Legal Briefing

Tackling workplace fraud

The In-House Lawyer Logo

Ireland | 01 April 2010

Up to 5% of a firm’s annual turnover may be lost through fraud in the workplace and, according to a recent survey, at least 70% of that fraud is perpetrated by employees. What may surprise many is that most corporate fraud is not billion-euro embezzlement by top directors, but is committed by ordinary workers who never imagine that their actions could be seen as fraud.

‘Padding’ expenses and overtime, theft of office stationery, and even the popping of personal mail into company post, is thought to cost UK companies £15bn annually. There is every reason to assume that the cost is similarly high in Ireland and elsewhere.

What steps can employers take to prevent fraud?

Employee education is crucial. Employers need to explain to workers the nature of fraud, demonstrating how costly such activities are, and the threat that they pose to the organisation’s profits, to its reputation and, ultimately, to job security.

This approach can go a long way toward reducing casual fraud but, in addition, employers need to develop strategies so that fraud can be detected early and stopped. In the same way as employers identify hazard points in a manufacturing process, they must identify situations where financial and product misappropriation is possible. Eliminating opportunities to commit fraud, and creating a culture of non-acceptance of fraud and dishonesty in the workplace, can make a big difference. Reinforcing that financial misconduct, however minor, will not be overlooked or tolerated is crucial to overcoming the problem.

Hiring to avoid firing

While the systematic checking of stock levels, customer payments and supplier invoices can reduce fraud, heavy-handed monitoring of staff can cause resentment and be counterproductive. A more effective way of tackling fraud is to hire workers who are unlikely to commit an offence in the first place.

The Irish workplace is highly regulated by law, and it can be difficult and time-consuming to fairly dismiss an employee who is suspected of committing fraud. Therefore, careful recruitment is the first line of defence.

Certain simple actions should always be taken at the recruitment stages and, where appropriate, when existing employees are being promoted. These include:

  • An application form should be provided for every job vacancy to supplement or replace the need for CVs. The forms should contain a declaration to be signed by the job applicant, confirming that the information supplied is correct and acknowledging that if the information later turns out to be false, disciplinary action may be taken.
  • Proof of qualifications, eg degree or training records, and even proof of address should be obtained to ensure that the job applicant is who or what they claim.
  • Job applicants should be asked to ‘self certify’ that they have no criminal convictions or charges pending against them.
  • Sources such as Stubbs Gazette can be checked to ensure that the potential employee has had no significant debt charged against them that could supply a motive for fraud.
  • References should always be checked. It is estimated that fewer than a quarter of employers verify references consistently.

Contracts of employment

Employment contracts should expressly prohibit fraud in the workplace, and should require employees to report actual and suspected fraud.

Template contracts of employment and employment policies should be regularly reviewed to ensure that they take cognisance of any changes in the law or practice within the organisation.

Detailed policies in relation to claiming expenses and any other matter where fraud will easily occur should be given to employees. The employer must ensure consistent compliance with these procedures.

A Compliance Officer

Consideration should be given to appointing a person to monitor and audit anti-fraud measures. This person can also be designated as the person to whom employees should report any suspicions of fraud. While there is still no general application for whistleblowing legislation in Ireland, several large organisations have express ‘speak up’ policies to provide detailed information and guidance to employees who suspect fraud and who wish to report it to management.

Dealing with suspected fraud

Adhering to fair disciplinary procedures in dealing with suspected fraud is a legal requirement, but research also shows that where an employer deals with fraud fairly and quickly, employees are more likely to report fraud in the future. Whether or not an employer has its own disciplinary procedures, careful regard should be paid to the terms of Statutory Instrument 146/2000. This is a code of practice with respect to disciplinary and grievance procedures, and an employer must ensure that the procedures it follows do not fall below the standard set out in the code of practice.

Acting rashly and failing to abide by fair disciplinary procedures, on the other hand, leaves the employer exposed to potential litigation, particularly under the Unfair Dismissals Acts 1977-2007. If an employee loses an unfair dismissal action, the employee can be awarded redress of up to two years’ renumeration and/or could obtain reinstatement or re-engagement.

Investigation

Where there is a suspicion of fraud, immediate steps should be taken to investigate. The investigation should be conducted by an appropriate person within the organisation, who can be seen as being unbiased and objective.

The employee under suspicion must be informed of the allegations and how the investigation will be conducted. The employer may consider suspending an employee pending the investigation’s outcome, depending on whether or not the employer has a contractual entitlement to do so and depending on the seriousness of the fraud. If the employee is suspended while the investigation is ongoing, the investigation should take place as quickly as possible and the employee should be kept on salary so that the suspension is not seen as prejudging the issues. The Irish courts tend to draw a distinction between two types of suspension: punitive and holding. This was illustrated by Barr J in Paul Quirke v Bord Lúthchleas na hÉireann [1988] where it was said that a suspension can be a ‘holding operation’.

The response of the employee to the allegation of fraud must be sought, but impromptu verbal confrontations should be avoided. Instead, the employee should be invited to a disciplinary meeting under the company’s disciplinary procedures. The employee’s attendance should be requested in a letter that includes an outline of the employee’s legal rights and the nature of the allegation. Under the code of practice set out in Statutory Instrument 146/2000, the employee is entitled to be accompanied to a disciplinary meeting by a trade union official or colleague.

Disciplinary action

Following the investigation and disciplinary hearing, the employer will decide on the appropriate action to take. This may include the termination of the employee’s contract or a disciplinary warning.

Warnings should always be recorded in writing and the employee should be made fully aware of the consequences of repeating the conduct that gave rise to the warning. Moreover, warnings should be expunged from the employee’s record after a specified time.

If the employer decides on dismissal, it is vital that the correct procedures have been followed during the investigation and hearing. Also, the employer should be confident that dismissal is a proportionate and fair penalty. If the employee has an otherwise clean disciplinary record or if they have explained that there are mitigating circumstances, dismissal may not be appropriate.

A significant issue with fraud investigations, particularly where the issues involved are complicated, is that they can become protracted and go on for so long that the employee submits that their rights under natural justice have been infringed. It is vital that an investigation is thorough, but also that it is concluded as quickly as possible.

Involving the police

If the suspected fraud is serious, the involvement of the police may be appropriate. In such a situation, the police should be contacted early, as even well-conducted workplace investigations can run the risk of unwittingly damaging evidence and compromising a prosecution. This is indicated by the fact that less than 10% of all workplace frauds lead to a successful prosecution.