How companies can protect themselves from senior level employee frauds

Published: September 12, 2019 12:22:10 PM

A white-collar criminal is predominantly described to be from mid-30s to mid-40s, who is associated with the finance department in a senior position and, has been employed with the organization for many years.

financial express, financial express opinionflexi staffing, workforce, formal job, financial express, financial express editorial, jobs, jobs growth, working age population, employment, ease of doing business, labour reformExisting risk management plans are perhaps outdated, or unable to tackle these frauds.
  • By- Deepak Bhawnani

The business landscape continues to change with the introduction of new processes and compliance requirements. Domestic and international entities operating in India continue to deal with traditional frauds like theft, diversion and bribery.

Existing risk management plans are perhaps outdated, or unable to tackle these frauds. Various surveys indicate that senior management was the most susceptible to commit fraud. A white-collar criminal is predominantly described to be from mid-30s to mid-40s, who is associated with the finance department in a senior position and, has been employed with the organization for many years. The individuals could be directors, shareholders or seniors with a high rank.

Senior management malfeasance usually comprises big-ticket frauds. They may have an annual salary of over a quarter-million dollars i.e. in crores of rupees, and thus the frauds they commit are large and result in huge losses for the company, both monetary and to the employer’s reputation.

While there are numerous ways, some of the more common frauds in India are:

Asset misappropriation

Senior management is entrusted with the management of the assets of their employer. An embezzler diverts some of these assets into their personal control. This is the most common as the individual, as an insider, knows better than anyone else on how to manipulate the system.

Systemic frauds 

These are when employees get a kickback from vendors in a systematic manner. Some could even have an undisclosed stake in the vendor entities. There could even be shell companies that exist on paper only. Billing can be systematic and under the radar, i.e. limits of approval.

Theft of trade secrets

Trade secrets include confidential business information which provides a business with a competitive edge over its competitors. These could be business strategies, proposals, databases, compilations, designs, devices, formulae, structures, new launch dates and more. Not all data falls under the law, especially if there are insufficient clauses in the employment contract.

How do you mitigate risks of such frauds?

It is important to have certain systems in place in order to lower the risk when it comes to frauds committed by the management. Here are some ways that companies can mitigate such risks:

Checks and balances

Proper checks and balances before hiring is a crucial step that must be undertaken. A strong internal check system for all employees, with special focus on the senior management, is the need of the hour. This includes comprehensive background checks, verification of facts, including professional qualifications and registrations, and intense evaluation of any anomalies in the application documents.

Levels of approvals

When it comes to financial approvals, the possibility of collusion remains, especially where a person who is more dominating or belligerent than the rest of the team. This dominant officer could intimidate due to the power vested and persuade clearance of inappropriate transactions by subverting the system. Levels of approvals for authorizations or expenses over a certain amount must therefore take this into consideration. Where appropriate,
board approval can be sought for higher expenses. Clear documentation and approval processes (different departments) can help avoid major frauds.

Lifestyle mismatch

Many frauds can be detected where there is a clear lifestyle mismatch between an individual’s known sources of income and his/her way of living. In fact, this method has been adopted by income tax officials in order to curb tax evasion multiple times in India. When it comes to senior management of a company, this is a good way of recognising a potential fraudster. Not everyone gets a significant inheritance!

Complaint Box

An external system where people are able to report anonymously can be beneficial for the company. In fact, some studies indicate 40 per cent of frauds are detected by anonymous tip offs. Employees may not be comfortable disclosing their identity for fear of repercussion, however, they will be freer to share critical information or evidence using another system, such as an external service provider contact number or email, or even a complaint box kept
outside of the internal CCTV system.

No Vacation: Warning bells

One might think that if a person never went on vacation, he/she is a workaholic and is committed to work. Think again! This could be a sign of fraud where the person is holding on to their home turf lest someone else figures out their malfeasance in their absence. In order to ensure that this does not happen, a forced two-weeks off with limited or no access can be made mandatory for senior executives. Companies will then know how things work in their absence. This is being followed in some companies in India. Employees of all levels are a critical asset to companies. An organization flourishes through their skills and abilities. However, some try to further their own interests at the expense of the company. Thus, having a strong system in place to mitigate and lower the chances of fraud by employees must be mandated by the owners.

  • Deepak Bhawnani is CEO and Founder of Alea Consulting. 

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