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3 Ways Documentation Can Help Fight Internal Fraud

Apr 30, 2016
Deb Muller


The Fraud Triangle is a well-known concept that has its roots in criminology. Largely attributed to researcher Donald Cressey, he believed that people that commit fraud are motivated by the convergence of three factors:

  • Pressure
  • Rationalization
  • Opportunity

Cressey’s theory was the culmination of a series of interviews, and without wishing to oversimplify it, there is a value to extending the construct of the Fraud Triangle to employee relations and the battle against occupational or internal fraud. Because all three elements in the Fraud Triangle must be present for fraud to occur, human resources (HR) can systematically target the individual components as part of a fraud prevention strategy. It’s a different way to think about the issue of fraud in the workplace, and in my view, proper documentation can go a long way towards making this tactic a successful one.

Using the context of the Fraud Triangle, here are 3 examples of how proper documentation protocols can potentially help mitigate internal fraud in the workplace:


Use documentation to track external pressures that may alter employee motives

In a striking finding in the 2016 ACFE Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) noted that in 79% of occupational fraud cases, there are changes in an employee’s behavior:

“Fraud perpetrators tended to display behavioral warning signs when they were engaged in their crimes. The most common red flags were living beyond means, financial difficulties, unusually close association with a vendor or customer, excessive control issues, … and recent divorce or family problems.”

These circumstances, even when present, are by no means always evident. However, if co-workers or managers express concerns over a change in an employee’s behavior, particularly as it relates to one of these flags, employee relations should document the concerns. Managers should also document information gathered in employee check-ins or performance reviews that may seem significant. If employee relations practitioners become aware of external pressures that may impact employee performance, motivations or behavior, they too should document the events, because the correlation between certain triggers and internal fraud suggests it’s too risky not to do so.


Use documentation to help identify employees that are rationalizing behavior which deviates from workplace norms

When it comes to a discussion about rationalization, employee travel and entertainment (T&E) expenses are a perfect place to start. It is common for companies to issue employees corporate credit cards so they can avoid the burden on personal funds and credit limits. There is usually a written corporate T&E policy, and employees back their expense claims up with receipts. Accounting monitors and addresses clear breaches to the company policy such as rental car refueling charges, upcharges on hotels or rental cars or room costs that exceed a pre-approved threshold.

Yet, there are a multitude of ways that employees can charge the company for expenses that are not bona fide T&E nor easily identified. They pad meal and entertainment charges or use the company credit card for non-business expenses. Other common examples include expensing:

  • receipts for meals with friends, family or co-workers
  • personal taxis or Uber rides
  • gas for non-business related travel
  • event charges, when no client is present

Common excuses? Employees rationalize that everyone’s doing it, or they don’t get paid enough, so why not?

One way that T&E inflation can be mitigated is by analyzing expenses of co-workers in similar roles. If one employee’s expenses are always trending higher than his/her peers, something may be amiss. Human resources (HR) or employee relations can document the spending anomaly even if the reason is not apparent. If a pattern emerges over time that becomes clear in the documentation, it may be an indication that an employee is rationalizing and expensing items inappropriately.

Victim organizations that lacked anti-fraud controls suffered greater MEDIAN losses—in fact twice as MUCH


Use documentation to underpin tools that reduce opportunities for internal fraud

The ACFE Report outlined the importance to organizations of having fraud prevention and internal measures of control in place. Their respondent data showed, “Victim organizations that lacked anti-fraud controls suffered greater median losses–in fact twice as much” relative to organizations with controls. Interestingly, the Report also confirmed the value of an ethics “hotline,” as a means to intake potential allegations, the topic of a recent HR Acuity® blog.

In benchmarking the financial loss to organizations from internal fraud, the Report evaluated the use of three key tools:

  • data monitoring and analysis
  • management review, and
  • an ethics hotline

When an active control was in place within a particular category, the median financial loss to the organization from occupational fraud halved. What struck me is that to maximize the value of each tool, documentation protocols are a necessity as a means to record allegations, track management concerns over employee behavior, and provide a basis for meaningful metrics and analysis.

By some estimates, internal fraud costs the average organization 5% of its revenue each year, and there are cases when it has gone undetected for years. There is no easy solution, but documentation may be part of the answer. It’s a powerful tool that can flag patterns of employee behavior outside of workplace norms and track important employee-related information. No doubt, documentation will play an increasing role in the new data-driven paradigm that has enveloped so many industries. Employee relations is no exception.

Deb Muller
Deb Muller is the CEO of HR Acuity, employee relations case management and investigations software that combines documentation, process, and human expertise so organizations can meet the challenge of managing employee relations in the modern world.

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