Employee Screening: Leave No Stone Unturned

Editor’s note: The following article excerpt is from our latest Fraud 360 magazine (Issue 1 2015)

 By Zafar I. Anjum

As a longtime contractor for a small construction company, “John” was like a part of the family. In fact, it was a family business, owned by two brothers, and they had met John through a fundraiser held by their children’s school. An accountant, John handled most of the bookkeeping during a time when business was growing and the company, “ABC Enterprises,” added more clients — and consequently, more staff.

Over a period of about two years, ABC formalized some of its hiring policies and implemented a background screening process for new, full-time employees. The measures were recommended by a consulting company that had identified vulnerabilities to fraud and other unethical actions, and the brothers were quick to embrace the suggestions. They didn’t want to fill any positions at ABC with someone off the street who might have something to hide.

Meanwhile, John continued his work on a part-time basis and enjoyed a good relationship with the brothers and most of ABC’s staff. Though he didn’t work in the office, he was invited to holiday parties and had, on several occasions, gone to dinner with the brothers. The only mild complaint about John, in fact, was that he was only a part-time employee and business was stacking up — there were invoices to handle, checks that needed to be written. There were times when John was simply unavailable, which was understandable given that he was only supposed to be a 20-hours-a-week employee.

The Brothers Make an Offer

To solve this dilemma, the brothers presented John with an offer for a full-time position. To come aboard as ABC’s controller, he would be given a generous salary, and would be free to keep his private business on the side, if he wished. John agreed — he knew the company was growing, and he felt that in time he might even rise to having an ownership stake. The brothers were relieved, as they’d been worried that John was too happy with his part-time flexibility and would decline their offer. Had he been unwilling to go full-time and help them get on top of the growing workload, they knew they would have had to replace him altogether.

Instead, in John they kept a longtime, trusted employee in the fold and they formalized his new position quickly. Human resources updated his paperwork and the brothers agreed that there was no need to drag the process out — in case he might change his mind!

John settled into his new job and the company kept expanding — but it was showing some growing pains. Payroll rapidly expanded. Problems with vendors left a lot of payables outstanding. Within a year, profits had sharply decreased and the brothers started looking hard at ways to make the business more efficient. John was always helpful with suggestions and always seemed to have a resolution for any financial problem that would arise, but it always seemed that a new problem would pop up in its place. Nearly two years after John accepted his full-time position, ABC was officially losing money. The brothers were exasperated. A recent audit hadn’t discovered any serious regularities, but it noted some control deficiencies that were problematic. Some of them led straight to the accounting department. John handled most of the responsibilities aside from some purely clerical tasks. In fact, the audit noted there was very little separation of duties and John had overlapping control over different functions including check signing, bank statement reconciliation, approval of purchase orders, etc.

Searching for Clues

Concerned, and desperate to stem their increasing losses, the brothers started staying after hours to pore over ABC’s paper-work. They weren’t sure what they were looking for, and couldn’t be sure that they would know it if they found it. But immediately, one of the brothers pulled a stack of invoices out and couldn’t make sense of half of them.

Read the full article and learn the rest of John’s story in Fraud 360 magazine. Just sign in (for free) to subscribe and get immediate access to the online version.