Fraud Symptom 7- Ineffective Human Resources Function

Every organization wishes to be a great place to work as it can attract and retain the best talent. Every employee wishes to work in an organization, which has a good work culture as s/he get fair treatment, growth opportunities and remuneration. In this one aspect, management and employees are in complete agreement as it benefits both. The key player for achieving this goal is the human resource function. However, an ineffective human resource function can cause the most damage not only for achieving business targets but also for also increasing fraud risks.

As I had mentioned in the earlier post – “Employee Disengagement Risks” as per Blessing White Employee Engagement Report Survey 2011, in India 37% of employees are engaged and 12% are disengaged. According to surveys conducted by LSA Global Learning Solutions, “lower employee engagement scores result in: 12% lower profits, 19% lower operating income and 28% lower earnings per share.Kroll Global Fraud Report 2010 states that in India, in 48% of the cases, the key perpetrators were employees. Hence, the question that needs an answer is how does this increase fraud risks?

1.   Recruitment & Selection Process

Human resource department (HRD) along with the business teams is responsible for recruitment and selection of the resources. In India, this becomes especially critical as human resource survey reports indicate that 25%- 30% candidates submit fake or inaccurate resumes. The second aspect is that with the increase in financial crime and terrorist threats, the organization becomes more vulnerable. Organized crime groups infiltrate companies to give a cover to their sleeper agents. Financial institutions are the most vulnerable, as understanding the systems also helps the crime groups in money laundering and organizing funds for their activities.

Under such circumstances, the HRD role is critical. HRD is responsible for background checks of the candidates. Any lapses in the process can cause high risk to the organization. Here are some examples of what can go wrong-

a)   Hire people for critical positions without verification – For example, risk management functional heads and second-in-commands positions are critical. They are subject to stringent checks. Without background verification, they shouldn’t he hired. In one organization, my superior was hired without any verification whatsoever. When his name was announced, me being a nosey parker did an independent personal verification and was quite amazed that he was hired since his professional background didn’t fit. I decided to give benefit of doubt and see for myself. Within a week of his joining, I knew that he didn’t even have the fundamentals of the areas I was managing. I thought he knew about the other areas of the department. My colleagues in that area informed me that he was clueless about their area. There was absolute chaos in the function, because he refused to take responsibility for any work whatsoever.

b)  Hire people for critical position with insufficient verification – For example, an executive assistant was hired for a senior manager without checking criminal records. She was previously involved in a high profile data theft case. On investigation, it was found out the vendor who was conducting background verification for the organization, didn’t even have an office in the city. The vendor was just generating verification reports with superficial checks.

c) Hire people knowing they have submitted false information – For example, in a case I found out that the new candidate was a plant by someone, most probably with the knowledge of local HRD team. The employee was subsequently found to be involved in a huge fraud.

Hence, if HRD team looks the other way or doesn’t put in effective measures for background verification, things can really go wrong for the organization. The fraud risks increase quite significantly.

 2.   Working environment

As I repeatedly say, organization culture makes or breaks the organization. Employees work best in an environment, which is free and fair. Even perceived unfairness by senior managers can cause the work culture to deteriorate. UK and US studies show that nearly 50% of the employees reported being bullied. In Asia where focus on organization culture is still in nascent stage, the percentages are higher. Now HRD has the role to provide a safe working environment. Any lapses from its part can cause a chain reaction in the organization and give encouragement to others to show deviant behavior. Here are some examples of it.

A senior manager has better relationships with the HR team than the juniors do. I would say, in some context HR team is there to protect the senior managers. However, when it is apparent that a senior manager is unethical, and a junior is ethical, HR should ideally arbitrate disagreements fairly. However, if it knowingly supports the senior manager in forcing the employee to leave his/her job, then incorrect messages are sent across the organization.

The second problem arises when HRD commences, participates or encourages top end mobbing. The report –Women and Workplace Mobbing by Dr Jocelynne Scutt states –

The politics of ‘high end’ mobbing are important to fathom, because this type of bullying is generally directed at change makers or change agents. If change agents are halted in their tracks, change will be stultified and the hopes we have for a different world, where bullying, abuse, discrimination, prejudice and bias become of historical interest only will be stymied. The hopes we have for construction of a world where disadvantaged and dispossessed groups are elevated to equality, and the misuse and abuse of power is ended, will not be fulfilled”.  

In such a case, the target is being an effective change agent that certain senior managers do not wish to occur since it is against their personal or political agendas. The message is sent across to attack the target, the abusers will not be prevented or stopped and will be provided protection. In such situations, the victim does not have any recourse with the HRD department, as they themselves are supporting the mobbing.

In such situations, the organization culture becomes deviant and aggressive. Employees are concerned about their safety. They face a psychological battle on whether to report or not to others. Read the article “Whistleblowing – The Psychological Paradox” to understand more.

The target employee may leave the organization or maybe forced to leave. Situation worsens when the mobbing continues after leaving the organization. Employee can be stalked; his/her reputation ruined and/or is given negative references on prospective jobs. If other employees know of such instances (sometimes there are more than one) they are terrified of facing the same situation. Hence, the senior managers responsible for initiating mobbing keep control of the others from reporting to other seniors by way of threat and punishment. The target employee is basically the sacrificial goat to ensure silence of others.

This is kind of worst-case scenario and the organization has extremely high fraud, legal and reputation risks.


 a)    Organizations must implement policies, procedures and systems for proper background verification of employees.

b)    HRD function must build a healthy work culture within the organization and maintain impartiality.

c)    If HRD team is participating in damaging work culture or mobbing etc. the individuals must be terminated.

d)   Organization must implement internal whistle blowing system that is not directly dealt by HRD team.

e)    Senior management must review the whistle blowing information on a monthly basis and ask the audit committee to independently investigate the reported cases. Investigation reports must be reviewed by senior management.

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One comment on “Fraud Symptom 7- Ineffective Human Resources Function

  1. Human Resource (HR) management is a hard task. As human beings are prone to erring, it is almost impossible for human beings alone to accomplish this task, all by themselves. The structure of the company will get affected negatively if the work of the HR department suffers.

    In order to ensure that the HR department serves its purpose, it is advisable to install face recognition Human Resource Management System (HRMS) solutions in the company premise. It will help in capturing the time and attendance details of employees, calculating their salary, and managing their other details. This system application has become a usual thing in many Indian companies with more than hundred employees.

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