Steel Buyers Basics: Fraud in the Workplace

Recently, there was an article in the WSJ about the risk of theft in the supply chain. The story starting me thinking about the times I’ve seen white-collar fraud and how unprepared I was to deal with it.   So I thought I would write an article outlining my experiences — especially since purchasing management is often held accountable when theft within any organization is detected.

In general, all organizations say they will not tolerate unethical behavior but typically they don’t help train managers on how to spot such behavior or what to do about it when it does occur. It’s a distasteful subject so most people don’t want to even think about it. In his book, Duty: A Memoir of a Secretary at War, Robert Gates warns the incoming Obama leadership team not to make this mistake. He tells them that “There is somebody in your organization doing something right now that is illegal …” and as leaders they should be prepared to deal with it. In my experience, he is correct about the illegal part and it is also correct that leaders should be prepared to deal with this issue.

Here is a partial list of some of the illegal employee behavior I have seen:

* Secretary changing expense reports in order to siphon off cash.
* A/P manager writing fictitious checks to a company he set up.
* Employees using the company credit cards for their personal benefit.
* Trucking managers taking kickbacks from freight companies.
* Production manager stealing high-value scrap.
* Owner not paying withholding taxes and employees being blamed.
* Employee approving bogus invoices and benefiting financially from doing so.
* Shady suppliers send bogus invoices simply hoping they will get paid.

Of course in addition white-collar fraud I’ve seen I have also seen all the other types of crimes people commit. Crimes such as drug dealing, theft of personal items, physical violence and even one case of a bomb threat but those types of situations are outside the scope of this article.

An IT department manager perpetuated the largest internal theft situation I ever experienced. An invoice would arrive for computer equipment without a matching purchase order or signed receipt. Our A/P department asked purchasing why there was no PO, of course purchasing didn’t know because nothing had been ordered. Nevertheless A/P paid the invoice when the IT manager told them to do so.

Everybody knew this manager and no one imagined that he was, well a crook. The supplier and this manager conspired to send in these fake invoices and would then split the payment – total loss was around of one million dollars. What sticks with me most about this is that this same manager had been in jail for a similar scheme before we hired him!

Not all thieves are this clever. I know of a case where an employee was stealing scrap steel and no one noticed. He saw a chance to make some real money by taking a 1-ton coil. Unfortunately for him, rolling a 1-ton coil of steel off a loading dock and onto a pickup truck doesn’t work well – he destroyed his truck and he got caught.

In my opinion most thieves start small when a risk-free opportunity comes by that they just can’t pass up. They need the money and perhaps feel that no one will miss it or perhaps even believe that later they will make restitution. But, for some folks, stealing and getting away with it is like taking drugs — once they start they can’t stop and they turn into a full-fledged thief. So one key to stopping theft is to close off easy opportunities. But, even more important is avoiding hiring dishonest people in the first place.

People who had previously stolen money or been in bankruptcy perpetrated most of the thefts that I have seen in my career. It is difficult to determine if a job applicant has the right set of skills and personality to perform well in a particular job.   But it isn’t that difficult to determine if the person you hire is honest because dishonest people usually leave a trail. Don’t skip doing a thorough background check on anyone you hire.

Simply checking the personal references people give you is not enough – they may not tell you everything they know (or may simply not know). For anyone responsible for ordering or receiving material and certainly for anyone involved with paying bills or handling money I recommend that you always do a credit check as well as a criminal record check. A credit score doesn’t care about personalities; its only purpose is to tell a cold-hearted lender if a person can be trusted with other people’s money.

I know this isn’t politically correct but based on my experience it would be very hard for me to hire anyone with bad credit. Declaring bankruptcy basically says its OK to take someone else’s money and break the promise to pay it back, or it says I cannot manage my own life. Of course that isn’t a 100% rule because bad things can happen to good people (medical issues, job-loss or a bad divorce). So, if I planned to hire someone but found out their credit was no good I wouldn’t unless they had a compelling story to tell.

Making sure you hire honest people seems so obvious but lots of organizations don’t do even minimal work to make sure this fairly simple check is done.

Moving on from hiring, if you are in charge of a purchasing organization I would also recommend the following:

First no employee should ever buy and then also approve receipt of any item, ever. This separation of duty protects the company and the employee. Of course this leaves you open to problems when two people are involved but that is much less likely to happen and finding a partner in theft is not easy and a very risky thing to do.

Second, any item a company purchases should have a purchase order (or something similar). Reject any delivery of an item that does not refer to a PO.

Third, I don’t like company credit cards for traveling expenses, especially in small organizations. The theft I’ve seen most often in my career is through such credit cards. Your staff can use personal credit cards and then claim their costs separately. In today’s world of easy credit, if someone on your staff does not have good enough credit to get a personal credit card then why would your company want to give them one? For larger companies there are economies to company credit cards but in that case each item should be documented by the employee and reviewed by the employee’s manager. If entire credit card bills are simply paid without item level review there is going to be misuse – it’s just too tempting for a lot of people.

Fourth, review your company spend periodically and, if you see a supplier you do not know, find out for yourself what is being purchased and paid for and why. Another warning sign is suppliers that have very similar names, that may just be a typo of some type but it could also be unapproved payments going to a fictitious company.

Fifth, carefully track your inventory and track your scrap. Scrap has value and is an easy target for theft. If you experience unusual shrinkage of inventory (or losses of scrap) don’t just accept that as a natural consequence of doing business. Find out where the loss is coming from.

Sixth, have your accountant/auditor review your payment procedures and follow their advice. Also if you suspect there is a problem, get some outside help to research the issue. The outsider will not have an emotional attachment to anyone and so is less likely to be misled.

(As a special case, if you have anything to do with paying the company’s taxes, make sure they are paid properly. In particular, the IRS is completely unforgiving about unpaid payroll taxes — they consider that theft of other people’s money. Anyone (owners, managers or clerks) they think participated in tax fraud is in big trouble and the IRS does not accept the excuse “the boss made me do it.” If you think your operation is not paying taxes properly, bring it up to the proper authority in your company. If you think the owner is involved, don’t hesitate and don’t be understanding, leave the job immediately and tell the IRS what’s going on. If you are an owner and in a cash crunch, pay the payroll tax first.)

Despite these precautions, sooner or later a purchasing manager is going to be faced with some type of fraud situation. It’s going to be stressful and perhaps heartbreaking if you know the people involved. My advice is, don’t hesitate, report the situation to your management and if you are the top manager call the police.

When one of my employees forged checks for his own benefit I was embarrassed that I had let this happen. I called close friend who was a criminal defense attorney for advice. Fortunately he told me to call the police immediately. He said that any delay on my part would simply create suspicion that I was part of the theft. He went on to say that the police are trained to deal with these situations (and I was not) and lastly, stay in contact with the police and make sure they follow up.

So, be aware that theft is common in the workplace and keep your eyes open. White-collar crime happens all the time and unfortunately from people you know and even trust and respect. Don’t assume theft can’t possibly happen in your company because it does, and will, sooner or later. Look to prevent theft opportunities and be prepared to act when it occurs.