Employee Fraud

  • Disciplinary
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Peninsula Group, HR and Health & Safety Experts

(Last updated )

Most business owners hope to have a team of employees they can trust. But unfortunately, no employer or workplace is perfect.

If an employee commits fraud at work, your company could suffer and face financial losses.

In this guide, we'll explore the different types of employee fraud, how to spot red flags, and avoid the risk of fraudulent activity altogether in your business.

What is employee fraud?

Employee fraud occurs when someone lies about or steals from your business. Typically, this is to gain benefits such as money, access to company assets, or even workplace recognition.

Employee fraud, also known as insider fraud, might not have been something you'd usually worry about. But the reality is, it can be a threat to your business and its sales no matter your company's size.

What are the risks of employee fraud?

Employee fraud quite simply puts your company and company assets at risk.

Employee fraud often starts small, with the employee taking more benefits as time goes on and their confidence increases. It can be a complex issue to spot, due to the many processes the fraudster may have taken to cover their tracks.

Common types of employee fraud

There are many different types of employee fraud that businesses might encounter. Some types are less severe than others, but it's important to be aware of them all.

For example, you may not be too worried about office supplies going missing. However, the effect it has on your company all adds up. Being aware of all types of fraud - big or small - will reveal which employees can be trusted.

Below are the most common types of fraud your company may encounter:

  • Employee theft.
  • AP fraud.
  • Accounting fraud.
  • Payroll fraud.
  • Vendor fraud. 
  • Expense fraud.
  • Timesheet fraud.

Employee theft

Employee theft is a broad term to describe an employee stealing from an employer. But, theft can take many other forms.

Let’s explore some examples.

Data theft

Data theft is when an employee steals sensitive information from your company. This can vary from your client's personal information to your business's confidential secrets.

For example, an employee could use data theft to get details of their employer’s customer base, create a competitor company and use this information to build clientele.

Theft of cash

Employee theft of cash or funds can take a variety of forms. It isn’t just an employee taking money out of the till, or stealing it from another employee’s desk. Its most common form is when an employee takes money from the service you provide.

For example, an employee may not register a sale but take the cash. Or they could charge a client a higher price and take the excess money.

Theft of services

Employees can steal from the business services, sales, or even company assets.

Examples of this form of employee fraud include using the company vehicle for personal use or using the company credit card for personal expenses.

Embezzlement

Embezzlement is when an employee misdirects money from the business to themselves, another person or another company.

The employees involved will usually use their knowledge or position within the company to take advantage.

Accounts payable fraud

Accounts payable fraud - also known as AP fraud - is a form of employee fraud where an employee commits fraud by targeting the payroll department. Typically to make any type of illegal or false payments on behalf of the business.

Employees that commit AP fraud usually have a wide knowledge of the accounting system their employers use.

Accounts receivable fraud

Accounts receivable fraud is when an employee uses a customer's funds for personal use. To ensure they don't get caught, employees will move payments from one account to another.

For example, they may pocket a customer's funds and use another customer's account to replace this money. And so on and so forth.

Accounting fraud

Accounting fraud is when an employee manipulates the business' finances to appear financially stronger.

There are a number of reasons why an employee may commit this form of fraud. They may want to hide the company losses, or attract customers by appearing more successful.

They may do this by destroying accounts, falsifying sales, inflating sales numbers or altering documents so they don't reflect the true value of the business.

Bribery

Bribery at work is when employees offer or receive a gift, loan, payment or reward to another person in exchange for their own benefit. Examples of bribery at work may include accepting a gift from a customer in exchange for an unauthorised discount.

Bribery is an illegal offense with severe penalties. It has a damaging financial effect on companies. As well as ruining a business's reputation and employee morale.

Check out our guide on bribery and corruption in the workplace to find out more.

Payroll fraud

Payroll fraud can occur in a variety of ways. Most often, an employee will commit payroll fraud by boosting payments to themselves.

They will likely work in the financial department of the company, as they would need to know the payroll process.

Timesheet fraud

Employees may also commit timesheet fraud.

This is where employees will fake their timesheet records to present themselves as having worked longer. Consequently, they receive a higher payment despite not working any extra hours.

Similarly, they may seek an advance on their salary. This means they would get paid earlier than usual. But if they don’t plan on paying it back, this is advance fraud.

Vendor fraud

Whilst you need to be aware of your employees committing fraud, you also need to trust the suppliers and businesses you work with. Otherwise, you may be at risk of vendor fraud.

An employee may commit vendor fraud by working with external suppliers or a contractor.

The employee - on behalf of a supplier - could submit false invoices to the accounts team and steal money from the business. If they have access to the financial system, they may even create a false vendor and set up regular payments to them.

Detecting vendor fraud is difficult as the number of people involved can make the issue more complex.

What businesses are most at risk of employee fraud?

There is more risk involved when it comes to employee fraud for small business owners. This is mostly due to small businesses having fewer resources than a bigger business.

There is often more at stake for small businesses when it comes to employee fraud. That’s because a big loss of money can be more difficult to recoup.

This does not mean that larger businesses shouldn't worry about employee fraud. Large and small businesses should ensure they have a procedure in place to deal with employee fraud.

Employee fraud falls under gross misconduct in the workplace. If you discover employee fraud you will need to follow your company’s disciplinary procedure.

How to spot employee fraud

Spotting employee fraud is easy to do when you know what red flags to look for.

Suspicious activity may include:

  • An employee acting secretive, being reluctant to be reviewed by a colleague or share their work.
  • An employee living well beyond their means with a lifestyle that doesn't match their salary.
  • Excessive inconsistencies within their work and financial documents, including unexplained cash transactions or increased expenses.

Catching an employee commit fraud

So, what do you do if you catch someone in your business committing employee fraud? Well, there are several actions business owners should take.

  • Remove the employee's access to accounts and financial systems within the business.
  • Follow your disciplinary procedure and launch an investigation into the employee's alleged misconduct.
  • Call the police and file a report.
  • Call your insurance company to seek advice and potentially make a claim.

How to prevent employee fraud

Employee fraud may seem like a scary prospect. But, you don't need to hire a team of certified fraud examiners to avoid employee fraud and theft.

There are many ways to protect your business from employee fraud. These include:

  • Conducting thorough background checks
  • Rotating employee duties
  • Implementing random audits of company accounts
  • Use purchase orders for invoices
  • Create an anonymous employee hotline

Let’s explore how to protect your business from employee fraud.

Conduct thorough background checks

It may be time-consuming to conduct thorough background checks. But you need to do your due diligence as an employer to ensure you're hiring employees you can trust. This can be done with a pre-employment check.

Checking their references, right to work - and in some instances, their criminal record, can give you a quick idea of an employee’s background. And whether or not they are capable of committing fraud. It's also worth checking the background of your suppliers by getting speaking with existing customers.

Rotate employee duties

Having employees rotate their duties will mean that no singular person has access to a whole system. It might require additional training for your employees but in the long term it’s difficult for them to commit fraud.

Implement random audits of company accounts

Random and ad-hoc audits to your company accounts makes it difficult for employees to commit fraud. These checks act as a barrier for employees, as they have an increased chance of being caught in the act.

Use purchase orders

A purchase order or PO is a legally binding document. The document notes the intentions of a customer to buy a service or product from a business.

POs typically include:

  • PO number.
  • PO order date.
  • Buyer address.
  • Supplier address.
  • Products purchased and its prices. 
  • Payment terms.

Having a purchase order system makes it easier to manage projects and budgets. Similarly, it also leaves less room for error in comparison to an order over the phone or verbally face-to-face.

You can also use POs to refer back to when reviewing financial accounts.

Create an open dialogue with employees

Setting up open, safe and confidential communication channels with your employees is important. And will encourage them to report suspicious activity when they spot it. 

For example, you could create an anonymous employee hotline. This gives employees the chance to alert management about any misconduct that could occur. Including employee fraud.

Allowing employees to report anonymously will also make it easier for those who may be scared of coming forward.

Don't ignore small mistakes

Small mistakes happen and of course, employees should not be penalised if they make one or two now and again.

However, if an employee is consistently making mistakes, you should keep an eye on their performance.

If there are discrepancies in financial documents they have reviewed or written, check every detail. This may mean tracing a sales invoice back from the beginning to ensure it is correct.

Get expert advice from Peninsula

Employee fraud is a serious issue that large and small businesses need to be aware of. It’s important to have a procedure in place that can prevent employee fraud and help spot it when it happens.

Peninsula offers expert advice and resources for companies about the risk of employee fraud. Our HR team provides unlimited 24/7 HR employment services which are available 365 days a year.

Want more information on how to protect your business from employee fraud and all its forms? Seek specialist advice from one of our HR advisors. For further information, call our telephone number 0800 051 3683

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