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Employee fraud: ‘where there’s smoke, there’s fire’

By Dave Gordon, Contributor

Fraud is a potential hazard for any company, but once it’s discovered, it may not be the wisest course of action to immediately terminate the offending employee, Toronto forensic accountant and investigator Dave Oswald tells

“A company might let the suspected employee go — either with or without cause — or pay them to leave,” says Oswald, founder and owner of the white-collar crime investigation boutique Forensic Restitution. “And they think that will be the end of it, but most of the time, it isn’t.”

Though it might feel counter-intuitive, he says it’s better to keep the potential offender on the payroll.

“We’ve discovered that companies very rarely — from the outset — know how much has actually been stolen. What they have uncovered is normally just the tip of the iceberg,” Oswald says.

“In effect, by firing the employee, the business has removed a significant source of information. Once the person is gone, it’s difficult to ask them to come back and explain their actions. Often, it’s that explanation that will reveal important details about the fraud,” he says.

Instead, Oswald recommends placing the employee ‘on leave,’ and conducting a full investigation to find out exactly what’s been stolen, “and that’s when you interview the bad actor.”

Stories of massive fraud hit the news on an ongoing basis, suggesting that any company is vulnerable, he says.

In recent examples, a Global News report of a Winnipeg CFO who was arrested after allegedly defrauding a crane company out of millions of dollars, and a woman sentenced to three and a half years in prison for defrauding her insurance company employer of $1.3 million. And there are scores of others that occur on a yearly basis, Oswald says.

Forensic Restitution investigates these kinds of crimes, in addition to fraud detection and prevention, computer forensics, data analysis and recovery, insurance claims, and cybercrime, among other niches.

Oswald says it’s critical that employers act quickly once they suspect they’ve been defrauded by an employee.

“If you are going to make an insurance claim later, and you’ve known about the fraud and don’t do anything to prevent it, you may well end up not being able to claim for any amounts that were stolen from the time you became aware of the fraud,” he says.

Two pieces of advice are offered to mitigate risk — have a good tip hotline, and conduct fraud risk assessments, Oswald says. About half of frauds are uncovered through whistleblowers, rather than internal controls or external audits, he says.

Though whistleblowers aren’t always correct in identifying fraud, he says “Where there’s smoke, there’s usually fire.”

Statistically, fraud tends to hit more frequently in companies with fewer than 100 employees, because larger corporations often have better internal control and whistleblowing systems in place, Oswald says.

He says technology “has certainly enhanced the cycle of fraud,” where almost anyone can “phoney up’ bogus invoices with the right design software.

Moreover, some large frauds are never reported because the companies are afraid of what the incident will cost in terms of reputational damage, but that’s harmful in the long run Oswald says.

“If you fire a person, and don’t prosecute them, you are just passing that problem on to somebody else,” he says.

“If your financial director is stealing from the company, and all you do is fire him, he ends up getting a job as a financial director in another company, and starts doing the same thing there,” Oswald says.

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