Employee theft and fraud are among the most widespread and costly challenges facing today’s business world. Statistics suggest they cost American businesses between $20 billion and $50 billion annually. Employee fraud not only causes financial losses but also impacts growth while reducing profitability. Employee fraud can also affect your company’s brand image and reputation.
Upon learning about the fraud, customers may develop distrust in your organization’s credibility, and some may even abandon you. Understanding employee frauds that companies are highly likely to experience and how to avoid them can help safeguard your business’s finances and reputation. Discussed below are the common types of employee fraud and how to prevent them.
1. Employee data theft
Every business possesses proprietary or confidential information, including financial records, employee and customer personal information, trade secrets, and passwords to company accounts. Employee data theft occurs when employees share or take this information without authorization. It can be intentional or by mistake (when an employee accidentally exposes company data). Employee data theft can result in:
- Financial loss
- Operational disruptions
- Reputational damage
- Regulatory and legal issues
- Higher security expenses and more
Reliable Database Forensic Service Providers can help you unearth the truth behind employee data theft in your company and catch the perpetrator. Adopting a proactive approach to information security, including detailed monitoring systems, sturdy access controls, and more, can help prevent the risk of employee data theft.
2. Embezzlement
Embezzlement happens when an employee, usually one with access to business properties or funds, such as a financial manager or accountant, starts diverting some of this money into their personal accounts. A small amount can be siphoned off occasionally over an extended period, or a huge sum can be taken in one go.
When it comes to embezzlement, the embezzler has legal possession of the property or money when the theft occurs, and they use their position of responsibility or trust to commit the crime. While employees may go the extra mile to conceal their fraud, being keen can help you catch signs of embezzlement. Employees who commit this crime may be:
- Living beyond their means
- Hesitating to take time off
- Being defensive when questioned about financial discrepancies
- Resistance to reviews or audits
- Working overtime more frequently
To prevent embezzlement, consider:
- Depositing daily so cash doesn’t sit around for long and reconciling monthly to spot irregularities sooner
- Separating employee financial duties, for instance, those who write checks shouldn’t reconcile bank statements
3. Payroll fraud
Payroll fraud occurs when an employee unlawfully changes a business’s payroll system, intending to manipulate employee compensation calculations for their own benefits. There are various types of payroll fraud, including:
- Timesheet fraud: It happens when employees are paid for hours they didn’t work. Timesheet fraud is committed by employees misrepresenting their work hours by clocking out late and clocking in early. Other employees may clock out for their colleagues late in the day when they weren’t at work for that long
- Ghost employee fraud: It involves using a non-existent employee to steal money from the payroll system and is committed by those with access to the payroll system
- False expenses fraud: It happens when employees falsely claim expenses they aren’t entitled to. They can forge the expense reports completely or inflate a legitimate claim’s true value to get profit
You can prevent payroll fraud by:
- Implementing controlled payroll system access
- Performing regular internal and external audits
- Outsourcing payroll services to reduce the possibility of employees committing payroll fraud
4. Credit card fraud
Credit card fraud is the unauthorized use of your business’s credit card or its information to withdraw money or make purchases. This can significantly impact your company’s operational integrity and financial stability. Some of the credit card fraud signs to look out for include:
- Abnormal spending patterns, such as sudden a rise in expenditures and odd-hour transactions
- Regular chargebacks
- Unfamiliar vendors
- Inconsistencies in statement entries
Taking proactive measures can help safeguard your company against credit card theft, including:
- Establishing limits: Set credit limits for every employee and track their spending to ascertain that they remain within their cap. You can implement a system that notifies you when employees approach their limits
- Reviewing credit card statements regularly: It helps ensure all charges are authorized and legitimate
5. Bribery and corruption
Corruption and bribery often involve employees and third parties. They entail giving or receiving money or other things to obtain favors. Signs that bribery and corruption may be happening in your company include:
- Inappropriate or unnecessary purchases: If an employee buys unnecessary items from a contractor or supplier with no apparent business need, it could be a sign of a possible corrupt connection. To prevent this kind of fraud, ensure there’s a legitimate business need for every purchase and demand double sign-offs of purchase orders. Implement verification checks on items received
- Constant acceptance of poor-quality services or goods: If employees keep accepting inferior services or goods regardless of numerous complaints, it could be a sign of corruption, and the involved parties could be accepting kickbacks from suppliers or service providers. To safeguard against this fraud, ensure procurement contract decisions aren’t made by a single person but by a group. Also, doing due diligence on every supplier can ensure they have the resources and experience to deliver the required goods or services and a proven track record
- Questionable invoices: Invoices can be used to conceal bribes and corrupt payments. For instance, invoices may be submitted for payment without any work being done or supporting documents. Looking out for inflated invoices or those that can’t be matched to detectable output can help prevent corruption/ bribery fraud
6. Asset misappropriation
Asset misappropriation happens when employees entrusted with the management of specific assets steal from the company through fraudulent means. The assets can be stolen in the form of cash equivalents or cash, including vouchers or credit notes. Nevertheless, the fraud may extend to consist of intellectual property or company data.
Asset misappropriation can also involve employees taking funds from the business before they go into the accounting system. This may include participating in fake billing schemes or overcharging clients and keeping the difference. Doing background checks when hiring, conducting random inventory checks, and implementing duty rotation in the accounting department can help avoid asset misappropriation.
Endnote
While employee fraud can cripple business operations and cause financial losses, it’s preventable. Understanding common employee frauds, such as employee data theft, embezzlement, payroll fraud, and more, can help you find effective ways to prevent them.
Featured Photo by Sora Shimazaki
