Background Check Best Practices

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Copyright © FraudResourceNet LLC
Background Check
Best 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 Petrucelli
Companion Site to Detecting Fraud in Organizations
jpetrucelli@ppdaccounting.com
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 Care must 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 for
certain 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 RELEASE
6-11-13
EEOC Files Suit Against Two Employers for Use of
Criminal Background Checks
BMW Fired and Denied Hire to Class of Employees Who Worked Successfully for
Years; Dollar General Disproportionately Excluded African Americans From Hire
WASHINGTON - 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 by
implementing and utilizing a criminal background policy that resulted in employees
being fired and others being screened out for employment, the U.S. Equal Employment
Opportunity 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 the
organizational process undetected” – Joe Petrucelli – Detecting Fraud
In 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 SVCS
P.O. BOX 740241
ATLANTA, GA 30374
(800) 685-1111 Website: www.equifax.com
EXPERIAN
P.O. BOX 2002
ALLEN, TX 75013
(888) 397-3742 Website: www.experian.com
TRANS UNION
P.O. BOX 34012
FULLERTON, 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 Check
http://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
jkaplan@fraudresourcenet.com
Peter Goldmann
FraudResourceNet LLC
800-440-2261
www.fraudresourcenet.com
pgoldmann@fraudresourcenet.com
Joseph R. Petrucelli
CPA/CFF/CGMA, FCPA, CVA, MAFF, PSA, CFE
jpetrucelli@ppdaccounting.com
www.joepetrucelli.com
732‐636‐4400
Thank You!

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