How to stop your business hiring a fraud

Kate McNab thought everything was going to plan. Her sales and marketing business Comunicom was performing well, and customers were rolling in.

Then everything came to a halt when an employee stole nearly $1 million.

“We almost went bankrupt. We sold investment properties to get money, we spiralled out of control. It destroyed us.”

McNab and her husband had known the bookkeeper for years, with no prior evidence of foul play. But things started to go amiss when McNab noticed some payments had been doubled.

“I checked some spreadsheets against what was actually being transferred, and there wasn’t a lot different. But some money was missing.

“When you’re supposed to pay $100,000, you won’t notice much if $102,000 comes out. But it creeps up over time.

“The big kicker was when one of my employees said their superannuation hadn’t been paid for the past few years. That was a real shock.”

McNab talked to her colleagues – including her husband – and decided to freeze the bookkeeper out of the accounts once they found out what was happening.

The entire incident was eventually uncovered, and the bookkeeper was jailed last year for three years.

The business is thriving now, performing better than ever – but McNab says it was a hard lesson to learn.

“One fraud expert we brought in after that told us that if the opportunity is great, the risk is low, and the reward is high, someone will commit fraud.”

Fraud is on the rise

Over the past few years there have been a number of major cases of fraud in businesses ranging from small to large – and in some cases having a devastating effect.

In the past year alone, a bookkeeper in South Australia stole more than $170,000 from a fisherman, and was jailed for two years.

The bookkeeper of a Hairhouse Warehouse franchise was sentenced to four-and-a-half years’ jail in August 2011 after embezzling nearly $1 million from the company over two years.

But even more disturbing is the number of businesses unwittingly hiring convicted fraudsters.

In February this year, it was revealed the woman at the middle of an alleged multimillion-dollar fraud at Visy had only been released from jail 18 months prior – where she had served time for another multimillion dollar fraud.

Damien James, chief executive of podiatry clinic Aged Foot Care, hired a man who had been convicted of fraud in the 1990s after failing to run the necessary background checks

“I was pretty young…and my attention to detail wasn’t the best back then. I was a young guy, focused on growth. I did overlook some things.”

So what can you do about it?

With the rise in fraud over the past few years due to the global financial crisis, plenty of employers have been put on alert to ensure their due diligence is being done properly.

But experts say they shouldn’t be doing this at the expense of a key role – hiring.

The hiring process is one of the most crucial in a business. Bringing on new members of the team can either make or break a business purely based on whether they’re a good worker or not, but add in potential fraud to the mix and it becomes an even more daunting task.

And as KPMG head of forensic accounting Gary Gill says, it’s a better time than ever to be diligent.

“Fraud has actually increased quite significantly in the past six months to December 2011. Now, whether that’s because of the greater level of economic uncertainty, it’s hard to say. But certainly it has increased.”

It all starts in the hiring process

Business owners that have been involved in fraud say it all began during the interview. Something either felt not quite right, or the owner said questions were answered in a way that sounded a little too much like a prepared speech.

“There was something in my gut that told me there was something not quite right,” James says. “He seemed to have answers for everything.”

Forensic accounting experts say they know of plenty of instances of fraud where the first signs occurred during the hiring process.

Kerry Irwin, head of human resources at the Australian Institute of Management in New South Wales, says the key here is the resume – a keen eye looks for anomalies, such as extended gaps, or departures from jobs without any given reason.

“The key is the resume, first of all. Are there gaps that are unexplained? Or don’t sound quite right?”

Irwin says some reasons are understandable, such as extended trips overseas, but others can raise suspicion. For instance, if someone moves interstate due to a radical change in profession. That can often be explained, but for some it may take a little more explaining.

James says one of the first warning signs he noticed was his employee had answers for everything. Almost as if the answers were rehearsed.

“From the perspective of someone who commits fraud, you would expect the person to be quite brazen and overly confident,” Irwin says.

“To hide some misdemeanours, that may have to be quite rehearsed in terms of their responses.”

As a result, Irwin says you need to probe an applicant about their prior jobs – especially the reasons they give for leaving.

“You need to ask people why they left an organisation, and under what circumstances. If they say something like they didn’t get on well with the CEO, that’s a little flag that should go up for you.”

“There are certain things they can imply that should give you warning. One of those critical questions you need to ask is why someone has left a particular role.”

Gill says it’s critical that you ask open-ended questions about why they left a previous job, and that you’re not afraid to back down.

“It’s always worth having them explain why they left. Probe around what they were doing.”

 Gill also points out something critical that many hirers overlook – you should call references, but not the ones listed on a resume.

“Look at a person’s CV, look at the references listed, but don’t be afraid to call up other people at those places of work to just have a chat.”

“Call the head of human resources, perhaps. You’ll be amazing sometimes at how much people are prepared to tell you.”

The background check blind spot

Of course, fraudsters have to start somewhere.

Kate McNab says had she run the necessary background checks on the staff member who stole $800,000 – nothing would have come up.

“She had access to all accounts. But she didn’t have any prior convictions, and none of those checks would have led anywhere. There really wouldn’t have been any sign.”

“It’s tragic. I do a lot of the books and transactions now. But if we were going to hire someone doing that again, we’d be much more stringent in that process.”

Forensic accountant Andrew Firth says this is a hard situation to navigate, but warns businesses they should go beyond the minimum when attempting to catch a fraudster.

Social media provides a great place to start.

“Social media is essential checking these days. Do your own background checks through Twitter, Facebook and all these other areas where people are giving out information online.”

“When you’re looking at these areas you can find something unusual or that will reveal more about a candidate’s true identity.”

While businesses may not be able to find fraudsters through a social media search, a quick trek through Google will surely find out if a candidate has any prior convictions.

“I know there’s debate around that, but social media brings up so much more information about the individual that you can’t find elsewhere,” says Gary Gill.

Some things are incredibly easy to check. For instance, Firth says you can always call professional associations to double check memberships.

“If someone says they are an accountant, then just check the membership is still current. It’s just one of those simple checks you can always do that won’t cost much time or money.”

And if someone does get to the interview stage, and you still feel nervous, Firth says you should take a lesson from some eccentric interviewers and throw subjects questions that may catch them off guard.

For instance, Google chief executive Larry Page asks interviewees to explain something – anything – in 10 minutes, giving them only a few minutes to prepare. It shakes off people who aren’t on their guard, and while Firth says you don’t have to go that far, you should try and catch them off-balance.

“Ask them random questions, ones that aren’t typical of an interview,” he says.

“Get them off their common ground, or give them a case study they have never seen before. Challenge them, or ask follow up questions. Don’t just accept the casual answer.

The other method, Irwin says, is making the person go through an entire example of a previous project, or interaction with other colleagues. Put them in a situation where you want to record their reactions.

“It’s very easy for a person committing fraud or intent on committing fraud to speak in generalities,” she says.

“Ask them about a project they did that went well. Ask about that project, why it was so good, what they contributed, and so on. It’s harder to give concrete examples.”

Due diligence never hurts

Despite all this, businesses are still hit by fraud every year. Gill says it’s worthwhile to diligently look at all those checks and balances you have in place to protect yourself and your business.

“There’s a greater level of uncertainty right now, and the question is whether there’s a higher level of fraud risk in this type of environment.”

“What often happens is that you have one person doing the jobs that two people did previously in a situation where jobs are being lost. The segregation of duties; that creates an opportunity for fraud.”

Firth says you need to share responsibilities as often as possible. Make sure more than one person has access to an account, double-check procedures and implement a structure where you’re notified of unusual activity in accounts.

“In small businesses, they typically don’t put these controls in. They feel they need to delegate more, but don’t have the controls in place to protect themselves.”

Both James and McNab say they’d do the same if they had their time over again.

“We don’t hire bookkeepers anymore. We have other admin who have been with us for years. We need two signatures to sign off on everything now,” says McNab.

“If we were ever going to hire someone in that position again, we’d be much more stringent.”