Occupational fraud generates annual losses of several USD trillion globally. How can companies mitigate reputational risks wh


Occupational fraud generates annual losses of several USD trillion globally. How can companies mitigate reputational risks while hiring?

30 March 2023

Opinion article by Alexandru Nae, Senior Manager, Financial Advisory, and Alexandra Nisipeanu, Senior Associate, Financial Advisory, Deloitte Romania

From professional background to culture fit, there are a lot of boxes to be checked during the recruitment process, in order to spot the right candidate for a certain role. However, one of the most important steps of the process, often overlooked or underrated, is the pre-employment screening.

But before getting into the importance of pre-employment screening, it is useful to establish what it stands for.

Given the major post-pandemic changes and the ongoing economic resettlements, organizations are handling a rising and all more dynamic employment force, thus significantly more wrongdoings such as employee impersonation, dual employment, resume fraud, as well as fake employment and education documents. A pre-employment check is designed to reveal any details that the individual may have hidden or misrepresented to their potential employer, and to also uncover possible history of fraud or any other unethical record.

A pre-employment screening is thus a process used by companies to verify that an individual is who they claim to be, by verifying the applicant’s information provided in their resume, through official legal records and via publicly available and subscripted databases, and, if needed, by asking for references, all that in order to prevent operational and reputational risks for the organization in case the candidate gets employed.

Why is it important to conduct background checks?

Employee background verification or namely pre-employment screening reduces the risk of occupational fraud and misconduct at the workplace. Supporting data exists, and according to the “Global Fraud Survey” report, published in 2022 by the Association of Certified Fraud Examiners (ACFE), 43% of victim organizations did not run a background check on the perpetrator prior to hiring. Furthermore, according to ACFE’s study, conducted among companies in 133 countries worldwide, 21% of the background checks usually reveal existing red flags. The same study has found that a typical business organization loses 5% of its revenue each year due to occupational fraud, which amounts to over USD 4.7 trillion yearly lost to fraud at a global level.

On the other hand, there are situations where the failure to perform a background screening of the applicants may lead to litigation. In Romania, for example, the employment of foreign workers without a valid stay permit or lacking an employment permit may lead to a fine between RON 10,000 and 20,000, that is approximately EUR 2,000-4,000, for each person identified, as per the General Inspectorate for Immigration’s data.

Types of searches that can be run in line with the local legislation

From a legal perspective, there are several aspects to be considered when it comes to individuals’ screening in different countries, and each country has its own regulations and common practices, which will impact the nature and amplitude of the checks that can be conducted.

In Romania, the legislation is scarce and restrictive when it comes to providing a reputational check procedure for recruiting future employees. Besides the medical check and a police clearance certificate that is only asked for in some specific fields and professions, no other background checks are commonly required. Although allowed by the law, references from previous employers are rather uncommon, and are generally limited to the tenure of the employment and the employee’s role altogether.

Depending on the position to be held in the company, the pre-employment screening should include aspects such as: collection of basic information, including residence history and identity verification, through ID or passport, birth certificate, residential address and professional licenses or certificates; employment eligibility, by verification of the right or authorization to work in the relevant country; educational background verification; work history, through verification of past employment; criminal background check in national and international criminal and litigation records; adverse media check, including allegations found in reputable news and other publications that link a person or an affiliated company to fraud, money-laundering, corruption, terrorism and other unlawful or unethical activities.

Regardless of the jurisdiction or magnitude of the position to be held, pre-employment screening should be performed to a reasonable extent, so that it is compliant with data protection laws, labour laws or any other specific legislation applicable in each geography.

Reduce the risk for fraud

Companies are expected to protect their business, their existing employees, and their clients. In a scenario where a company fails to conduct a proper pre-hiring screening for a new employee, and several months later that same employee commits a wrongdoing while on the job, potentially a deed they had committed before, the company may be held liable and may suffer from financial and reputational damage.

As a conclusion, hiring a person who does not align with the company’s values or shows a lack of transparency in terms of application credentials would be a costly mistake for the organization, and can have a negative impact on its reputation. Instead, acting in a pre-emptive manner will ensure the safety of both the company and the brand, and of their existing employees. As such, the pre-employment screening should be regarded among the primary lines of defence for the business.