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Beyond the Pursuit of Justice – Employers’ Reactions to Fraud 

You have just found out that one of your most trusted employees or service providers has defrauded your organization. Before you jump into an investigation, you need to carefully consider your objectives and desired outcomes. Do you want to terminate for cause, attempt to recover funds through insurance or civil litigation or pursue criminal charges? The decision you make may very well depend on the organization you belong to and goes beyond the pursuit of justice. To many, it becomes a business decision.
Beyond the Pursuit of Justice – Employers’ Reactions to Fraud

The Alternatives

 

Upon the detection of fraud, representatives of an organization need to determine what course of action they are going to take to deal with the employee or service provider and the organization's losses. Courses of action that may be taken include the following:

 

  • Criminal complaint
  • Civil recovery
  • Insurance claim (if organization holds fidelity or crime insurance)
  • Termination (with or without cause)
  • Do nothing

 

These courses of action are generally not mutually exclusive and can often be pursued simultaneously. The evidentiary requirements to pursue criminal charges are much higher than for civil litigation or an insurance claim. An organization may find it will change its mind on the course of action it wishes to pursue as the investigation proceeds. It is therefore normally suggested that the investigation be conducted on the basis that evidence gained will be used in supporting a criminal complaint.

 

Factors to Consider

 

There are many considerations that an organization may take into account when determining alternative courses of action and the objectives of an investigation, such as:

 

General Considerations

Insurance Recovery

Civil/Criminal Litigation

The amount of financial loss will be a general factor influencing decisions on objectives and proposed courses of action

Does the organization have fidelity or crime insurance?

Civil or criminal processes  will usually be drawn out and lengthy, and may be costly

Does the wrongdoer have the financial resources to repay the loss, either voluntarily or as a result of successful litigation?

What is the policy limit and deductible relevant to a potential claim?

The fraud and surrounding circumstances may become public as a result of civil or criminal processes

If no ability to recover from the individual or insurance, justice may be pursued through the criminal process

Does the policy stipulate that civil litigation be started or a criminal complaint filed?

Publicity may have negative implications for the company and its business

If the organization does nothing, the individual will not have a criminal record and may defraud another organization

Does the responding policy cover some or all costs to investigate the matter including legal and accounting fees?

Publicity and criminal charges will be "attached" to the individual

Sympathy for the accused as they have a drug or gambling problem, health issues, or other personal consideration such as children to support

The insurance policy will usually include the insurer's right of subrogation and the insurer may, as a result, sue the wrongdoer

Will send a message to employees and stakeholders that fraud will not be tolerated

 

Actual Cases and Organizational Decisions

 

Some recent investigations conducted by KPMG (discussed below anonymously) provide insight into the decisions that have been made by some companies in the face of fraud.

 

Municipality

 

It was determined that an external service provider of a Municipality was supplying false information resulting in overpayments by the Municipality of approximately $300,000 during a four year period. Rather than using the funds for their intended purpose, the service provider used these funds for personal expenditures. The Municipality was able to recover the funds through a private settlement but it also used KPMG's forensic report to file a complaint with the police. As an organization in the public sector, representatives of the Municipality felt an obligation and responsibility to the taxpayers to bring this matter forward.

 

Financial Products Company


A large independent financial products company was defrauded for over $1 million by one of its top executives using false vendor accounts. As a result of pursuing civil litigation, an out-of-court settlement was reached and a significant portion of the funds were recovered. The employee was terminated for cause but no criminal charges were pursued. The company felt the damage to its public image would be too severe to proceed to a public criminal trial. In addition, the effort to continue with litigation would be time consuming and would distract from its current operations.

 

Credit Union

 

A full service credit union and its members were defrauded by one of its senior loan officers through unauthorized transactions exceeding $350,000 over a two-year period. The loan officer was known to be a "shopaholic" and was in a poor personal financial situation. It was realized that funds would not be recoverable from the individual. Therefore, recovery through insurance was pursued and was successful. In addition, the credit union made a criminal complaint to the police. The matter became known to many of the credit union's clients and members who had been severely impacted by the fraud. Management of the credit union believed it was their obligation to push for a criminal investigation and trial to provide satisfaction to those members who had been impacted.

 

This course of action was also intended to send a signal to the organization and its stakeholders that fraud is not tolerated. Since many of the credit union's members were already aware of the fraud, the board believed the criminal process would not create any further negative impact on the organization.

 

Non-Profit Charitable Organization

 

A charitable organization was defrauded by its Executive Director (ED) for approximately $200,000 in less than a year. KPMG's forensic investigation revealed that the ED had created unauthorized cheques and payroll payments (via unauthorized raises and bonuses) in her name and those of her family members. In addition, the ED used the organization's credit cards for personal items including air travel, food and clothing. The Board of Directors pursued criminal charges as they felt an obligation to the donors and stakeholders of the organization. In addition the board believed that a criminal record would prevent the ED from penetrating another organization.

 

City Employee

 

A city employee responsible for bank deposits and bank reconciliations defrauded the City for just under $11,000 by misappropriating cash allegedly paid for specific services during a two-year period. The City pursued and recovered most of the loss through an insurance claim. The City's insurance policy had a stipulation that it would only pay the insurance claim if either civil litigation or criminal charges were pursued. Council decided to provide KPMG's forensic report to the police in pursuit of criminal charges. Council's decision was based on its obligation to the public to pursue charges as well as prevent further costs to the taxpayers that would be incurred in civil litigation. Council also believed if criminal charges were not pursued and the alleged fraud was "leaked" to the public it could appear that they were "covering up" the incident.

 

Religious Organization

 

A bookkeeper defrauded a religious organization by transferring approximately $1.5 million of the organization's funds to her and her family's bank accounts. The misappropriation began two weeks after the bookkeeper started working for the organization and was concealed through false bank reconciliations and forged documents. Approximately $600,000 was used to build a large home. Through civil litigation, the organization quickly gained control of the house and recovered some of its loss from the sale of the home.


Additional recoveries were obtained through the organization's fidelity insurance. Due to the betrayal of trust, the organization also pursued criminal charges and two years after the forensic work was completed, the bookkeeper was sentenced to three years in prison.

 

Private Trucking Company

 

A member of senior management defrauded the company of $900,000 over a four to five year period. Initially management wanted to report the fraud to the police and have the necessary forensic work to support criminal charges. However, management became concerned about the fraud becoming public through criminal court proceedings. Management's concern stemmed from the belief that its suppliers and customers would think the company was too profitable (and demand better rates) since the misappropriation went without detection for such a long time. In light of this concern and the fact that there was little expectation of getting any of the money back, the company decided not to proceed with civil litigation nor a criminal complaint and took no further action.

 

School Board

A whistle-blower alleged that the manager in charge of a school board's prepaid money card system had been loading

non-existent money onto the card in the names of fictitious students. The fraud amounted to approximately $30,000. The school board reported the fraud to the police who used KPMG's findings as part of the criminal investigation. The manager pled guilty and was terminated for cause by the school board. The manager later repaid $50,000 to the school board to cover the fraud and a portion of the school board's costs. The judge took this into consideration and did not sentence the manager to any incarceration time.

 

Hospital

 

A clerk in the finance department of a hospital defrauded certain employees out of $400,000 over four years. The clerk was able to deposit cheques payable to other staff into her own bank account. This went unnoticed by both the bank and the affected employees for an extended period of time. It was obvious that the clerk lived beyond her means by the house and amenities she owned but it was believed by most that she had family money. Once the fraud became apparent, the clerk was immediately terminated and the police were contacted. In order to repay the funds to the rightful owners, an insurance claim was filed and recovery was provided. The investigation is still ongoing.

 

Not-For-Profit

 

A preliminary forensic investigation strongly supported the allegation that a senior executive had been defrauding the organization for many years through a variety of methods mainly related to his expenses.  Based in part on the fact that an hourly employee of the organization had recently been fired for a minor theft, the internal auditor recommended that the senior executive should be, at a minimum, terminated for cause. Senior management decided that because this was a long-term senior executive, not an hourly employee (implying that two different standards had to be applied), the senior executive was to be given an internal warning and today he remains working.

 

Not-For-Profit

 

The Chair of a local not-for-profit (NFP) Board came to the understanding that the Executive Director (ED) of the NFP had been expensing personal trips and other items through the organization. Although the expenses amounted to thousands of dollars a year for many years, members of the board were concerned that pursuing criminal charges would create negative publicity for the organization. They felt in a worst case scenario, their government funding could be stopped altogether and the NFP would cease to exist. The Board determined that the best course of action for the NFP would be to obtain as much evidence as possible in respect of the ED's wrongdoing so that it did not have to provide a severance package to the ED upon termination. Through the use of the evidence gathered, the NFP was successful in demonstrating just cause in the termination of the ED.

 

General Trends

 

In general, based on KPMG's recent forensic investigations there appears to be a trend that public sector organizations (municipalities, universities, school boards, hospitals, etc.) are pursuing civil recovery and criminal charges. This sector is taking public accountability and its obligation to its "taxpayers" and "stakeholders" seriously. In that respect these organizations tend to pursue the recovery of funds through insurance and/or civil litigation and criminal charges in the pursuit of justice.

 

The decision of whether to pursue civil litigation or criminal charges in the NFP sector and in religious organizations appears to depend on the expected ramifications to the organization. On the same basis, many private organizations have tended to avoid criminal complaints at times.  These organizations appear to base their course of action on well thought out business reasons as opposed to bringing justice to the fraudster.

 

The private sector tends to avoid the public eye (and therefore criminal complaints) where it is believed it would be detrimental to business. While this may be the best business decision for that company, it may be to the detriment of the fraudster's next employer as they jump from company to company with no criminal record.

 

Karen Grogan is a Vice President of KPMG Forensic in Southwestern Ontario.
She is a Chartered Business Valuator and a Chartered Accountant designated by the Canadian Institute of Chartered Accountants as a specialist in investigative and forensic accounting. Karen has 15 years of experience focusing on employee and corporate fraud investigations and litigation support

 

Contact: kgrogan@kpmg.ca or (519) 747-8223

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