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Whistle blowing

20th Apr 2012
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April 20 - What do you do about whistle blowing? And whistle blowers?

We have one at the moment. She's suggesting one of my managers is committing a fraud. I do not know if she's right. I do think she's of sound mind. I do not think the complaint is personal, per se, or a vendetta. and instinctively I want to think she's wrong and would, in a sense, rather not think about it. So I know my reaction to someone who I think is well motivated and who is doing the right thing is, I know, wrong.

And I know I will have to do something about it. The first thing is to meet her properly today. I'm suggesting it is about a piece of wrk for which she has responsibility, but for which I suspect anyone would know I don't really need to see her so I'm going to have to show undue interest in it as a cover. And even that shows just how hard this is.

Anyone got any experience or a policy on the issue? 

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David Winch
By David Winch
20th Apr 2012 10:39

A danger for your business in this situation if word gets around that something is amiss is that everyone feels somehow under suspicion (I would stress "feels" under suspicion rather than believing that actually they are).

That can be bad for the atmosphere within the working environment.

If, after your meeting, you think that further inquiries are necessary one option would be to call in the police.  But I would suggest you think twice - or thrice - before doing so.

It depends of course on how serious the alleged misconduct may be.

However if simply interviewing the alleged wrongdoer and asking him (if appropriate) to pick up his personal effects, resign and walk out of the door then and there is an option it may be the best option.  (You will need to check with your HR department regarding unfair dismissal etc of course.)

There should be two people (yourself and a note taker) on your 'side' at that interview.  No more than that - lest the interview itself be suggested later to have been oppressive and unfair.

If you do decide to call in the police then first suspend the alleged wrongdoer (on full pay).

But a speedy resolution of this is key, in my view.  Days not weeks!

David

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By alistair_king
23rd Apr 2012 10:35

From past experience...

What is the nature of the fraud?  How compelling is the evidence? Is it direct evidence or circumstantial or hearsay? Is it something that could be potentially innocent but have been misunderstood by the employee blowing the whistle? Do you need further evidence?

Investigate quickly but discretely. If the manager is innocent you do not want them to feel under suspicion for any length of time, and you want to avoid making other employees feel uncomfortable or under suspicion.

If the fraud is real you want it closed down immediately. Follow David Winch's advice for dealing with the individual. No matter how small the amount, never keep an employee who has committed fraud - trust has been breached.

Preventative maintenance - Do you have a written ethics policy? Does it clearly define what is acceptable/unacceptable behaviour (including fraud, improper payments, etc.)? Do you make all employees read and sign it?

Several of the possible sources of evidence I list below are self-evident and I assume you would follow up, but some may be new to you or to blog readers:

Where you have false invoices or expenses or similar frauds then analysis of invoice total first digits using Benford's law could provide supporting evidence - e.g. invoices totalling 0.19, 19.99 and 199.99 all have first digit 1 and you should have a certain proportion of first digit 1's in the population (usually around 33%). Fraudsters rarely follow the natural probability distribution for first digits because people often follow a pattern and favour certain numbers when they are making things up even if they think they are being random - usually whatever number is close but below their personal authority limit. You can find the probabilities for each digit on the internet. I've used it to find fraud by homing in on suspect invoice patterns and it really works.If you are looking at kickbacks

Is there an trail in company email (you'd expect fraudsters to be careful and avoid this but I came across an example very recently). You might also find such a trail for or improper sharing of proprietary information.

Do any suppliers (or their registered offices) share the manager's home address? You can find this by comparing AR records to HR records.

Is there a pattern of regular sales credit notes to a particular customer?

Fictitious employee - I assume your company is small enough that you know everybody, but if not, count headsPetty cash - reconcile. Don't accept IOUsAR - Teeming and lading - In AR you'd be looking at somekind of kickback to the manager from a problem customer for taking cash from a good payer to hide the problem customer's failure to pay - you would see journals switching amounts between customers.AP - Teeming and lading or missing credit notes - Assuming you pay suppliers monthly - do you have any suppliers with 4 payments a quarter? Did all four payments go to the supplier? Or do 3 go to the supplier and the 4th to the manager? For missing credit notes fraud, the invoices are recorded in the system but credit notes are kept outside it. The correct amount due is paid to the supplier (net of credit notes) and then the amount of the credit notes is then taken by the fraudster. For teeming and lading - are there sub-ledger journals switching amounts between real suppliers and a fictitious supplier? You can also find these by carrying out supplier statement reconciliation. (morbid aside - When I was an auditor a colleague of mine saw a client's FD drop dead from a heart attack when asked to explain a series of unusual subledger entries - a list of the same entries was in the FD's pocket - it was his fraud)What is this manager's vacation pattern? This is more circumstantial - often (but not always) an individual committing fraud will feel a need to keep it under control and becomes afraid to take more than 1-2 days vacation at a time.

PS - if AM is still reading this blog she now knows there is suspicion of fraud within the company...

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