November 2003

Preventing Fraud by Conducting Background Checks

By Thomas A. Buckhoff

Employee fraud is a considerable problem for today’s businesses. Consider the following examples of fraud that could have been avoided had the employer conducted a diligent background check before hiring these fraudulent individuals:

Example. “John Baker,” a bookkeeper for a medium-sized Midwestern business, pled guilty to stealing $192,873 from his employer and was sentenced to four years’ probation and 100 hours of community service.

Two months later, Baker was hired as a bookkeeper for a different business that had not independently verified his written denial of felony convictions on his job application. Baker, earning about $35,000 annually, then embezzled $70,688 by forging his supervisor’s signatures on blank checks.

He ultimately pled guilty to 10 counts of theft and forgery and was sentenced to up to 15 years in prison.

Example. “Paula Ross” claimed on her resume that she possessed a bachelor’s degree in management information systems and an MBA. Based on these qualifications, a regional law firm hired the 46-year-old Ross as the information-systems director.

Nearly two years later, the law firm discovered that Ross, earning about $105,000 annually, had embezzled $2,035,232 by creating two fictitious suppliers. A belated background check revealed that Ross had neither of the two degrees that she clamed she had received. The employer recovered $1 million of the fraud loss by filing an employee dishonesty insurance claim, and another $500,000 was recovered by selling items acquired by Ross.

She ultimately pled guilty to one count of mail fraud and was sentenced to 41 months in federal prison, where she committed suicide.

The Problem

Experts report a virtual epidemic of phony credentials and false or inflated resumes among those seeking employment. Despite the few cases that get discovered and reported, thousands go undetected until it is too late. As competition for good jobs intensifies, more people are deliberately falsifying their background to gain a competitive advantage. Such dishonest individuals are gambling that overworked human resource departments will not verify the information contained in their job application. The following statistics illustrate the magnitude of the problem:

Employers can be held liable for their employees’ criminal actions, under certain circumstances. Negligent hiring is a legal doctrine whereby an employer is responsible for the negligent or destructive actions of an employee when due diligence—such as conducting background checks—would have revealed the employee’s propensity to commit such actions.

Example. Two men working for a home maintenance service exploited their access to upscale homes to familiarize themselves with the contents, alarm systems, doors, and windows. Several months later they returned to rob one home and shot the homeowner in the process. When the robbers were subsequently identified, the homeowner sued the home maintenance service. It was then discovered that the men had had criminal records and felony convictions before they were hired. The company was found guilty of negligent hiring and required to pay $11 million in damages.

Other examples of negligent hiring include employing a convicted pedophile at a day-care center, or allowing someone with a driving-under-the-influence (DUI) record to drive a delivery truck.

The Solution

This disturbing decline in ethics, which touches everyone from recent graduates to seasoned executives, has serious implications for all organizations. Several actions can be taken by businesses to protect themselves. First, employers must independently check prospective employees’ backgrounds. Second, those with questionable backgrounds or who lie on their resumes should be considered high fraud risk individuals. Third, every effort must be made to avoid hiring those with criminal backgrounds, as they can expose an organization to negligent hiring lawsuits.

Ultimately, a business’ collective integrity depends on the individual integrity of its employees. Employers have both a fiduciary and a legal duty to their employees, customers, and the public to know their workers’ backgrounds. At a minimum, a diligent background check should include independently checking: criminal, civil, and federal court, education, and driver’s license records; references; credit reports; and employment history. Outsourcing background checks can provide limited legal security under the Fair Credit Reporting Act. Third-party providers of background checks include companies such as Fraudwise, InfoLink, and PeopleWise.

The cost of background screening must be weighed against the enormous financial damage one bad hire can cause.

Thomas A. Buckhoff, PhD, CFE, CPA, is a manager/senior forensic accountant with Fraudwise, a division of Eide Bailly LLP, Fargo, N.D.

Robert H. Colson, PhD, CPA
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