No CU Is Immune From Employee Dishonesty

Effective risk oversight requires you to focus on all risks a CU faces, including embezzlement.

April 27, 2012

Many boards aren’t prepared for the financial and reputational impact of embezzlement. Whether your credit union is large or small, employee dishonesty does not discriminate.

As a risk management consultant for CUNA Mutual Group for 27 years, I’ve heard many board members say, “It will never happen to our credit union” or “We have honest employees.” Unfortunately, some of these board members have had to face the harsh reality of embezzlement in their credit unions.

While it’s important to trust your employees, it’s also important to realize any employee can commit fraud. There’s no prototypical embezzler.

People are human, and a variety of circumstances can lead honest employees to steal. Loss of a spouse’s job, divorce, illness, a family member in need, drugs, alcohol, gambling, and other factors can lead previously honest employees to rationalize theft from their employers.

Although the number of reported employee dishonesty claims to CUNA Mutual Group has gone down, the dollars paid for these types of losses has increased. In 2006, CUNA Mutual paid roughly 250 bond claims due to employee dishonesty.

In 2010, that number dropped to about 200. But claim dollars paid more than tripled, jumping from $12 million in 2006 to $38 million in 2010.Directors Newsletter

The average cost per claim increased from $50,000 in 2006 to roughly $190,000 in 2010. Employee dishonesty claims account for 13% of the total number of bond claims paid by CUNA Mutual Group, but represent 45% of the total dollars paid.

To recoup payments on behalf of policyholders, CUNA Mutual Group aggressively pursues recovery through civil litigation against individuals responsible for causing the losses. Recovering paid claims through civil lawsuits can help lower the cost of insurance, which can benefit policyholders collectively and individually through recouped deductibles, improved loss ratios, and lower premiums.

If you haven’t experienced an employee dishonesty situation in your credit union yet, don’t be complacent. Be proactive, and remain vigilant.

Effective board of director risk oversight includes all risks your credit union faces. Board members should ensure effective processes are in place to prevent or cut short embezzlement. It begins in the hiring process.

Here are some recommendations:

• Use background checks. Effective hiring practices should be in place to reduce the likelihood you hire an employee who might not have your credit union’s best interests at heart. Make sure your credit union uses comprehensive background screening.

• Create and maintain an internal fraud policy. Require new employees to sign the fraud policy and resign it annually.

The board of directors’ support of a fraud policy sets the tone from the top that fraud simply isn’t tolerated. Include examples of fraud in the policy so employees clearly understand what fraud is and that it’s absolutely unacceptable. The annual signing of a fraud policy should be extended to all volunteers, including the board of directors, who aren’t immune from committing dishonest or unfaithful acts.

• Implement and maintain effective internal controls in every facet of operations. Whether aimed at individuals such as frontline staff or senior management or functions such as cash handling or financial reporting, effective internal controls stop fraud or place responsibility should it occur.

It’s inexcusable not to be able to determine the employee responsible due to lack of internal controls. Likewise, it would be unfair to honest employees and could create personnel problems if you were unable to rule out suspects to the fraud.

• Question management about internal controls designed to prevent employee dishonesty. Accountability is key.

• Test and re-evaluate. Even if your board is comfortable management has taken necessary steps to implement good internal controls, ensure your credit union tests and re-evaluates controls periodically. Internal controls can become ineffective if not updated regularly.

• Conduct regular, independent audits. Use a third party or internal auditor/supervisory committee to ensure fraud isn’t present—or if fraud is occurring, that it is stopped and the responsible party held accountable. Review audit reports and ask questions until you’re content with all findings.

• Create a “whistle-blower” policy. Employees shouldn’t fear retaliation for reporting alleged wrongdoing. The board should be accessible to staff and welcome thorough and confidential investigations.

Preventing employee dishonesty should be part of your board's oversight responsibility. Set the tone from the top, and be vigilant, aware, and prepared.

JOETTE COLLETTS is regional manager, risk management, for CUNA Mutual Group. Contact her at 800-356-2644, ext. 5159.