Labor fraud - A friendly workplace environment reduces probability of labor fraud

Interview to Pablo Paladini: account reviser at the Argentinian Institute of Internal Auditors. Paladini emphasizes the importance of good policies of human resources in the prevention of irregularities inside the companies.

 The account reviser at the Argentinian Institute of Internal Auditors, Pablo César Paladini, explains how good practices concerning human resources decrease illegal events in companies.

 - What does “fraud” mean?
- There are several definitions. Basically, there are three kinds of fraud: the theft or bad use of the assets, corruption affairs, not just against the State but also inside companies. First: when the sales manager uses the influence that he has improperly. Second, when most of the purchases are done with “close” suppliers. And third is the fraud on the financial statements, which is "to "cook" the balance sheets to make them more attractive to people, in order that they’ll say: "Well, if this company is so successful we’d better trust them, or invest with them". There are very famous affairs such as Enron, for example. Those are the three kinds of fraud that can be seen in and out organizations.
In addition, there are other definitions given by the Verifiers' Association of the United States, and the Economic Science Council of the same country, all of them related to countable states. The Institute of Internal Auditors considers a fraud any act done by the company against the company and any act related to the evil use of the internal influences and the theft of the assets of the company.

- What kind of cases do you see more often?
- It depends on the kind of companies; different business; different frauds. In big companies you can see all kinds of frauds. Generally, most frauds related to big companies are about theft of assets. This is a situation you can see all over the world. Most cases of fraud are related to the theft of assets, then you can see several cases related to corruption and a very few countable fraud cases. A countable fraud case is very different in a big company and in a small one. Basically, in a big company it is very common to “increase” results. But, on the other hand, in small companies it is usual to “pull down” the results to pretend a less attractive look to the AFIP, and obviously to pay lower taxes. But basically: almost 80 percent of the fraud cases are related to theft or bad use of assets, 15 percent have to do with of corruption and 3 percent of frauds are done against the accounting statements. Usually we believe that between a 3 and 4 percent of the turnover of the companies gets lost because of different kinds of fraud.

- What examples of theft of assets can you tell us about?
- It is common to see theft of inventories and raw materials. You can also verify inappropriate use of stuff in the company. For example: if the company’s car is used for personal reasons, though it does not look like a fact of fraud, it is a case related to the bad use of the assets of the company. Another example is the incorrect use of the company’s cash. That is usually called "ride" of funds. This happens when the treasurer takes funds surplus, and since there are no further controls about these funds, he can invest this money in his own business. This is not exactly stealing, but it is to take money out of the company and get personal profits out of it. Basically the problem is called "fraud triangle", which stipulates that a fraud can exist if there are three elements together: an opportunity, a mistake or lack of control; a person’s need, and finally a mental fact that is the rationalization, which is to join those three elements together. That is to say, if the company still gains money, I got the possibility and I have a need, then I will do it, nobody will notice, I will take it as a "lending", and sometime in the future I will return it back. Anyways, I stay overtime working and, lately, they are not paying me for that. Some other times there is mistreatment, and people may say to themselves: "If they treat me inadequately, I will do it: I will take founds". That is the reason why it is common to say that better work environments cause better control situation, and fewer chances of fraud. Let’s see, fraud chances are everywhere. To do it or not to do it is up to the person. There are some statistics (we base a lot of our work on statistics) that asserts that a person is going to do fraud if he or she is 90 percent sure that is not going to get caught. But, if the possibility of being caught is higher, then people will not do it. But there is another reason: low salaries, bad payments.

- Did you prove that good policies of human resources decrease this fraudulent practice?
- Yes, absolutely. The problem is how to perceive the cost of prevention. This has to do with implementing certain controls, for instance. But you will never be able to see the cost of not preventing at all. What you can see is that at the time the auditor gets to the place after a fraud, and when he asks about possible reasons, there always are material reasons given to him, mistakes of the process. But, a little bit later, during the interviews with the staff around, several cases come to light, and then you can see people with serious financial problems, or people with pathological gambling addictions, several needs. Later on you find out that the whole job crew knew about these matters. The great point is if this all reaches to human resources team or not. Companies that show fewer frauds are those with better systems of control, better structures of human resources and better policies of work.

- What kind of company presents more frauds?
- SME companies. Most of them are changing little by little as managers are taking control. Parents are moving back and leaving everything to their sons and daughters. New generations have already gone to university and they have got other kind of skills, which already are changing the policies of the companies. Some time ago I went to a company that had a new manager and the son of the old owner began to implement quality policies, focusing in human resources in order to protect the employees, in order to “hold” them. But in SMEs with ancient management it is common to hear "Employes should be chased". To find a fraud in this kind of companies is so usual. In fact, every time we begin to analyze a company we always ask this question: “When was the last time you took a work environment survey?” This is one of the clues to prevent fraud. The internal auditor needs to know where the worst work environments are and he also needs to know if there are any assets in those areas. There is always a human resource issue related to the facts of fraud.

- Are companies taking all this into account?
- Lately you can notice things are changing according to management changes. Little by little work environment gets better. But there is another problem: it is not easy to find qualified resources to work, so companies really need to change their policies. If employees feel really committed to the company, then they will care about it. To control cash desk every day can be very helpful and can prevent fraud, it is an objective thing to do. We may think that trying to get a good work environment is not an objective control method; it may be a little lighter. But at the same time it can be the strongest way to control, because if the employee is really committed to the company, which is advisable, that employee wants the company to be safe and this is one of the strongest controls we can get.



We asked Dr. Pablo Paladini if fraudulent cases are taken to court and this is what he answered to us: “Most cases do not go any further because this becomes cheaper for the company. If the employer is sure that a person did a fraud, then he needs to find out either if it is cheaper or convenient to fire him or to prosecute him. It is advisable to follow the case, because it is a lesson and a good thing for other people to see. But in Argentina it is very complicated since it is hard to get evidence and this may take a lot of time too". Paladini adds that: "You should also look at the matter and see if it is worth to take it to court, because if it is something trivial then it does not make any sense to make the effort. In that case it can be better to talk to the employee. But if it is a US$ 2 million embezzlement, then it will not be enough just to have a chat about it. It all depends on the severity of the fraud case.

WHISTLEBLOWING: The most efficient way to control fraud

Among the services that RESGUARDA offers, there is the denunciation channel. This tool works out for all kinds of companies. The aim of the denunciation channel is to provide an easy way for employees, clients, suppliers and others to inform about all kinds of frauds and irregularities that they may see in their work area.



The whistleblowing improves all Internal Auditory tasks and reduces fraud expenses up to 60 percent (source: ACFE report 2011).


For more information about fraud prevention and detection, please send us your consults and your contact information to [email protected], or call us on the free number of your country, local time between 10 and 18 hrs.