Employee Investigations: Does It Pass the Smell Test? Part 1

Red flags during employee investigations usually confirm that the milk is spoiled.

history of interrogation, employee investigations

When it comes employee investigations, sometimes the “smell test” will just not let you rest. You know, those situations when you listen to a story or a business practice, and something just plain stinks. On the surface, nothing appears to be wrong, but there is a smell just below the surface that makes you think, “This is spoiled milk.” We don’t have to taste it to know that it’s bad. A quick sniff, a glance at the label on the side of the bottle, the floating lumps, and our decision is made.

Our last several cases failed the smell test because there were so many red flags. There were problems and circumstances that should have been further explored, yet they were overlooked. Occasionally, the smell test is wrong. But over the years, we have seen that when the red flags appear, they consistently confirm that the milk is spoiled.

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Let’s take a look at the red flags we have found to be most useful in ferreting out the dishonest employee. When reflecting on our interview and interrogation techniques, we should note that there are great differences between an employee who is a thief, and one who is a fraudster or embezzler. While both types may be stealing from the organization, their methods are often different, as are the red flags indicating dishonesty. Part One of this article series focuses on the employee suspected of fraud.

Lack of Internal Controls

Employee fraud can take many forms, from simple refund schemes to large-scale embezzlement to kickback cases. Fraud differs from simple theft in that it is intended to be an ongoing means to divert company money or assets. Fraud also tends to result in a larger dollar loss to the organization due to the duration of the activity.

A thief, on the other hand, often commits an impulsive act because circumstances allow him to do so. Regardless of whether we are investigating a simple theft or a complex white-collar scheme, there will be red flags indicating an investigator should take a closer look at the individual.

Large-scale frauds and embezzlements tend to be more costly to an organization because they remain in place, often diverting assets for years. Not surprisingly, we have found that some of the larger frauds occur in small businesses with fewer internal controls and audit structure. Those organizations that are in a growth mode where sales and expansion overwhelm the organization’s infrastructure are extremely susceptible to fraud. The seduction of increased sales often causes smaller organizations to leave behind infrastructure and controls during rapid growth, giving rise to the opportunity for fraud.

In many of the larger cases we have investigated, the fraudster was able to continue his scheme due to the lack of internal controls. Sometimes this was as simple as having one person responsible for both accounts payable and accounts receivable, allowing that individual the means to embezzle significant amounts of money.

Another case involved a company that allowed a father to supervise the first shift and his son the second shift with no additional office oversight. Since many of the employees were Spanish-speaking, the office personnel could not effectively communicate with the employees and had no idea who was working on either shift. The father and son handed out payroll checks at the end of each week to their employees. Office personnel later discovered by accident that the father and son had failed to mention that an employee had quit, leaving the men with the ex-employee’s check. Rather than turn the check back in, they took the check to a local bar and cashed it. As the scheme escalated over years, we found that 10 percent of the company’s workforce was part of a ghost payroll operation benefiting the father and son team. It was surprising no one realized that labor costs had increased so dramatically over the past several years, but good sales can cover a variety of problems.

Characteristics of Fraudsters

For a fraud scheme to work, an individual has to be able to manipulate accounting data or make decisions about purchasing or operations. As a result, most fraud schemes are discovered in the accounting function with management personnel.

One consistent aspect we have discovered over the years is the fraudster typically does not have a criminal background and has not been terminated for cause. Unlike the thief, this generally results in a longer-term employee who has successfully moved up the ladder with successive promotions and increased responsibilities.

Interestingly, the majority of our large cases were detected through a tip or by accident, rather than through internal audit. Some of these cases resulted in tips from another vendor or more often, from employees who had become suspicious of their coworker.

Age. The individuals involved in fraud, embezzlement, and kickbacks generally tend to be older, ranging from their late 30s to mid-50s. Many have been in the workforce for 15 or more years, successfully moving to positions with increasing responsibility until they reached the point where they could manipulate the organizational controls. Another common trait of these schemes is their duration. In most cases we have investigated over the years, the scheme lasted one to two years in duration before it was discovered.

Because the individual has successfully reached a position of authority, he (or, less often, she)  is typically married with children. In several cases, a spouse actively participated in the fraud by operating a front company that was used as part of a phony billing scheme.

Personality. The fraudster’s management style is often autocratic, with an “It’s my way or the highway,” attitude. They bully, demand, and manipulate their way through the business. Rules and controls are made for others. “I do what’s necessary to get the job done,” they say. Many of these people are master manipulators, turning conversations around, spreading rumors, stealing credit for another’s work, and convincing others to break the rules so “business can get done.”

In this person’s world, they are the sun, and the rest of us are minor planets revolving around their grandeur. Psychologists refer to these types as narcissists–the ultimate manipulators. They lack empathy and are so self-centered they feel entitled to act as they choose. They may butter someone up to get their way or guilt others into doing their bidding. They may bully or repeat a request over and over to get another to do something and then later selectively forget doing so.

In a recent fraud case, the senior executive scored “off the scale” on persuasion in his personality profile. But when you add a lack of empathy to that, persuasion becomes manipulation. He had gotten away with his tactics for so long he would look people in the eye and fabricate lies, believing no one would ever check. After all, they never had before.

Motivated by Greed

What is the primary motivation to embezzle or commit a fraud? Most often, it is simple greed. The greed motivation may manifest itself with several red flags. Since most fraud and embezzlement cases generate substantial amounts of money over time, the investigation should follow the money.

The investigation generally begins by looking at a net-worth computation that estimates the individual’s salary against expenditures. When the expenditures outweigh the person’s salary, there is another source of income in play.

Generally, this means that the fraudster is living beyond his means—one of the most common red flags associated with embezzlements, frauds, and kickbacks. This may reveal itself through lavish dinners, fine wine, multiple properties, frequent trips, or other lavish purchases. Sometimes the excessive spending will translate into financial difficulties that initiate the fraud or embezzlement. The person believes or has a perceived need for extravagant items, which push the employee’s financial situation into a difficult place that, in turn, motivates the establishment of the fraud scheme.

Added to the financial spending, many fraudsters have a wheeler-dealer mentality that encourages risk-taking behavior. Our investigations have revealed many instances where this wheeler-dealer personality manifested itself as a risk-taking gambler. While any gambler may have a string of wins, eventually the house recoups its losses, which contributes to the dire financial straits the fraudster has found himself in through his extravagant purchases.

In those instances where we have investigated collusion with an outside vendor or company, the losses have always been substantially higher. When collusion occurs, it is often the wheeler-dealer mentality playing loose and fast with the rules and internal controls that contributes to the decision to defraud the organization.

Fraud and long-term embezzlements often have a much higher loss than those caused by the simple thief. The red flags accompanying high-risk individuals have proved to be a good indicator whether to invest in what might prove to be a complex investigation. These individuals tend to be older, longer-tenured, possess a wheeler-dealer mentality, and a love for the good life even when they might not be able to afford the purchases. The first steps in developing our interview and interrogation techniques typically begin with the ability to conduct a solid investigation. Pay attention to the red flags, then have a good sniff at the business practices and decide whether the milk is spoiled.

Read Part 2 of this article series on employee investigations.

This article was first published in 2014 and updated April 26, 2017.


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