Reprinted with permission from the Fall 2015, Volume 30, Number 4 issue of The Bottomline, the journal of Hospitality Financial and Technology Professionals. Learn more at www.hftp.org.

You may know the difference between right and wrong behavior and never would consider committing fraud. But how do you maintain the highest level of professional conduct as it relates to fraudulent behaviors in others or when fraud is suspected?

A great place to start is the HFTP ethics policy, which guides members on topics such as confidentiality, objectivity, and professional competence. It’s important for professionals in the hospitality industry to set the right tone related to the tolerance of fraudulent behavior, know when to act when fraud is suspected, understand your role in an investigation, and respond appropriately to known frauds.

Setting the Tone at the Top

An effective way to begin protecting your organization is by setting the right tone at the top with an ethics policy tailored to your operations. The HFTP ethics policy addresses professional competence to include performing the duties of your position and supervising the work of subordinates with the highest degree of professionalism. Each property can improve its level of professionalism by creating an ethics policy specific to its organization. This helps send a message to employees that management considers strong ethics a high priority. When reviewing your current ethics policy, ensure the policy is:

• Tailored to your industry
• Written in clear, plain language
• Accessible to employees at all levels
• Reinforced frequently
• Filled with examples of real-life acceptable and unacceptable behavior
• A directive to appropriately respond to incidents using confidentiality and objectivity
• An outline for consistent enforcement and discipline for violations

The key to successful fraud prevention is making everyone in the company accountable for detecting and reporting illegal or suspicious behavior—and that’s only possible when the ethics policy is clearly communicated and employees understand what the organization considers to be acceptable and unacceptable behavior.

Including an antifraud element within your ethics policy will deter most employees who are inherently honest from committing fraud. We suggest including a definition of fraud such as “the intentional distortion of financial statements or other records by persons internal or external to the company which is carried out to conceal the misappropriation of assets or otherwise for personal gain.”

However, setting a policy, defining fraud, or providing examples of unacceptable behavior isn’t going to suffice unless internal controls are in place to back it up. Communication with your team on ethics is important. Don’t be afraid to talk about the risk of fraud or to conduct a fraud risk assessment with your team. Actively including team members in the conversation reinforces the tone at the top that fraudulent behavior is unacceptable and controls are in place to protect the organization from fraud risks.

From our experience, suspects in fraud investigations rarely have a history of unethical behavior that would show up in a background check. This is further supported by the Association of Certified Fraud Examiners' Report to the Nations on Occupational Fraud and Abuse. Based on its 2014 study, only 18 percent of fraudsters were punished or terminated by an employer for a fraud-related offense. This doesn’t mean that a background check is obsolete because it rarely detects a red flag. A background check is a time-tested, simple control that’s easy to implement. However, we see time and again that simple controls are only partially used, unmonitored, or simply nonexistent, which allows the opportunity for fraud to flourish undetected. Other examples of good controls include safe cash counts, bank reconciliations, supporting schedules for general ledger balance sheet accounts, or verification that expected cash deposits make it to the bank.

Knowing When to Act

Even with an ethics policy, there’s still an element of personal judgment that comes into play. For example, let’s say you come across a transaction, invoice, or other suspicious document by accident or receive a tip from an employee. The first clue of a suspicious situation is often referred to as a red flag of fraud. If you see or hear about a red flag, the worst thing you can do is ignore it. The choice is yours to either pursue the red flag in an ethical manner or ignore the signs of fraudulent behavior.

A preliminary investigation should be your first step, which may simply include an examination of additional documents before elevating the red flag to a suspicion of fraud. An important red flag that’s often overlooked is the fact that fraud is a people business. Fraudsters may have their own motivations, but living beyond their means, financial pressures, unusually close association with vendors, divorce, and problems with addiction are behavioral red flags that are frequently noted and often overlooked in fraud cases. Any investigative activity should be conducted without regard to the suspected wrongdoer’s length of service, position, title, or relationship with the organization. No one likes to feel as if there’s a lack of trust, but as the famous saying goes, “trust, but verify” when performing a preliminary investigation. In order to proceed undetected, a fraudster’s first line of defense is relying on coworkers to believe plausible explanations or presume his or her innocence.

Here are some of the key elements of a successful investigation, whether preliminary or a full-blown investigation:

• Whistleblower policy. Encouraging employees to report red flags or other suspicious activity is easier said than done. Recognize that the decision to report a concern can be a difficult one to make due to the fear of reprisal from those responsible for the suspicious behavior. It’s important to establish that the organization won’t tolerate harassment or victimization of whistleblowers and will take action to protect those who raise a concern in good faith.
• Objectivity. Be fair, and don’t allow prejudice, bias, or the influence of others to compromise your objectivity. It isn’t uncommon to have long-term, trusted employees betray that trust in unexpected ways. In particular, the hospitality industry encourages teamwork, which means you can grow rather close with co-workers and learn much about their lives and personal situations. This personal connection makes it more challenging to accept a possible deception if a red flag appears. In addition, different fraud techniques can be used in more than one way, so it’s important to remain objective when considering all the access points a suspect has to commit fraudulent acts. For example, someone who submits false vendor invoices may be just as likely to submit fraudulent expense reimbursements.
• Confidentiality. Respect the confidentiality of information acquired during the course of an investigation by not disclosing details to other parties unless specifically directed by human resources or legal counsel. The investigation team may want to have the opportunity to gather evidence undetected. Minimize the risk of false accusations by not sharing a suspicion or rumor about suspect behavior that may later prove to be unjustified.
• Professional competence. Investigations need to be performed with care, competence and diligence, and should take into consideration up-to-date developments in practice, employment law and techniques. If you don’t know the answers or how to proceed, it’s best to discuss the case with internal resources such as human resources, internal audit and/or legal counsel. External resources include certified public accountants or fraud examiners who can help coach you through the process.

If you aren’t part of the investigation team, it’s best to not approach the suspect or continue the investigation on your own because it could unintentionally jeopardize the process. Instead, rely upon those trained to handle fraud investigations. In some situations, internal resources might not be trained to conduct or properly document an investigation. Here are some common mistakes we’ve seen jeopardize fraud investigations:

• If there’s evidence of fraud, human resources immediately terminates the subject of the investigation when fraud is confirmed. This is done without conducting a detailed interview to gather evidence about the extent of the loss, who else may be involved, and other potential fraudulent behavior.
• An initial interview by an untrained member of the investigation team results in the suspect leaving employment, reducing the chances of obtaining a confession or gathering more evidence.
• The suspect’s computer will be turned on, which may make the evidence inadmissible in court because the evidence could be considered tampered.
• The suspect’s computer is repurposed by the IT team rather than kept secure and retained as evidence.
• An employee not on the investigation team will look through the suspect’s office, when it should be left untouched to preserve evidence.
• A suspect’s office was left unsecure over the weekend and resulted in a destruction of evidence by the perpetrator.

After the Fraud

Employees will understand your organization’s real position on fraudulent behavior based on how management addresses a known fraud. Investigations should be conducted professionally; consequences to dishonest acts should be fair and consistent; and internal controls should be improved to send a message and strengthen your ethical standards of behavior.

To learn more about preventing fraud at your organization, or for help investigating a potential instance of fraud, contact your Moss Adams professional.