Integrity is a core value for businesses. Dishonest behaviors like fraud can severely damage an organization's reputation and finances. HR professionals play an important role in preventing corporate fraud through measures like verifying candidates' backgrounds, educating employees on ethics policies, and establishing reporting systems for suspicious activities. If fraud occurs, HR should handle it carefully and potentially involve outside experts to investigate properly and minimize further losses.

1. Tackling Corporate Fraud
By Kelvin Ko, Managing Director, Verity Consulting Limited and Andy Cheung, Founding Principal, MAWSL Consulting
Original article contributed to Human Resources Magazine for October 2012 issue
Integrity is a core value in business. Top-level management, namely Chief Executive Officers (CEO), directors
and presidents, needs to proactively demonstrate their commitment to this value in order to discourage
corporate misconduct. A comprehensive compliance programme together with an effective internal control
system will raise awareness on business ethics amongst staff and customers, and build a work environment
that addresses wrongdoing and fosters high ethical standards.
Dishonest behaviour, such as taking false and frequent sick leave, can cause serious damage to an
organisation. Such conduct may encourage other employees to behave in a similar way, which will eventually
create an unhealthy and unproductive environment. On a greater scale, misappropriation of funds and
financial fraud can severely jeopardise a company’s reputation, harm its relationship with customers and incur
substantial monetary loss.
Hire the right people
The first line of defence starts with recruiting new employees.
HR professionals need to be aware of the type of staff they
want to hire. Whilst a job candidate’s experience and skills
are important, honesty is an essential quality that affects the
success of an organisation.
Prior to the recruitment, preemployment screening processes
should include obtaining a candidate’s authorisation to conduct
a reference check. This way, the company is entitled to take action if the employee has been dishonest. Also,
HR professionals can better verify a candidate’s information by contacting people who are not listed as
referees, such as former HR managers and direct supervisors.
However, it is irrelevant for HR professionals to obtain a candidate’s criminal records (this can be important
when the position involves the control of valuable items for example) because Hong Kong authorities do not
allow access to such information for employment purposes. The employer would need to ask the job
applicant to get it by himself/herself. The HR professional can determine if it is a reasonable practice
depending on the job nature and the company’s policy. If this type of records is required, the employer
should mention it on the application form. In the event a job candidate refuses to provide his/her criminal
records, the HR professional should explain that any misrepresentation or false statement will result in
dismissal of employment with the company without any compensation.
Résumé verification is another common practice. HR professionals should focus on both written information,
such as the applicant’s previous positions, responsibilities and academic certificates, and unwritten
information such as employment gaps, conflicts of interest, bankruptcy ties (this includes association with a
company’s bankruptcy or personal bankruptcy) and civil litigation. In one case, a candidate who applied for a
high-level position in a multi-national company in mainland China claimed to have an MBA degree from a
renowned Chinese university and provided a supporting certificate. During the verification process, the
university confirmed there was no such graduate or even academic programme. In addition, the HR
professional’s enquiry made to the applicant’s previous employer revealed that the applicant had a bad
reputation and inflated his salary during the job interview.
Logically, the depth of check depends on the seniority of the position. The steps mentioned above apply to
senior and middle-management positions. For more junior positions, the bare minimum check for HR
professionals includes CV verification and at least three references.

2. Be aware of typical fraud schemes
Familiarity with types of fraud is an efficient way of detecting signs of corporate cheats, leading to the
subsequent design of effective internal control schemes. According to a recent research conducted by the
Association of Certified Fraud Examiners (ACFE), a large global anti-fraud organization based in the US,
corruption is the most common type of fraud in Asia. Corruption is defined as the misuse of office for private
gain. It comes in different forms, such as kickback. Indeed, the number of corruption cases in this region is
the highest in the world. The second and third most common kinds of fraud in Asia are billing and non-cash
schemes.
Other
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common types of corporate fraud include:
Conflict of interest: an employee chooses to outsource work to a company owned by a family member.
False expense claim: an employee submits a falsified and/or inflated claim for expense reimbursement.
Kickback: an employee receives payment from a vendor in the vendor’s selection and order placing
process.
 Information leakage: an employee leaks sensitive information to a competitor.
 False sickness or injury claim: an employee claims to be physically hurt so as to be entitled to paid sick
leave.
Facts about corporate fraud
1. A typical organisation loses 5% of its revenue to fraud
each year. Applied to the estimated 2011 Gross World
Product, this figure translates to a projected fraud loss
of more than US$3.5 trillion globally.
2. 43% of occupational fraud is detected by tips reported
by employees of the victim organisation.
3. Asset misappropriation schemes are the most common
type of occupational fraud.
4. 49% of companies do not recover any losses that they
suffer due to fraud.
5. Corruption and billing schemes pose the greatest risks
to organisations throughout the world.
6. The most commonly victimised industries are banking
and financial services, government and public
administration, and manufacturing sectors.
7. Lack of internal controls is the most cited factor leading
to corporate fraud.
Source: Association of Certified Fraud Examiners 2012 Report to the Nations
Note: This data is based on an ACFE study of 1,388 cases of occupational
fraud in 94 countries.
Proactively communicate business
ethics
Every organisation should have a set of
policies that outlines business ethics such as
codes of conduct, expense reimbursement
policies and procurement procedures. HR
professionals should communicate these
policies to new employees during their
orientation and regularly remind existing staff
of these policies. For instance, internal
newsletters are a useful way to raise
awareness of business ethics.
During annual reviews, HR professionals
should encourage employees to speak out if
they face ethical issues or conflicts of interest,
such as the case of a procurement employee
marrying a supplier. This could also arise if a
supplier pays an employee to guarantee the
vendor’s selection: even in the case that the
employee turns down the offer, he/she may not know what actions to take towards the supplier and to
whom to report this problem. Annual appraisals are thus an ideal occasion for HR professionals to make
appropriate adjustments regarding ways to tackle corporate fraud. For example, if a company enters a new
market with higher fraud risks, HR professionals should revise the company’s policies on procurement and
sales procedures and provide staff with more stringent guidelines.
In addition, exit interviews allow HR professionals to find out integrity-related issues. During this intelligence
gathering process, leaving staff tend to speak up on corporate procedures and provide clues to HR
professionals on areas that require more attention, such as tendering processes and financial control.
Although HR professionals have to analyse the accuracy of the allegations, such information is usually a way
to enhance existing policies and processes on business ethics.
Provide continuous training
On-board and periodic training on integrity at work is an important part of fraud prevention as it instructs
employees on addressing and preventing corporate violations. HR professionals can tie up with professional
associations, such as the ACFE and the Independent Commission Against Corruption, to organise seminars
on fraud prevention and anti-corruption. Organisations like these are often held up as examples of
professional excellence and provide a platform for discussion of ethical challenges in the workplace.

3. Establish an alert system
To effectively prevent fraudulent activities at work, companies need to
set up an alert system to detect and respond quickly to threats. For
instance, HR professionals should encourage the workforce to report
any suspicious activity. Fraud telephone whistle-blower hotlines are a
useful tool for staff to report anonymously. Small businesses may also
use anonymous e-mails to reach out to appropriate personnel for
support, such as HR heads or CEOs, if it is too expensive and difficult to
set up hotlines.
Setting up an annual fraud risk review is another useful method to help HR professionals identify vulnerable
areas and provide better understanding to staff regarding the effectiveness of internal controls and
procedures. They can then use such feedback to improve the alert system.
Handle fraud with caution
When fraud occurs, HR professionals have to conduct a preliminary assessment to check the scale of the
incident. It can range from relatively minor fraud, like stealing a laptop, to more major problems, such as
multibillion-dollar embezzlement. If an employee is involved in fraudulent activities, the company has to make
sure that it has the capacity and/or staff with the relevant skills and knowledge to handle it. Otherwise, it is
best to seek professional support and solicit legal advice.
Without knowing the magnitude of the fraud, and its ensuing potential damage, top-level management may
attempt to deal with the situation internally without caution, which may result in more losses to the company.
For instance, implicated parties may try to retrieve evidence from the computer of an employee suspected
of corporate fraud and end up deleting all data before any evidence is retrieved. HR professionals should also
make sure that they have enough information on corporate fraud, or else the suspected employee may sue
the company for defamation.
Corruption Perceptions Index
Conclusion
Source: Transparency International Note: The Index ranks 182 countries on a scale
of 10 (very clean) to 0 (highly corrupt).
As the old saying goes, “an ounce of
prevention is worth a pound of cure.”
This is certainly true when it comes to
fraud prevention. Although corporate
cheats cannot be completely eliminated,
continuous review of a company’s
prevention system can greatly reduce
risks. By establishing proper internal
controls, organisations can create an
ethical business environment based on
trust and integrity.
Verity Consulting Limited is a corporate investigation firm based in Hong Kong providing a
wide range of investigation and intelligence solutions to large and small corporations with
extensive experience and networks operating around Hong Kong and Greater China.
Phone: (852) 2581 9696
Email: info@verity.com.hk
Website: www.verity.com.hk