Does Your Business Rely on Luck to Uncover Employee Fraud?

Lucky in Fraud-WordsIn celebration of St. Patrick’s Day and with a nod to the Emerald Isle, some will wear green, some will eat corned beef and cabbage and many will go to the pub for a pint of libation (preferably green in color). All will be hoping for some ‘luck of the Irish.’

Hoping for luck on St. Patrick’s Day is one thing, but planning to rely on luck is especially unwise in the business world.

Luck doesn’t help you determine your marketing plan, your operating budget or your growth strategy, so why should it be the main method of detection for employee fraud schemes?

In the 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) estimates nearly half (approx. 45%) of the initial detections of fraud by employees is a matter of luck. This occurs in many ways, including happenstance, mistakes by the employee and unsolicited tips. While tips were the largest category reported by the ACFE, most tips were unsolicited and unanticipated – a lucky break for an employer losing money to a motivated employee with the opportunity to embezzle funds.

How could luck play a role in discovering employee fraud? In one case, an employee’s primary responsibilities included posting time and preparing payroll disbursement summaries. Because of weak internal controls, he was able to create non-existent employees (aka “Ghost Employees“), which would appear as actual employees on the company’s records and were issued paychecks. The fraudster would direct the checks to P.O. boxes he controlled; thereafter, he would retrieve and cash the Ghost Employee checks.

The fraud was uncovered during a testing of the payroll account. The fraudster had buried the Ghost Employees deeply into the system and consequently he was comfortable they would not be discovered. During the testing, the reviewer “got lucky” and discovered some phony documents created by the fraudster for filing in the Ghost Employee files. However, after the phony document discovery, it was realized that clues had been everywhere, such as arbitrary employee names, mis-matched social security numbers, and no taxes withheld for the Ghost Employees.

There are numerous ways to prevent and/or uncover employee fraud in the workplace which do not rely on luck. Many of these methods are free or cost very little for the company to implement.

One of the most important fraud deterrence methods is the “tone at the top.” The tone at the top has been described an “ethical atmosphere that is created in the workplace by the organization’s leadership.” Typically whatever tone is set by management will ultimately become the tone of the company and many of its employees. A groundbreaking study commonly known as the Treadway Commission found that “tone at the top plays a crucial and influential role” in creating the environment regarding fraud within a company. Whether highly ethical or not at all, employees will typically follow the lead.

Generally, in setting the proper tone, owners/managers should take, at a minimum, the following four steps to create an ethical climate within the organization:

  • Communicate what is expected of employees
  • Lead by example
  • Provide a safe mechanism for reporting violations
  • Reward integrity

The resulting ethical climate should minimize occupational fraud risk, and simultaneously increase the likelihood of discovering the occurrence of occupational frauds.

Having a plan to detect fraud within your company is always better than hoping a lucky break or tip reveals the problem. If you’d like help with a fraud checklist, contact Mike Rosten, CPA, CFE at or 702-384-1120.


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