no knowledge of the whistle-blowing, which is very frequently the case.

Additionally, many whistle-blowers lose their cases because they didn’t comply with some technicality in the laws. Protection laws are very specific on how whistle-blowers must report the wrongdoing. Failing to comply with any aspect of the law will result in a loss of protection. Some examples:

• Subject Matter Jurisdiction – the court must have the power to hear the kind of issue in the whistle-blower’s suit. Subject matter jurisdiction is based on the law the whistle-blower plans to use. Generally speaking, federal courts hear violations of federal laws and state courts hear violations of state laws, although this isn’t always the case. Employees can file alleged violations of their civil rights in state or federal courts under Section 1983 of Title 42 of the U.S. Code of
Federal Regulations. While rarely used in the past, today Section 1983 is part of the Civil Rights Act and the primary means of enforcing all Constitutional rights. Subject Matter Jurisdiction can help employees decide to file in federal or state court. Of course, the employer might ask to have the case moved to another court.

• Personal Jurisdiction – the employee should make sure the court has power over the party s/he wants to sue. A court must have personal jurisdiction over the defendant to hear a case. Courts usually have personal jurisdiction over the people and organizations residing or doing business in their jurisdiction.

• Venue – venue refers to the court that will hear the employee’s case. The proper venue is the jurisdiction in which the defendant lives or does business, where the contract was signed or carried out, or the incident took place. More than one court can have jurisdiction over the case. The employee should pick the venue most convenient for her.

As I said above, most whistle-blower laws were written and are intended to protect public-sector employees who report violations affecting public health and safety. Proving public interest is easy for public-sector employees because their work involves public protection. It’s not as easy for private-sector employees. A goodly percentage of private-sector whistle-blowers lose their cases because the matters didn’t involve public policy. Whistle-blowers can improve their chances of success by preparing early and reading the whistle-blowing laws of their state of jurisdiction. The case law is also important because it shows the precedent already set by the courts. The better prepared the employee is, the less likely s/he will make avoidable mistakes. An evolving issue is the extent to which whistle-blowers must be certain of violations. Many laws already require the employee to state the specific law that was broken. Some courts require whistle-blowers to be certain of their allegations. Trends requiring certainty will make it increasingly difficult for whistle-blowers to receive protection.

As a final point. A goodly percentage of whistle-blowers fail to achieve protection each year because of their own improper conduct. Some of these whistle-blowers misused their employers’ property; some of them stole it. Employees must ensure their conduct is above scrutiny because some courts will apply the “doctrine of unclean hands” and bar whistle-blowers from protection, if they’ve engaged in misconduct directly related to their complaints. The doctrine of unclean hands can work against employers, just as it does employees. In Virginia not too long ago, a Medicaid provider submitted documents containing incorrect claims information to the court. The whistle-blower proved the information was false and won his case on those grounds alone. Thus, it’s important for employers and employees to comport themselves with integrity.

Whistle-blowers who commit unlawful acts to advance their cases don’t do well in court, but neither do whistle-blowers who refuse to commit unlawful acts on behalf of their employers. Most state whistle-blower laws are designed to protect employees that refuse to commit unlawful acts, but it can be difficult to receive even that protection.

All this by way of saying that the laws governing whistle-blower protection are many and varied. As fraud examiners and auditors it behooves us to be as familiar with these laws in the jurisdictions in which we practice as we reasonably can be. But always, when confronted with such cases, always consult counsel. As my father told me so long ago, the man or women who acts as their own attorney has a fool for a client.

Private Company Employee Health

Our last post presented a short list of the chief fraud threats targeting government run health programs.  We thought it might be useful to practitioners to balance it with one on frauds directed at private company health insurance plans.  From one perspective, many of the schemes, as you’d expect, are similar; but there are significant differences. Losses due to fraud in both public and private health-care spending are notoriously difficult to estimate but amount to more than US $6o billion annually, according to a statement made by the then U.S. Attorney General  several years ago at a National Institutes of Health summit.  Like all fraud, by definition, health-care fraud involves deception or misrepresentation that results in an unauthorized benefit.  In the private sector, it increases the cost of providing benefits to employees company-wide, which in turn increases the overall cost of doing business, regardless of industry. And while only a slight percentage of health-care providers and consumers deliberately engage in fraud, that small percentage can raise the cost of doing business significantly. The increased costs appear in the form of higher premiums and out-of-pocket expenses or reduced benefits or coverage for employees and affect small businesses disproportionately.

But the news isn’t all bad.  The good news is that, especially with the rise of fraud prevention approaches based on data analytics, companies have more and more tools at their disposal to help combat this problem. Most important, perhaps, are the contributions our fraud examiner profession is making and the unique expertise we bring to fraud-fighting efforts. With the right approach and technology tools, fraud risk assessors can help identify control weaknesses that leave the organization susceptible to health-care fraud and track down potential indicators that such fraud may have occurred or is in progress. Working with management as well as with other assurance professionals and external parties, fraud examiners can help meet this challenge and even prevent it by applying well designed system edits that identify fraudulent insurance claims on the front end, preventing them from even being paid (pre-payment prevention as opposed to post-payment pay and chase).

Every fraud examiner and forensic accountant knows that access to the right information is critical to combating the ever mutating array of health-care frauds targeting both the private and governmental sectors. Asking the appropriate questions and carefully sifting through relevant data can reveal potentially fraudulent activity and shed light on abuses that otherwise may not be identified.

Much of the needed health-care information often resides with an organization’s health insurance provider or third-party claims administrators (TPAs); fraud examiners and company management should work cooperatively with these parties to obtain an understanding of the details. Specifically, employers should hold regular discussions with their providers or TPAs to collaborate on anti-fraud activities and to understand their provider’s approach to the problem. Providers, on their side, should share the details of their anti-fraud efforts with organizational management. They should also explain their, often proprietary, techniques used to detect fraud and abuse and provide specific examples of potential frauds recently identified.  Companies also have access to employee historical health claims databases through their insurance provider or their TPA. Analysis should be performed by these parties, and it generally should focus on identifying unusual patterns or trends as such findings could signal fraudulent activity in the claims data; the objective in doing so is to develop payment system edits targeting specific fraud schemes so that claims related to the schemes are prevented by the edits from paying the related health service claims.  Even if the data does not contain indicators of potential fraud schemes, fraud examiners should still recommend that it be mined continually to ferret out potential mistakes.

If it’s not already part of your client company’s regular human resource (HR) administration process, simply matching employee data with the TPA’s files could also shed light on potential problems. Some employees, for instance, may be in the wrong plan or have the wrong coverage. Moreover, former employees may still be listed as covered.  Which brings us to the big problem of dependent eligibility; I say ‘big’ because dependent eligibility is a costly issue for all employee health plans because providing costly health insurance coverage to the ineligible dependents of company employees can quickly prove a budget buster for enterprises of all sizes.

To determine a client’s risk of exposure to ineligible dependents, fraud risk assessors should start with an assessment of the controls built into the benefits enrollment process. If the organization doesn’t require proof of eligibility during the initial enrollment process, the risk of exposure increases. Risk also increases if proof is required upon initial enrollment but not thereafter, such as when covered children reach a certain age. Based on the level of risk identified, examiners, in conjunction with HR, can select one of several approaches to the next phase of their review.

–Low Risk: Offer employees an amnesty period. The organization should remind employees of the benefit plan requirements and let them know that a review of eligibility will be performed. They should be given a reasonable amount of time to adjust their coverage as necessary without any repercussions; sometimes this alone can result in a significant level of compliance.

–Medium Risk: Require eligibility certification. In addition to the steps associated with low risk, the organization should require employees to complete an affidavit that certifies all of their covered dependents are eligible under the benefit plan requirements.

–High Risk: Audit employee eligibility. The company’s internal audit function should perform a full eligibility audit after the organization completes the steps associated with low and medium risk situations.

As this blog and the ACFE have repeated over and over again, employee awareness can be the best fraud prevention tool available. Fraud Examiners working in every industry should learn more about health-care fraud scenarios and their effect on their client’s businesses and pursue opportunities to educate management on the cost drivers and the impact of fraud on their companies. If the organization’s compliance program includes employee training and distribution of periodic educational updates, this would be a logical medium into which to integrate employee awareness messaging. At a minimum, Fraud Examiners should be sure that any new employee orientation sessions cover basic healthcare benefits guidance:

–Don’t provide personal health coverage information to strangers. If the employee is uncertain why a third party is requesting certain personal information, they should be instructed to contact their company’s benefits administrator.

–Don’t loan an insurance card to anyone not listed on the card as a covered individual.

–Employees need to familiarize themselves with the conditions under which health coverage is being extended to them and to their dependents.

Given the complexities of health benefits administration, an organization almost cannot provide too much information to its employees about their coverage. Taking the guesswork out of the administration process can result in lower costs and happier employees in the long run.  Although many anticipated long-term benefits from U.S. health-care reforms contained in the Affordable Care Act, in the short term most employers were required to expand coverage offerings for employees and their dependents, thereby increasing costs. All of these factors point to an opportunity for health-care fraud to continue growing and, consequently, for Fraud Examiners and for fraud risk assessors to continue to play an important role in keeping this relentless source of monetary loss at bay.

Cash In – Cash Out

One of our associate Chapter members has become involved in her first fraud investigation just months after graduating from university and joining her first employer. She’s working for a restaurant management consulting practice and the investigation involves cash theft targeting the cash registers of one of the firm’s smaller clients. Needless to say, we had a lively discussion!

There are basically two ways a fraudster can steal cash from his or her employer. One is to trick the organization into making a payment for a fraudulent purpose. For instance, a fraudster might produce an invoice from a nonexistent company or submit a timecard claiming hours that s/he didn’t really work. Based on the false information that the fraudster provides, the organization issues a payment, e.g., by sending a check to the bogus company or by issuing an inflated paycheck to the employee. These schemes are known as fraudulent disbursements of cash. In a fraudulent disbursement scheme, the organization willingly issues a payment because it thinks that the payment is for a legitimate purpose. The key to the success of these types of schemes is to convince the organization that money is owed.

The second way (as in our member’s restaurant case) to misappropriate cash is to physically remove it from the organization through a method other than the normal disbursement process. An employee takes cash out of his cash register, puts it in his pocket, and walks out the door. Or, s/he might just remove a portion of the cash from the bank deposit on their way to the bank. This type of misappropriation is what is referred to as a cash theft scheme. These schemes reflect what most people think of when they hear the term “theft”; a person simply grabs the money and sneaks away with it.

What are commonly denoted cash theft schemes divide into two categories, skimming and larceny. The difference between whether it’s skimming or larceny depends completely on when the cash is stolen, a distinction confusing to our associate member. Cash larceny is the theft of money that has already appeared on a victim organization’s books, while skimming is the theft of cash that has not yet been recorded in the accounting system. The way an employee extracts the cash may be exactly the same for a cash larceny or skimming scheme. Because the money is stolen before it appears on the books, skimming is known as an “off-book” fraud. The absence of any recorded entry for the missing money also means there is no direct audit trail left by a skimming scheme. The fact that the funds are stolen before they are recorded means that the organization may not be “aware” that the cash was ever received. Consequently, it may be very difficult to detect that the money has been stolen.

The basic structure of a skimming scheme is simple: Employee receives payment from a customer, employee pockets payment, employee does not record the payment. There are a number of variations on the basic plot, however, depending on the position of the perpetrator, the type of company that is victimized, and the type of payment that is skimmed. In addition, variations can occur depending on whether the employee skims sales or receivables (this post is only about sales).

Most skimming, particularly in the retail sector, occurs at the cash register – the spot where revenue enters the organization. When the customer purchases merchandise, he or she pays a cashier and leaves the store with whatever s/he purchased, i.e., a shirt, a meal, etc. Instead of placing the money in the cash register, the employee simply puts it in his or her pocket without ever recording the sale. The process is made much easier when employees at cash collection points are left unsupervised as is the case in many small restaurants. A common technique is to ring a “no sale” or some other non-cash transaction on the employee’s register. The false transaction is entered on the register so that it appears that the employee is recording the sale. If a manager is nearby, it will look like the employee is following correct cash receipting procedures, when in fact the employee is stealing the customer’s payment. Another way employees sometimes skim unrecorded sales is by conducting sales during nonbusiness hours. For instance, many employees have been caught selling company merchandise on weekends or after hours without the knowledge of the owners. In one case, a manager opened his store two hours early every day and ran it business-as-usual, pocketing all sales made during the “unofficial” store hours. As the real opening time approached, he would destroy all records from the off-hours transactions and start the day from scratch.

Although sales skimming does not directly affect the books, it can show up on a company’s records in indirect ways, usually as inventory shrinkage; this is how the skimming thefts were detected at our member’s client. The bottom line is that unless skimming is being conducted on a very large scale, it is usually easier for the fraudster to ignore the shrinkage problem. From a practical standpoint, a few missing pieces of inventory are not usually going to trigger a fraud investigation. However, if a skimming scheme is large enough, it can have a marked effect on a small business’ inventory, especially in a restaurant where profit margins are always tight and a few bad sales months can put the concern out of business. Small business owners should conduct regular inventory counts and make sure that all shortages are promptly investigated and accounted for.

Any serious attempt to deter and detect cash theft must begin with observation of employees.
Skimming and cash larceny almost always involve some form of physical misappropriation of cash or checks; the perpetrator actually handles, conceals, and removes money from the company. Because the perpetrator will have to get a hold of funds and actually carry them away from the company’s premises, it is crucial for management to be able to observe employees who handle incoming cash.

Detect and Prevent

I got a call last week from a long term colleague, one of whose smaller client firms recently discovered a long running key-employee initiated fraud. My friend has been asked to assist her client in developing approaches to strengthen controls to, hopefully, prevent such disasters in the future.

ACFE training has consistently told us over the years, and daily experience repeatedly confirmed, that it is simply not possible or economical to stop all fraud before it happens. The only way for a retail concern to absolutely stop shoplifting might be to close and accept orders only over the Internet. Similarly, the only way for a bank to absolutely stop all loan fraud might be for it to stop lending money.

In general, my friend and I agreed during our conversation, that increasing preventive security can reduce fraud losses, but beyond some point, the cost of additional preventive security will exceed the related savings from reduced fraud losses. This is where detection comes in; it may be economical when prevention is not. One way to prevent a salesclerk from stealing from the register would be for the security department to carefully monitor, review, and approve every one of the clerk’s sales. However, it would likely be much more cost effective instead to implement a simple detective control: an end-of-shift reconciliation between the cash in the register and the transactions logged by the cash register during the clerk’s shift. If refunds are not given at the point of sale, the end-of-shift balance of cash in the register should equal the shift’s sales per the transaction logs minus the balance of cash in the register at the beginning of the shift. Any significant failure of these numbers to reconcile would amount to a red flag. Of course, further investigation could show that the clerk simply made an error and so did not commit fraud.

But the cost effectiveness of detective controls, like preventive controls, imposes limits. First, such controls are not cost free to implement, and improving detective controls may cost more than the results they provide. Second, detective controls produce both false positives and false negatives. A false positive occurs when a detective control signals a possible fraud that upon investigation turns up a reasonable explanation for the indicator. A false negative occurs when a detective control fails to signal a possible fraud when one exists. Reducing false negatives means increasing the fraud detection rate.

Similarly, the cost effectiveness of increasing preventive security has a limit as does the benefit of increasing the fraud detection rate. To increase the detection rate, it’s necessary to increase the frequency at which the detective control signals possible fraud. The result is more expensive investigations, and the cost of such additional investigations can exceed the resulting reduction in fraud losses.

As we all learned in undergraduate auditing, controls are essentially policies and procedures designed to minimize losses due to fraud or to other events such as errors or acts of nature. Corrective controls are merely special control types involved once a loss is known to exist. With respect to fraud, an important corrective control involves the investigation of potential frauds and the investigation and recovery process from discovered frauds.

More generally speaking, fraud investigations themselves serve not only a corrective function but also detective and preventive functions. Such investigations are detective of fraud to the extent that they follow up on fraud signals or red flags in order to confirm or disconfirm the presence of fraud. But once fraud is confirmed to exist, fraud examinations shift toward gathering evidence and become corrective by assisting in recovery from the perpetrator and other sources such as from insurance. Fraud investigations are also corrective in that they can lead to the revelation and repair of heretofore unknown weaknesses.

The end result is that the fraud investigation functions to correct the original loss, and the related discovery of the fraud scenario leads to prevention of similar losses in the future. In summary, the fraud examination has served to detect, correct, and prevent fraud. However, fraud investigations are not normally thought of as detective controls. This so is because fraud investigations tend to be much more costly than standard detective controls and therefore are normally used only when there is already some predication in the form of a fraud indicator triggered by a typical detective control. Therefore, the primary functions of fraud investigations are to address existing frauds and help to prevent future ones.

In some cases, the primary benefit of a fraud investigation might be to prevent future frauds. Even when recovery is impossible or impractical (e.g., because the thief has no assets), unwinding the fraud scheme may still have the benefit of leading to the prevention of the same scheme in the future. Furthermore, a company might benefit from spending a very large sum of money to investigate and prosecute a very small theft in order to deter other individuals from defrauding the company in the same way. Many State governments have statutes specifying that every fraud affecting governmental assets, whether large or small, must be fully investigated because taxpayer funds are involved (the assets affected are public property).

There is never a guarantee that investigating a fraud indicator will lead to the discovery of fraud. Depending on the situation, an investigation might lead to nothing at all (i.e., produce a reasonable explanation for the original red flag) or to the discovery of losses due to simple errors, waste, inefficiencies, or even uncontrollable events like acts of nature. If a lender is considering a loan application, a fraud indicator might indicate nothing, fraud, or an error. On the other hand, in regard to the possible theft of raw materials in a production process, a fraud indicator just might indicate undocumented waste or scrap.

Two important factors to consider concerning the general design of a fraud detection process are not only the costs and benefits of detecting, correcting, and preventing a given fraud scenario but also the costs and benefits of detecting, correcting, and preventing errors, waste, uncontrollable events, and inefficiencies in general. Of course, the particular costs that are relevant will vary from one type of business process to another.

As a general rule, we can say that both preventive controls and detective controls cost less than corrective controls. Corrective controls tend to involve hands-on, resource-intensive investigations, and in many cases, such investigations do not result in recovering the loss. On the other hand, preventive controls can also be quite costly. Banks pay armed guards and incur costs to maintain expensive vaults and alarm systems. Companies surround their headquarters with high fences and armed guards, and use security checkpoints and biometric key card systems inside. On the information technology side, firms use sophisticated firewalls and multi-layer access controls. The costs of all these preventive measures can add up to staggering sums in large companies. Of course, losses that are not prevented or corrected in a timely fashion can lead to the ultimate corrective measure: bankruptcy. In fact, some ACFE estimates show that about one-third of all business failures relate to some form of fraudulent activity.

One positive aspect of the cost of preventive controls is that unlike detective controls, they do not generate fraud indicators that lead to costly investigations. In fact, they tend to do their job in complete silence so that management never even knows when they prevent a fraud. The thick door of a bank vault with a time lock prevents bank employees from entering the building at night to steal its contents. Similarly, passwords, pin numbers, and biometric data silently provide access to authorized individuals and prevent access from others.

The problem with preventive controls is that they are always subject to circumvention by determined and cunning fraudsters. There is no perfect solution to preventing acts of fraud, so detection is necessary as a secondary line of defense, and in some cases, as the primary line of defense. Consider a lending company that accepts online loan applications. It may be difficult or impossible to prevent fraudulent applications, but the company can certainly put a sophisticated (and expensive) system in place to analyze applications and provide indicators that suggest when an application may be fraudulent.

In general, the optimal allocation of resources to prevention versus detection depends on the particular business process under consideration. So, there is no general rule that dictates the optimal allocation of resources between prevention versus detection. But there are some general steps that can assist in making the allocation:

1. Analyze the target business process and identify threats and vulnerabilities.
2. Select reasonable preventive controls according to the business process and customs within the client’s industry.
3. Estimate fraud losses given the assumed preventive controls.
4. Identify and add a basic set of detective controls to the system.
5. For a given set of detective controls, identify the optimal mix of false negatives versus false positives. The optimal mix depends on the costs of investigations versus the costs of losses. Large losses and small investigation costs favor relatively low false negatives and high false positives for red flags.
6. Given the assumed mix of false negative and false positive errors, estimate the incremental cost associated with adding the detective (and related corrective) controls, and estimate the resulting reduction in fraud losses.
7. Compare the reduction in fraud losses with the increase in costs associated with adding the optimal mix of detection and correction controls.
8. If increase in costs is significantly lower than the related reduction in fraud losses, consider adding more detective controls. Otherwise, accept the set of detective controls under consideration.

The Ideal Employee

It was late on a dark November evening in 2002 when the corporate counsel of the Victoria Paper Corporation contacted our Chapter member Jay Magret, CFE, CIA about a suspected irregularity involving the team of Tim Clark, the world-wide maintenance manager for Victoria’s most complex automated paper manufacturing equipment.

Clark had been hired after a long exhaustive search by one of Victoria’s many employment contractors, Global Image, Inc. Clark was hired to oversee the entire maintenance program at Victoria’s plants worldwide.  Victoria’s management was elated because Clark seemed ideal for the position, seemingly having spent half of his professional life providing automated systems savvy support to major paper companies around the world. He was used to working in foreign locals and had collected an array of impressive skills that enabled him to be appreciated as a through professional. Once hired, Tim requested four additional staff members for his unit, whom he said he personally knew, and contracted for through Global Image. The names and resumes of the four new staff members were subsequently provided by Grayson Employment, another job agency that also specialized in providing labor to the paper industry. Because the four new staff members were already registered in Grayson’s employee database and were explicitly requested by Tim Clark, Victoria and Global Image didn’t feel the need to complete the usual background verifications.

Such a chain of job agencies is common in the labor market: international paper companies, like companies in other industries, manage large projects in disparate, sometimes isolated locales around the globe, and they are stressed by production deadlines. Accordingly, companies find themselves continuously short on the highly specialized people who are qualified to manage and support such projects. Such international companies rely heavily on job agencies to provide contractors already skilled in the business and available to work in remote destinations.

When a business sector is booming, it becomes crowded with personnel interested in exploiting opportunity and, in the resulting complicated labor market, the temptation to cut personnel supply corners in response to tight deadlines often emerges. The result is that, with a plethora of job agencies providing labor, sometimes to a single project, the final employer sometimes doesn’t know with precision what the hourly fee paid to each individual contractor is after it is redistributed along the chain of multiple job agencies.

Under Clark’s direction, his team was charged with the ambitious task of assuring the continuous performance of maintenance activities at Victoria’s paper plants around the world. On paper, Clark’s team worked long hours each week and most weekends, sometimes flying throughout Europe and Asia with little rest. Each hour worked by a member of the maintenance team was certified and signed off on personally by Clark, on behalf of Victoria.

During their year-and-a-half of service, the four individuals hired by Tim Clark claimed to have worked an excessive number of hours, which triggered an internal review by Grayson Employment’s personnel management. During their review, personnel management found that the four employees’ employment files did not include appropriate identification documents. When the agency requested copies of their passports, the four employees immediately submitted their resignations, and soon after Clark did the same. The day after Clark resigned, Grayson contacted Victoria whose corporate counsel, alarmed, contacted our Jay Magret.

Setting to work immediately and working closely with Victoria’s auditors and the corporate counsel, Magret quickly uncovered evidence that Clark had falsified records and documents for three of the individuals on his team. It became apparent to Jay that those individuals were ghost employees; they did not exist. Clark had created fake resumes for three ghost employees, falsified contracts, signed time sheets, and forged the resignation letters. Further analysis showed that the fourth individual did indeed exist, was related to Clark, and had collaborated on the scheme. Clark and his accomplice had to work hard to carry out the duties of four employees.

Jay’s analysis also showed that Omega’s employee interviews were sometimes conducted solely by line managers involved in the hiring process, without the support of the Human Resources Department. The same line managers were then responsible for certifying the time sheets of their employees, including contractors, while their identification documents weren’t systematically collected or retained. Moreover, the contracts and procedures in use didn’t clearly establish or document each step of the selection and job assignment process.

Magret’s final report specified that the fraud was possible, and profitable, because the paper company client paid the wages of each ghost employee through the chain of job agencies and directly into the accounts of the contractors, which were registered in the name of a private company and managed by Clark. By the time Victoria realized the scope of the fraud scenario with Magret’s help, Clark and his associate had already disappeared with more than a million dollars paid to them during their year-and-a-half scheme. The paper company later discovered that even Clark was not who he claimed to be. He had used a fake identity and was untraceable, leaving little to no chance of recovery of the stolen money.

In response to management’s request that he proactively suggest controls to strengthen Victoria’s anti-fraud program, Magret suggested, as a matter of normal practice, that:

–Companies should perform time assessments to ensure they know how long a job will take to complete.

–Strict procedures should be in place during the hiring process, especially regarding segregation of duties. Human resources should always be involved in the process and responsible for checking identification documents with the physical person.

–The company should limit the opportunity for line managers to recommend hiring people they know. In some cases, it is unavoidable, so managers should always try to guarantee a higher level of segregation, especially in the authorization of time sheets.

–When using a job agency, the company should be sure that the relationship with contractors will be directly between the company itself and the agency. By doing this, the company will save money and be more assured about the contracted personnel.

— Client inhouse auditors of the personnel function should perform a periodic analysis of office records by selecting a sample of employees and verifying their effective presence in the office or on the job site, making sure appropriate identification is included in their records.
–Excessive hours claimed is as a red flag, especially when it is common among off-site employees. Establishing key performance indicators for each department or business process can serve as a reference for red flag comparisons.

–A wide-ranging and fragmented work environment can make the ghost employee phenomenon possible. A strong internal control framework and strictly enforced personnel policies are the only ways to prevent and discourage this type of fraud scheme.