Discovering a co-worker stretching or disregarding the rules can be a very stressful occurrence in the workplace. How you handle a delicate situation like this will also say a lot about your character and work ethic.
"I have discovered a co-worker being dishonest in the workplace. As soon as I made the discovery, I gently confronted the person and asked if this was, indeed, what I observed. Generally speaking things can be worked out on a one-on-one basis."