Paul Grewal thought something funny was going on when he looked over a client’s accounts and found numerous cash transactions with no back-up documents. Shortly after, a lunch meeting with the client’s controller set off even more alarm bells.
“He was bragging about buying a $2,500 massage chair and how he eats out all the time, so I started to wonder how he could afford such an extravagant lifestyle on his modest salary,” recalls Mr. Grewal, a chartered accountant in Surrey, B.C.. “It turns out he had been taking a lot of cash from the company.”
Mr. Grewal had uncovered a case of workplace fraud – an economic crime committed within a company, typically with an employee as the perpetrator and the employer as the victim.
A 2011 global survey by accounting and management consulting firm PwC points to the pervasiveness of workplace fraud: About 35 per cent of almost 4,000 senior executives surveyed said their company had experienced at least one case of fraud in the past year. Of the companies that reported fraud, almost 60 per cent said the crime was committed by an employee.
The Association of Certified Fraud Examiners in Austin, Tex., says organizations lose about 5 per cent of their revenue each year to fraud, translating to total losses worldwide of more than $2.9-trillion (U.S.). Small businesses are more vulnerable to fraud than medium and large companies, notes the association.
“The actual incidences and costs of fraud are probably higher than reported statistics would indicate,” says Pamela Murphy, professor of accounting at Queen’s University in Kingston, Ont. “Many cases of fraud go undetected and unreported.”
Ms. Murphy cites three main types of workplace fraud: theft or misappropriation of assets, corruption or conflict of interest, and fraudulent reporting. There are various reasons why employees commit fraud, says Ms. Murphy, including a desperate need for money, feelings of resentment against an employer, or just plain greed.
Many people who pilfer money from their employers don’t really believe they're stealing.
“In their minds, they're just borrowing the money and have every intention of putting it back,” says Ms. Murphy. “Besides, they're only ‘borrowing’ a small amount; except, of course, we know that most frauds start small and pretty soon, they're in too deep and now they have no way of returning what they took.”
In some cases, intense pressure to meet business targets have driven managers to fudge their department’s results. Bonuses tied to performance can also increase the temptation to falsify business reports, says Ms. Murphy.
“People often jump to the conclusion that someone who has committed fraud is inherently evil,” she says. “I think most people are good people but, in my view, what happens oftentimes is situational factors come together that cause an otherwise good person to commit an act of fraud.”
These situational factors can include a poor workplace culture – typically, where employees feel they are not treated fairly – and a lack of internal controls against fraud. Chartered accountant Sarah MacGregor, director of forensic services at PwC Canada, says there are a number of steps companies can take to protect themselves against fraud.
As a starting point, companies need to have a good understanding of which areas of their business are particularly at risk for fraud. Functions that deal with cash carry the highest risk, but other areas such as warehousing, intellectual property management, and financial reporting are also vulnerable to fraud.
Once they’ve identified at-risk areas, companies need to put fraud safeguards in place. A good rule of thumb, says Ms. MacGregor, is to segregate duties within these areas to avoid putting control in the hands of one person. For example, in accounting, ideally three different people should handle bank reconciliation, bank deposits, and recording of the bank deposits. In the warehouse, the person who oversees the day-to-day operations should not be same person in charge of inventory audits.
