background check best practices

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Copyright © FraudResourceNet LLC

Background CheckBest Practices For Reducing Employee Fraud Risk

Special Guest Presenter:

Joseph Petrucelli, CPA/CFF/CGMA, FCPA, CVA, MAFF, CFE, PSA


President and Founder of White Collar Crime 101

• Publisher of White-Collar Crime Fighter• Developer of FraudAware® Anti-Fraud Training • Monthly Columnist, The Fraud Examiner, ACFE Newsletter

Member of Editorial Advisory Board, ACFE

Author of “Fraud in the Markets”

• Explains how fraud fueled the financial crisis.

About Peter Goldmann, MSc., CFE

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About Jim Kaplan, MSc, CIA, CFE

• President and Founder of AuditNet®, the global resource for auditors (now available on Apple and Android devices)

• Auditor, Web Site Guru,

• Internet for Auditors Pioneer

• Recipient of the IIA’s 2007 Bradford Cadmus Memorial Award.

• Author of “The Auditor’s Guide to Internet Resources” 2nd Edition


Joseph Petrucelli

President and Founder of Joe PetrucelliCompanion Site to Detecting Fraud in Organizations

[email protected]

www.joepetrucelli.com

732‐636‐4400

• Author: Detecting Fraud in Organizations, published by Wiley

• Adjunct Professor at College of Staten Island

• Testifying Expert Labor Related matters.

• Fraud Forces, Inc. Founder provides Continuing education and speaking services.

• http://fraudforcesinc.com/

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Disclaimers

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Get the Mind Thinking Differently


1. Be Practical in applying what you have learned.

2. Be Creative in your designs.(Think Differently)

3. Be Skeptical (Eyes and Ears open)

4. Be able to develop well Documented evidence and support.

5. Maintain Impartiality in your conclusions. (Always remain objective

and maintain your moral compass)

Name 5 Things You Expect to Get out of this Webinar

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History Lesson


Fraud happens – The First Step is acceptance (Bad Hiring can lead to fraud)

Defined policy and standards

Confirm employee references – With specificity and purpose:

He claimed he had a B S & M S Degree from the University of B.S. M.S. Chicago – Larry Ellison, CEO Oracle – He had neither!

Understand where organizational value resides and the hiring or existing employees access by the

job responsibilities.

Focus on the high‐risk, low hanging fruit, e.g. safeguard payroll by making sure you hire the right

people.

And not all assets are tangible: think about critical documents and Information access that the

employee will be gaining or has access to.

Ensure there is third party independent review

Background check business opportunities

Consider annual audits

Improve the plan continually: research and documentation

• Useful Resource : The AICPA’s Audit Committee Effectiveness Center has free articles, tools and resources companies clients can use to

prevent and detect fraud.

Overview Background Checks and Fraud.

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68% Non-Public Companies

32% Public Companies

Source: ACFE 2010 Report

Where Does Employee Fraud Occur?


800‐Pound Friendly Gorilla Interview

A Fresh Perspective

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Background Check Ground Rules

Higher Out of the Box thinking!

“We cannot solve problems by using the same kind of

thinking we used when we created them.” – A.E.

Skepticism at its Highest!

A new standard: beyond a reasonable doubt – for new

hires and anyone with access to the organizational value

Remember APE : Assets less People = Equity


Purchase Order

Raw Materials

Receiving Documents

Inventory

Invoice / Accounts Payable

Cash

Manufacturing / Finished Goods

Cost of Goods Sold

SaleReturned / Defective Goods

Fraud & Internal Audit Training Strategic Internal Audit Services Fraud Investigation & Forensics

All Business Processes are Connected

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GAAS ‐ Obtain internal or external documents supporting economic transactions generated in the normal course of business, e.g., checks, bank statements, or invoices.

Forensic ‐ Review public document sources and perform background checks for information about key individuals (e.g., owners and employees), relationships (e.g., related parties and competitors), transactions (e.g. Stock trading activities and related party transactions), and the company (e.g., ownership, customers, and the industry).

GAAS vs. Forensic Evidence


GAAS‐ Inquire regarding established control procedures or explanations for observed results.

Testing versus 100% Check

Forensic ‐ Interview knowledgeable persons to discover or obtain evidence of questionable activities such as management override or evidence of a weak control environment. Although audit guidance includes interview requirements, the manner in which interviews are conducted is more in‐depth and focused than interviews performed in a traditional GAAS audit.

Studies Intent

GAAS vs. Forensic Evidence (cont.)

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You can add all the pressure and opportunity rocks to the fraud‐o‐meter that you want, but until the rationalization rock is added, you will not have fraud.

Art By James Lee

Rationalization


BACKGROUND CHECKS, LISTENING, AND WATCHING!

Repetition of Oaths Selective Memory Character Testimony

Covering Eyes / Face Scratching Biting Nails / Lips

Fraud & Internal Audit Training Strategic Internal Audit Services Fraud Investigation & Forensics

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Perspective

Occupation

Position

Are the expectations and perspectives of the potential fraudster aligned with your organization's? People are classified within an organization by occupation (title). Is the potential fraudster in the right occupation to commit fraud? People get put in positions of trust based on occupation and title. Does the fraudster’s position in an organization give him or her the ability to commit fraud?

Art By James Lee

POP!


Due professional care

Ethics: everyone on board

Remove personal judgment; replace with factual support

Understand motivational needs of both the organization

and all employees

Remember the “…what would a reasonable person…” think standard of the assessment made

A Foundation for Assessment

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What would a reasonable person think standard?

A Foundation for Success


RULE 201• Due Professional Caremust have been maintained in making

the decision.

• Adequate Planning and Supervisor oversight should have been present in the decision.

• Sufficient Evidential Matter should have been present when making the decision. The evidence should have been sufficient enough to stand up in a court of law.

• Parties involved in the decision must have had Professional Competence.

Regulations and Standards

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•Conservatism

•Materiality

•Revenue Recognition Principle

•Historical Cost

•Matching Principle

•Going Concern

•Full Disclosure

•Economic Entity Assumption

•Monetary Unit Assumption

•Time Assumption

The 10 Accounting Principles

Knowing the Rules


Which Rules of Professional Conduct should be adhered to when performing background check ?

1. AICPA Professional Standards 101.

2. AICPA Professional Standards 201.

3. AICPA Professional Standard 202.

4. All of the above

Polling Question #1

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Employees Win


Criminal Background

Survey by Employee Screening.com http://www.employeescreen.com

There appears to be a trend to remove requirements to not disclose past criminal history forcertain hiring positions.

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Employees Win (continued)

Employee Background Check Precautions

Privacy Rights Background Checks

Regulation: Do they ensure compliance? Patriot

Act, Gramm/Leach-Bliley, Dodd/Frank, HIPPA etc.

The Fair Credit Reporting Act (FCRA)

The Americans With Disabilities Act (ADA)


Consider all circumstances and consequences

(Brainstorm).

Ask whose self‐interests are being served?

What would an average person think?

Select the best or most ethical alternative with

documentary supports

Keep the compass pointing due North.

The Roles of Ethics

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Art By James Lee

Moral Compass


Beware “Ethics Creep”

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Which is not true about company ethics policies:

1. If an organization doesn’t truly value integrity, its ethics policy might do more harm than good.

2. A thorough, well‐designed ethics policy is a surefire way to prevent

fraud.

3. An ethics policy should address the specific risks of employee misconduct that were identified in the organization’s risk assessment process.

4. Ethics policies are applicable to all members of the organization.

Polling Question #2: Proper Ethics in the Organization


Job candidates and/or employee have perceived right to privacy rights

Several laws:

1. The Fair Credit Reporting Act (FCRA).

2. The Driver’s Privacy Protection Act.

3. The American with Disabilities Act (ADA).

4. Different states have different regulations, such as the Investigative Consumer Reporting Agencies Act NJ Private Detective licensing

Organizations as Social Gatekeepers

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The FCRA says that any employer that uses an outside company (called a consumer reporting agency) to conduct an employee background check must:

Provide the target of that check with certain notices

Obtain written authorization to conduct the investigation

Fair Credit Reporting Act


If an employer decides to take an “adverse action” based on the information in the consumer report (such as not hiring an applicant or terminating an employee), the FCRA has other requirements an employer must follow when notifying the individual of its decision. First, prior to taking the adverse action (sometimes referred to as the pre‐adverse action), the employer must provide the applicant or employee two notices:

A copy of the report obtained from the CRA

A summary of the individual’s rights under the FCRA. This summary is a standard document created by the Federal Trade Commission

Examples and procedures presented on how to run and understand the results of a credit report with respect background check later on in presentation.

…continued

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The Federal Trade Commission (FTC), which has previously overseen employment matters under the FCRA, has passed some of its authority to the Consumer Financial Protection Bureau (CFPB).

This means that anyone who wishes to contest the outcome of an employee background screening or get any other information regarding the check must contact the CFPB instead of the FTC.

Dodd / Frank at Work!


Consumer Reporting Agency: valuable information from the FCRA

Using this information provides you with access to multiple state and federal reporting systems

However – you must adhere to specific procedures for:

Notifying the employee / prospective employee

Obtaining acknowledgements

Maintaining proper associated record‐keeping

Understanding CRA’s

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Three important notices that are part of the background check process related to the change of authority from the FTC to the CFPB:

The forms that are being updated are all used in the background screening process, and are required by the FCRA. They include:

“A SUMMARY OF YOUR RIGHTS UNDER THE FCRA”

“NOTICE TO USERS OF CONSUMER REPORTS: OBLIGATIONS OF USERS UNDER THE FCRA”

“NOTICE TO FURNISHERS OF INFORMATION: OBLIGATIONS OF FURNISHERS UNDER THE FCRA.”

The main change to the forms is to explain how individuals and businesses can contact the CFPB. All employers must use the new forms in their background check procedures beginning Jan., 2013.

CFFP Changes: http://www.consumerfinance.gov


Beware the pitfalls:

Safeguard access to report request / file information

Be prepared for negative information on prospects

Periodically validate the sources of information

Periodically review key aspects of policies and procedures:

Dated

Relevant

Effective

Get Input From Employees

Easy To Understand

Training Program To Enforce

Discussion

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Visit your federal, state, local, and county government websites

Search court records (Pacer or Justia.com)

Use a commercial people‐search service

Use Google or web‐based search engines

Visit your federal, state, local, and county courthouses

Search social media (Facebook, LinkedIn, Twitter, etc.) for a clue

into this person’s past

Hire a private investigator

Private Citizen Accesses


Fitting this into the Organization

Manage the Culture

Direct overall ‘group’ behaviors, but follow‐up on negative signs

Utilize additional in‐house, federal, state, local, and county resources,

for example:

National Association of Background Screeners

FBI

Credit Agencies

Tax Records (deeds)

Social Media

Internal / External Auditors

Share war stories – be sure employees are aware of how bad things

can get if something is missed

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ABC Inc. is revamping its background check policy to ensure it is not hiring thieves. Which is NOT true?

1. ABC Inc. should implement a background check policy for all employees.

2. ABC’s policy should require credit checks only for staff hirings

3. ABC should run credit reports on people with access to assets.

4. Don’t document the file and pretend it never happened

Polling Question 3


PRESS RELEASE6-11-13

EEOC Files Suit Against Two Employers for Use ofCriminal Background Checks

BMW Fired and Denied Hire to Class of Employees Who Worked Successfully forYears; Dollar General Disproportionately Excluded African Americans From HireWASHINGTON - A BMW manufacturing facility in South Carolina, and the largest small box discount retailer in the United States violated Title VII of the Civil Rights Act byimplementing and utilizing a criminal background policy that resulted in employeesbeing fired and others being screened out for employment, the U.S. Equal EmploymentOpportunity Commission alleged in two lawsuits filed today.

Don’t Get Sued ‐Relevant News

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A Successful Fraudster’s Six P’s

“There are six traits a fraudster must display to remain in theorganizational process undetected” – Joe Petrucelli – Detecting FraudIn Organizations

Passion Philosophy Planning Persistence Patience

Prison


Assessing Background Risks.

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Inherent Risk is risk of violating the employees rights

Control Risk get the proper disclosures signed. Best approach is interview with specific questions.

Verifying vs. Investigating

Detection Risk ‐Make sure you are checking and not perceived as being on a witch hunt. Independence and transparency.

Residual Risk needed to avoided politics in the selection

and ensure the system is not biased. Applied to everyone equally!

Know the Background Risks


A review by Petrucelli & Co. of XYZ Co’s internal controls revealed that XYZ had risks in its background check policies. Petrucelli Co. should…

1. Identify, Record and communicate the risk to the proper management

2. Get a Sign off from management that there are no material issues with the background policy.

3. Accuse an employee with a post on facebook that they drink a lot based on a picture they saw.

4. Stakeout the employee residence and follow them and write a report

Polling Question 4

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Include Everyone

Low Level Employees Know The Details

Former Employees Can Provide Valuable Info

Do Not Allow Employees To Be Influenced (treat Everybody consistently)

Assure Sources Are Confidential

No Retribution For Speaking Up (Reward Ethical Behavior)

Interview sets up the key items you want to verify to make sure that you are hiring the right person

Employee Interviews


Types of Searches

County, National and Federal criminal records

checks

Employment verification – past employment dates,

job titles and positions

Social Security Number validation

Address history

Motor vehicle records check – driver’s license

status and violations

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Credit

Citizenship, immigration, or legal

working status

Litigation records

Education records

Employment records

Financial information

Licensing records

Medical, Mental, and Physiological

evaluation and records

Military records

Polygraph testing

Other interpersonal interview

IRS Transcripts (Form 4506, 4506T)

Types of Searches (continued)


Sample Credit Authorization

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The 3 National Credit Repositories

EQUIFAX INFORMATION SVCSP.O. BOX 740241ATLANTA, GA 30374(800) 685-1111 Website: www.equifax.com

EXPERIANP.O. BOX 2002ALLEN, TX 75013(888) 397-3742 Website: www.experian.com

TRANS UNIONP.O. BOX 34012FULLERTON, CA 92834(800) 916-8800 Website : www.transunion.com

Obtaining a copy of your credit report is easy. A 2004 federal law entitles everyone to one free credit report from each of the 3 main credit reporting agencies — Equifax, Experian and TransUnion — per year.

To order online, visit www.annualcreditreport.com. By phone, call 877-322-8228. Or, you may complete the form on the back of the Annual Credit Report Request brochure, and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA, 30348-5281.


Credit‐Related Issues

Auto repossession remains for a time after being paid off

Buy‐here‐pay‐here dealer not likely to report payments

Credit information is updated continuously

Ensuring account is reported “closed”

Ensuring charges sent to collection in error are not in credit report

Getting credit report updated quickly after debts are paid

How long before paid credit cards are updated

How long it takes for a $0.00 balance to show in your credit report

Income is not part of a credit report so cannot be updated with Experian

Individuals cannot report their own accounts

Paid court judgments updated automatically, not deleted immediately

Reporting accounts to Experian is probably cost prohibitive for small business

Reporting utility bill payments will be beneficial to consumers

Sending change of address to Experian not necessary

Stopping preapproved credit offers addressed to deceased son

Updating bankruptcy information

Updating employer listing on your credit report

Updating the employers listed on your credit report

Updating your report when a tax lien is released

What to do if you are mistakenly reported as deceased

When will paid accounts be updated?

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Know what's Required

After giving the applicant or employee these notices, the employer is required to wait for approximately five days before actually taking the adverse action. After the adverse action is taken, the employer must provide a number of other notices to the applicant or employee: Notice of the adverse action taken;

The name, address, and toll free telephone number of the CRA that provided the consumer report;

A statement that the CRA did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken;

Notice of the consumer’s right to obtain a free copy of the consumer report from the CRA within 60 days; and

Notice of the consumer’s right to dispute the accuracy or completeness of any information in the consumer report furnished by the CRA.


What to Disclose

When ordering a background check from a CRA, employers need to be aware of particular laws regarding the use of such information. For example, although the FCRA allows the reporting of arrest information going back seven years, some states prohibit employers from considering whether a job applicant has ever been arrested (but not convicted) of a crime. Therefore, employers need to make sure they are familiar with the specific laws of their state before making an employment decision based on the information from a background check.Although instituting a background checking program can be a big step for an employer, the benefits are almost always worth the time and effort. The costs of instituting a good background check process are slight compared to the costs that can be associated with hiring an individual who lies on his or her resume or job application and who later goes on to steal from the company, drive a company car while drunk, engage in workplace violence, or worse.

The background check process can help employers reduce or eliminate such risks.

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FBI Background Searches

http://www.fbi.gov/about-us/cjis/nics/national-instant-criminal-background-check-system/view


Background Search & Record Checkhttp://backgroundsearch.com/

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Sample Background Authorization


Which of the following should an organization do in conducting background checks on existing employees?

1. Utilize a third party contractor

2. Have HR call toverify the references after securing permission.

3. Conduct and record and interview prior to conducting background checks.

4. All of the above.

Polling Question 5

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800 Lb. Friendly Gorilla Tips

Human resources is the Front Line of Defense

Confirm skills and knowledge by testing and verifying rather than

investigating references and representations.

An Internet search, on the candidate's name, especially at Google.com to confirm an individual's representations about their jobs, performance, awards, Social media sites, Facebook, Linked, Twitter, etc.)

Criminal background checks ‐ (Sex offender registry)

Patriot act searches . Maintain Privacy by adhering to Federal, State and local levels.Accounting and finance professionals, credit checks. Anyone with access to convert the value in the organizational process.

Run all Three Credit Repositories

Pacer or Justia.com (Court documents public information)

Open Public Records Act or Freedom of Information Act

Maintain the what would a reasonable person think standard

with regards to background checks.


Jim Kaplan

FraudResourceNet LLC

800-385-1625

www.fraudresourcenet.com

[email protected]

Peter Goldmann

FraudResourceNet LLC

800-440-2261

www.fraudresourcenet.com

[email protected]

Joseph R. PetrucelliCPA/CFF/CGMA, FCPA, CVA, MAFF, PSA, CFE

[email protected]

www.joepetrucelli.com

732‐636‐4400

Thank You!


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