Here at SorbaraLaw, we have heard the topic of corporate and employee fraud come up more and more often with our corporate-commercial clients. The fact is, corporate fraud exists, and it is a growing concern for most Canadian corporations.

A survey conducted by SAS Institute Inc. indicated that, in large firms, 48% of employees have attempted to defraud the company in some way. The number was only slightly lower (35%) in mid-size corporations. These statistics don’t refer to the employee who takes office supplies home or who borrows a loonie from the social committee pot and forgets to repay it. Fraud is a serious civil and criminal offence that can lead to criminal charges, prison and civil law suits. Additionally, the survey showed that, of those employees who committed fraud, up to 10% of them managed to escape detection and criminal charges.

Some employees who commit fraud rationalize their actions in terms of a response to being poorly treated by the company. Others may view the company's intellectual property as unrestricted access and a means of obtaining financial rewards.

We are all familiar with the recent news reports on individuals who have committed fraud in the financial sector. But fraud exists and is a concern across all industrial and business sectors. No business, regardless of size, can afford to ignore the potential risks and damage that can result from fraud.

Corporate fraud affects everyone, not just the company. A domino effect occurs, which ripples and impacts clients, consumers, insurance premiums and the corporate economy. Many corporations accept a degree of employee fraud, and include a percentage factor into the financial status of the company.

With the present economic stresses, corporate and employee fraud must be controlled and minimized with a “zero tolerance” attitude. However, it is unrealistic to believe fraud can be eliminated in every corporate environment.

In dealing with the risk of fraud, corporations should consider the following questions:

1. What policies, processes, protections and protocols exist to prevent, detect, control and respond to fraud?

The policies and processes should be easily and readily communicated to all employees. They should identify the areas of concern (e.g., corporate intellectual property) as well as the organizational levels with the greatest risks.

The assessment should be a serious undertaking that encompasses a multitude of issues, including a full review of the policies and procedures, past occurrences, how the fraud was detected, the extent of damage, and whether the damage was controlled.

3. Is the company able to identify potential and actual risks effectively, efficiently and in a timely manner?

Supervisory controls are required to review and double-check procedures. Random risk audits conducted by independent consultants experienced in the field of corporate fraud should become a frequent form of review.

The extensiveness of the policies and procedures will depend on the size of the organization, the type of risks, what needs to be protected, the complexity of the organization, the type of business, and the levels of management.

All employees must be made aware of the policies and procedures and encouraged to recognize and report potential fraud. Balance must be maintained between reporting inappropriate activities and preventing paranoia. Corporate culture has its foundation in teamwork, cooperation and ethical behaviour. Management at all levels needs to encourage, train and promote ethical behaviour.

Many professionals (accountants, physicians, lawyers, etc.) have professional and ethical codes of conduct that are established and monitored by their respective professional societies. A similar code of conduct should be entrenched within the corporate environment and clearly communicated to all. Additionally, those employees (whistle blowers) who do report suspicious activities should be able to do so without fear of negative ramifications.

A corporation's image within the general and business communities is not simply a reflection of profits and losses or marketing the best web site. It must have its reputation rooted internally through all levels of employees. The management of corporate and employee fraud is a significant factor in this process.

Be aware that these policies and procedures may be raised by the company and/or by disgruntled employees in the context of the use of intellectual property, performance reviews, disciplinary actions, and dismissals.

At SorbaraLaw, we work jointly with risk management consultants to ensure the appropriate policies and procedures are in place to help our corporate clients avoid fraud issues. Additionally, we provide discussion seminars and reviews of present policies. If you have any questions or concerns, or for more information, contact a member of our Corporate-Commercial Practice Group.