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Best Practices for Prevention of Employee Dishonesty

Although there is no way to completely prevent all forms of employee dishonesty, applying some best practices will help to reduce the negative impact.

This table will help illustrate some of these best practices that have been proven to reduce the risk of employee dishonesty:

Best Practice
 Pre-employment screening
 Fidelity bonding process
 Criminal record check
 Board approved ethics policy
 Ethics policy awareness program
 Zero tolerance policy
 Monitoring of key reports
 Unscheduled reconciliations
 Loan file reviews
 Internal audit program
 Monitor high risk accounts
 Segregation of employee duties
 Mandatory vacation policy
 Dishonesty investigation procedures
 Complaint monitoring
 Anonymous reporting of dishonesty
 Involvement of law enforcement
 Recovery of stolen assets
 Termination of dishonest employees
Here are a few general rules to follow:
  1. Maintain and promote an ethical and honest culture
  2. Screen high risk individuals during the interview process
  3. Ensure that controls are in place to deter the dishonest behaviour
  4. Investigate all allegations of discrepancies
  5. Deal with unethical or dishonest behaviour promptly and effectively


Employee Dishonesty - Best Practices in Detail


Employee Screening 

Employee screening will reduce the risk of fraud, employee misconduct, and poor performance through proactive candidate selection.  By making applicants aware of the company’s screening policy, it will act as a deterrent to unsuitable candidates.
An effective screening process will include the following elements:
  • Employee selection based on sound character and strong ethical foundation;
  • Participation in fidelity bonding process through The Credit Union Bonding Program (see “Fidelity Bonding Guidelines”);
  • Background screening of all new employees for verification of employment history, criminal record search and sound financial position;
  • Provide employees with specific information regarding their rights and responsibilities under the fidelity bond, and as an employee in general;
When reviewing résumés or employment applications, keep in mind the “red flags” which are proven indicators of dishonesty:
  • Falsification of dates;
  • Exaggeration of experience;
  • Falsification of identity;
  • Gaps in education or employment history;
  • Information that cannot be verified 

Ethical Corporate Culture 

Your credit union must promote a culture that emphasizes honest and ethical behaviour. A clear policy will help the employees become familiar with the consequences of unethical behaviour.
Maintaining a strong ethical culture should include:
  • Establishment of an ethics policy and code of conduct which are supported by the Board and senior management;
  • Effective communication of the policy to all employees when hired, and on a regular ongoing basis;
  • Participation in a visible employee screening and bonding process;
    Maintaining a zero tolerance policy for unethical, dishonest behaviour.

Strong Visible Internal Control System

Employee dishonesty incidents usually start out small but can spiral out of control if not detected.  A strong control environment serves an important function in preventing employee dishonesty.
Some key elements in the Internal Control Process:
  • Ensuring that all employees are subject to regular performance reviews, particularly of lending and overdraft activity, since this type of review will often uncover irregularities in the documentation;
  • Obtaining key information from a number of sources to ensure that no single source of key information can be compromised by a dishonest employee;
  • Effective external audit programs, including specific instructions to scrutinize high exposure areas such as:

    • overall control environment;
    • employee accounts;
    • suspense and in transit accounts;
    • loans and overdrafts;
    • inactive accounts;
    • treasury balances.

  • Providing employees with the means to report suspected dishonest acts, including a mechanism for anonymous reporting.

Segregation of Duties

The single most important factor that has led to employee dishonesty losses within the credit union system is a lack of responsibility separation. In many small credit unions, ensuring proper separation is a challenge due to the low number of employees.
It is important to ensure proper segregation of duties based on job functions rather than based on the individuals who perform those functions. Whether or not the person is “trusted” or a long-time employee should never be a factor in considering the proper control environment.
In cases where the credit union lacks sufficient employees for proper segregation of duties, it may be necessary to engage independent resources to ensure additional scrutiny.


Zero Tolerance

As part of the ethics policy and employee awareness programs, the credit union should make it clear that there will be no exceptions made to the key ethical principles adopted by the Board.
The policy should also emphasize that it is the responsibility of employees to report suspicious or unethical activity. An anonymous reporting facility should also be made available to employees.
The key to an effective zero tolerance policy is to follow it up with action. If exceptions are made, then the ethics policy will be seen as arbitrary and will not be supported by the employees.
The requirement that all employees be bondable should also be formally recognized.


Reporting and Detection

Information about dishonest activity is often available but is not properly recognized for its true nature.

In order to ensure that information is properly recognized, it is important to:
  • Ensure that key reports related to high-risk loans and accounts are reviewed by someone other than those responsible for those loans and accounts;
  • Monitor customer and supplier complaints carefully;
  • Ensure that allegations of employee dishonesty are reviewed by the fidelity bond insurer;
  • Establish a mechanism for reporting suspected dishonesty that allows flow of information through channels other than management, such as a “tip line” to report dishonest activity;
  • Be prepared to retain outside assistance or advice when reviewing information which may involve dishonesty, to determine if further investigation is needed;
  • Do not accept easy explanations of discrepancies without independently confirming the facts.


A prompt and thorough investigation is required in all cases where dishonesty is suspected. These investigations should always include:

  • Prompt investigation of any fraud-related allegations, including establishing formal investigation procedures;
  • Use of experienced investigators or special investigation units when needed;
  • Freedom from bias – investigation conducted without regard to the position, length of service or apparent character of the employee;
  • Suspension of the employee with pay until the investigation is complete;
  • Employee dishonesty issues reported to the fidelity bond insurer, which may also have input into the investigation;
  • Full involvement of law enforcement in any case where theft or embezzlement is evident;
  • Aggressive recovery of any proceeds of crime.


Once an investigation is concluded, the facts will determine if an employee should be terminated in accordance with company policy. In cases where dishonest acts are strongly suspected but not proven, the employer should consider consultation with legal counsel to determine if a notice period is required.
Provincial legislation varies. Credit unions should contact their Central or Bond master policyholder for specific details.