Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Management responsibility for employee fraud

employee fraud, theft

Should management be held responsible for employee fraud? If British Prime Minister David Cameron has his way, they will be. England is considering expanding its “failure to prevent” law which currently covers bribery and tax evasion. Serious consideration is being given to include a wider range of crimes committed by employees, including money laundering and false accounting.

While speaking at an anti-corruption summit, Mr. Cameron spoke of a new law widening the scope of executive responsibility. Attorney general Jeremy Wright spoke at the Cambridge Symposium on Economic Crime about the intention of the government to promote a culture of corporate responsibility.

So should management be held responsible for actions of employees? Maybe. Management is responsible for setting the “tone at the top”, appropriate corporate culture and putting systems and controls in place to deter fraud. If management sets a tone that cultivates opportunities for employee fraud, then they should be held responsible when frauds are committed. A very recent example of corporate culture or “tone at the top” can be seen at Wells Fargo. The creation of thousands, if not millions of fake accounts by the sales force is largely thought to be a result of the bank’s high pressure sales environment with unrealistic goals leading employees to manufacture accounts in fear of losing their jobs. And workers who tried to report the improper sales tactics were fired, presumably in retaliation. The CEO, John Stumpf, has taken early retirement as a result of the scandal. Some might say that isn’t enough.

The 2016 Report to the Nations by the Association of Certified Fraud Examiners (ACFE) indicates that $3.7 trillion (yes, trillion with a “t”) is lost every year to fraud. Prevention, deterrence and detection all starts with management. Companies should be educating both management and employees about the risks of fraud and taking steps to prevent its occurrence.

International Fraud Awareness Week is November 13 – 19, 2016. Take a minute to think about how much $3.7 trillion is and what steps your organization or your clients should be taking to limit that amount.

Melissa E. Loughlin-Sines, CPA, CFE, CVA, CFF, ABV