Prevention is Better Than Cure Handling Corporate Fraud
Best practices for employers and human resources professionals to prevent, detect, and handle corporate fraud. Verity Consulting Limited is a corporate investigation consultancy based in Hong Kong providing a wide range of investigation and intelligence solutions to large and small corporations with extensive experience and networks operating around Hong Kong, Greater China and the Asia Pacific region. Learn more about us at: Website: www.verity.com.hk LinkedIn: www.linkedin.com/company/verity-consulting-limited Facebook: www.facebook.com/VerityHK Google+: plus.google.com/+VerityHK
Published on: Mar 4, 2016
Transcripts - Prevention is Better Than Cure Handling Corporate Fraud
Prevention is Better Than Cure:
Handling Corporate Fraud
By Kelvin Ko, Managing Director, Verity Consulting Limited and Andy Cheung, Founding Principal, MAWSL Consulting
Original article contributed to Human Resources Magazine for October 2013 issue
Corporate fraud is a major concern for organisations worldwide. Prominent fraud cases and recent strict anticorruption regulations (eg the Bribery Act in the United Kingdom and the Foreign Corrupt Practices Act in the
United States) have increased business leaders’ awareness of this problem. The need to implement and
enhance internal controls, especially in Hong Kong, is hence more critical than ever. HR professionals, in
particular, play a crucial role in detecting and preventing fraud during the recruitment and assessment
process, as well as enforcing ethical policies in the workplace.
Consequences of fraud
A typical company loses 5% of its revenues to fraud
each year, a 2012 Report to the Nations on
Occupational Fraud and Abuse estimated. This was
conducted by the Association of Certified Fraud
Examiners (ACFE), a global anti-fraud organisation
based in the United States, which studied 1,388
cases of global occupational fraud in 94 countries
between January 2010 and December 2011.
Besides, more than 20% of the fraud cases studied
caused losses of more than US$1 million and about
40% of the victimised organisations could not
recover the losses. The report also found that
asset misappropriation schemes were the most common type of occupational fraud, comprising 87% of the
cases reported to the ACFE. Companies seldom recognise the seriousness of corporate fraud and its impact
until it occurs. Other than monetary implications, other serious damages include reputation loss,
stakeholders’ loss of confidence and legal liabilities.
For example, in a recent corruption case, the Chinese subsidiary of GlaxoSmithKline (GSK), a British
pharmaceutical giant, allegedly set up a bribery scheme that involved £320 million in cash to facilitate GSK
drug sales in mainland China. Sexual favours were made to doctors there in exchange for prescribing the
company’s products to customers. Slush funds were created by falsifying expenses for conference meetings
paid to colluding travel agencies, so that the generated funds were used to bribe the doctors. As a result, the
price of GSK drugs went up by 30%. This scheme, undoubtedly, damaged the reputation of the organisation.
Fraudulent acts do not only occur in multi-national companies. In another case, a Hong Kong business lost
thousands of US dollars because of employee fraud. What happened was that its marketing executive got his
wife to set up a shell company in order to pocket money siphoned away from the business. The shell
company, which had the same name as a service company with whom he signed a contract, offered services
that were twice more expensive than that of the actual service company. This way, the employee cashed the
Another Hong Kong case involved information leakage and clients stealing, other common types of fraud. An
account executive working for a small office of a Europe-based company stole his company’s suppliers and
clients information in order to set up his own business and sell similar items (ie home decorations) at a lower
price. As he was in charge of finding suppliers in mainland China and ship products to Europe, he took
advantage of confidential information he possessed. The employee notified his employer’s suppliers and
clients of the company name change so that they continued to supply the products to his own company and
conduct business with him.
It is key that a company is attentive to questionable behaviours and typical frauds. Corporate frauds could be
committed by employees irrespective of their level and length of service, which is why HR professionals
should not overlook the fact that fraud can be committed by top management or staff who are typically seen
as being loyal. In addition, most employees who committed fraud are first-time offenders.
Common behavioural warnings include:
1. working odd hours (before or after regular office hours) without heavy workload or urgent tasks;
2. excessive complaints or constant dissatisfaction with the company;
3. leading a lifestyle that is suddenly above the employee’s means;
4. personal problems such as debts, gambling addiction or alcohol abuse;
5. regular by-passing of corporate rules and procedures;
6. over-protective attitude to key documents or data; and
7. lack of segregation of duties (eg an employee responsible for purchasing a product should not be
responsible for its payment).
Below is the ACFE’s list of the four most common types of corporate fraud in Asia Pacific.
1. Corruption or abuse of power for personal (or third parties) gain
It includes conflict of interest (ie when an employee’s personal and professional interests or loyalties are at
odds with each other). For example, an employee favours a supply company that is owned by his/her relative
rather than another supplier of the same quality and price. Corruption also comprises bribery (ie giving
money or gifts that may change the recipient’s behaviour). For instance, an employee accepts lavish gifts
from a vendor in order to secure the vendor’s partnership with the employee’s company.
2. Billing and expense reimbursements
Billing refers to manipulating the company’s payment system to make fraudulent payments. For example, an
employee submits an invoice to reimburse the purchase of personal items. Expense reimbursements refer to
inflated or false claims for reimbursement: eg an employee submits expense claims for nonexistent meals
and transportation fees after a business trip.
3. Non-case misappropriations
For instance, an employee sells noncash assets, such as scraps from the business’s warehouse, for personal
This refers to the stealing of cash from the company before it is registered in the books. For example, an
employee keeps for himself/herself money that he/she obtained from a customer without notifying the
customer or the company. It should be noted that this type of fraud does not include straight theft from an
organisation by employees, such as stealing stationery or other physical assets.
HR’s role to mitigate the risk of fraud
It is crucial that HR professionals implement and enforce a comprehensive internal control framework, which
requires the collaboration of all business units. They should:
1. Foster an ethical culture
A well-crafted code of conduct is useful only if it is enforced at all levels of the organisation. HR
professionals, with the support of business leaders, are thus advised to instil ethical values in all staff,
including top management and encourage high standards of behaviours.
2. Develop recruitment and promotion policies
The hiring process should detail the criteria prospective employees have to fulfil before they can be part of
the organisation. First, it is critical that HR professionals get the applicant’s authorisation to conduct a
thorough pre-employment screening so as to avoid potential legal liabilities related to privacy infringement.
The pre-employment screening process – required for all levels and positions – should include a proper
résumé verification and reference check. It is recommended that HR professionals find out the reasons for
employment gaps and pay attention to the applicant’s previous responsibilities and positions, and academic
certificates. It is especially important to do so for candidates with overseas professional or academic
experience as the given information is more easily falsified.
HR professionals should then conduct a reference check. They are advised to collect at least three references
with all the necessary contact details (ie name, title, phone numbers and email) to speed up the process. HR
professionals could also contact former supervisors or hiring managers to cross-check data.
A more advanced level of screening for senior management or sensitive positions comprises collecting
information to determine if the candidate can be a potential threat to the company. Such information
includes previous situations where the applicant faced conflicts of interest, past litigation or bankruptcy cases
involving the applicant, and also his/her financial credibility and reputation amongst former colleagues and
Integrity interviews are also an effective tool to assess an individual’s honesty and integrity, which are
qualities needed for sensitive and senior positions. HR professionals could ask the interviewee to refer to past
experiences during which he/she had to face an ethical dilemma at work. They could also ask the candidate
to refer to a situation in which he/she admitted a mistake to a colleague. Although such answers do not fully
help in determining the trustworthiness of the person, it shows to a certain extent how he/she regards
One should bear in mind that employment screening is a continuous process: it should not end after a job
applicant is hired. HR professionals are advised to re-screen an employee whenever he/she changes positions
or is promoted within the company, as they have access to his/her confidential data.
3. Take advantage of exit interviews
Information gathering about ethical issues in the workplace should be included in exit interviews as a final
compliance check. It provides HR professionals the opportunity to learn about unreported wrong-doings or
unethical behaviours internally or externally with business partners. HR professionals could ask exiting
employees whether they want to report co-workers’ suspicious behaviours at work or if they witnessed
stealing, for instance.
4. Train and educate staff
Training on corporate ethics can foster a moral and responsible workplace. It enables employees to better
understand the company’s policies, ways to handle unethical situations and behaviours, and raise concerns.
Training should also be part of the on-boarding process to ensure that the code of conduct is understood and
taken seriously. In addition, HR professionals could send periodical reminders (corporate circulars and
emails) or updates to employees on corporate ethics, and organise regular courses on acceptable standards
5. Set up a whistle-blower hotline
Tips provided anonymously by staff are the best and most cost effective source of fraud detection.
It is therefore recommended that HR professionals set up a whistleblower hotline to allow employees and
external stakeholders to report suspicious activities and share their concerns. Small businesses that lack the
resources to do so can set up an anonymous email reporting system or outsource this task to a third party.
6. Face external threats
Threats of corporate fraud can come from the outside too. As such, HR professionals could establish due
diligence procedures to carefully select vendors, customers and business partners prior to starting a business
relations or closing a deal. For example, they could train external vendors and inform them about the
company’s code of conduct as well as the consequences of fraudulent acts.
7. Establish an action plan
Since Since we cannot detect all threats, a specific protocol with appropriate measures should be developed
to keep fraud to a minimum. These include:
a. setting up a hotline (phone, or email for small companies) so that employees can report suspicious
b. making available professional contacts (eg legal, accounting, computer forensics and investigation) in
the company’s database so that they are accessible by all staff;
c. identifying key individuals in the organisation (ie HR Director, Chief Executive Officer, Managing
Director, legal counsel and corporate security) to report to in the event of fraud; and
d. creating a checklist of steps to take when fraud is detected, such as documenting the date and time
of the incident and providing details on the misconduct.
The supervisor of the employee who committed fraud, and the HR head should then evaluate the potential
impact of the fraud on the business and discuss whether the company has the resources to handle this
For example, if an employee commits asset misappropriation by forging his/her manager’s signature to
pocket HK$10,000 at a time, the estimated loss can be significant. Further investigation, with the assistance
of external professionals (ie legal and investigation teams) is thus needed to evaluate the total loss and
duration of the fraudulent activity, as well as any potential involvement of other employees. In contrast, if an
employee is suspected of pocketing HK$1,000 by claiming unjustified travel expenses, the impact may not be
as big and as such, HR professionals can take disciplinary actions.
Corruption Perceptions Index
Caring about employees
In the end, the best way to detect and
prevent corporate fraud is to express
appreciation and listen to staff to
better understand their concerns. Such
simple acts contribute to the upholding
of corporate values and discourage
employees from committing fraudulent
Source: Transparency International, Note: The Index ranks 176 countries.
From 1995 to 2011 - a scale of 0 (highly corrupt) to 10 (very clean), 2012 – a scale of 0 (highly corrupt) to 100 (very clean)
Facts and Data
• The top three factors that help to detect corporate frauds are employee tips, management review and
• The United States has the largest percentage of corporate fraud (57.2% of corruption cases reported)
followed by Asia (15%) and Europe (9.9%).
• In Asia, sales, operations, executive/upper management, purchasing and accounting are the
departments that deal with the highest number of fraud cases.
• Most corporate frauds are conducted by first-time offenders with clean employment histories.
• Small organisations (fewer than 100 employees) are the typical victims of corporate fraud as they have
less internal controls in place than their larger counterparts.
Source: Association of Certified Fraud Examiners 2012 Report to the Nations
Verity Consulting Limited is a corporate investigation firm based in Hong Kong providing a
wide range of investigation and intelligence solutions to large and small corporations with
extensive experience and networks operating around Hong Kong and Greater China.
Phone: (852) 2581 9696