The Enemy Within: Preventing Employee Fraud

How Can You Prevent Employee Fraud?

One of the biggest challenges of detecting, investigating and preventing employee fraud is the fact that there are so many types of fraud and theft that require different methods for discovery. Every department presents opportunities for employee theft, although it’s been widely reported that a disproportionate percentage of theft is carried out by employees in senior positions and that employees involved in accounting and finance are the most frequent offenders. In 2016, the Association of Certified Fraud Examiners (“ACFE”) estimated that the average business loses about 5% of its annual revenue to fraudulent actions by employees, while the median loss is a hefty $150,000. Organizations without anti-fraud controls suffer even greater overall losses. Further, the majority of small-business fraud victims don’t recover their losses. It’s important for business owners and management to find ways to prevent employee fraud and reduce its impact.

Most employee fraud schemes fall into the following fraud categories:

Asset Misappropriation

Asset misappropriation is simply the theft of company assets by an employee, also known as insider fraud. This kind of employee fraud is the most common because personnel at any level and in any department, can (and do) misuse company resources.

Asset misappropriation schemes include: check forgery, check kiting, check tampering, inventory theft, theft of cash, theft of services, expense reimbursement fraud, expense account fraud, payment fraud, etc.

Vendor Fraud

Vendor fraud can be committed by employees acting alone or in collusion with vendors. It can also be committed by vendors on their own. Examples of vendor fraud are: billing schemes, bribery and kickbacks, overbilling, price fixing, etc.

Accounting Fraud

Falsifying a financial statement is a serious act that is often committed by an employee who has access to the company’s books. Recording fictitious revenues, inflating assets, and hiding expenses are common financial statement fraud activities.

Data Theft

This kind of fraud includes employee theft of critical data and employees providing corporate data to external individuals. The right tests can discover databases accessed by individuals without appropriate authority and reports generated by individuals without appropriate authorization. Similarly, fraud tests can detect customer accounts with exceptional credit terms and network logs that indicate unauthorized copying and movement of data files. Tests can also help discover if e-mail attachments include sensitive data.

Bribery and Corruption

Employees may accept bribes from vendors in exchange for purchasing their goods, or services, and offer unauthorized discounts in exchange for kickbacks.

What Are the Common Causes of Employee Fraud?

In order to prevent these crimes, it’s important to understand the factors behind them. What causes an employee to succumb to temptation and turn to crime?


Even the most honest employee can be tempted to steal if proper controls are not in place and if given the opportunity.


Economic pressures caused by such things as drug or alcohol dependency, gambling debts, divorce, and serious illness can create a situation where an employee becomes desperate enough to steal.


An employee who feels they have been treated unfairly may think that the company owes them something and they have a right to take it. This often occurs when someone doesn’t get a raise or promotion they feel they deserve, or when the company begins downsizing and they think they are going to lose their job.

How Can You Slash the Risk?

While all organizations are at risk for fraud, companies with fewer than 100 employees tend to suffer disproportionately. They’re more likely to have weaker internal controls due to factors such as a limited number of personnel and less management oversight. Clearly, by taking proactive steps, business owners and managers not only can slash the risk that their organizations will be hit by fraudulent activity, but also uncover any wrongdoing more quickly. The sooner a perpetrator is caught, the less harm he or she might cause. So, here are some ways to protect your business:

Do background checks before hiring anyone new

You can check public records to look for bankruptcies and criminal records without permission from the job applicant. If you want to do a credit check, you’ll need permission.

Remain vigilant

Look for common warning signs of fraudulent activity, such as an employee who’s living well beyond his or her means or a worker who refuses to take time off (such as a bookkeeper who never takes a vacation or declines to delegate work, employees who have close relationships with vendors, disappearing office supplies). Employees continually working overtime might be a sign of dedication, it can also signal the individual’s concern that a replacement will discover his or her criminal activities. An employee who insists on working odd hours, when he or she is most likely to be alone, may also be concealing activities. Also, employees with financial difficulties, such as an employee experiencing a home foreclosure or one with a gambling problem, may feel compelled to steal.

Separate financial duties

The more difficult it is for a single employee — acting alone — to commit a crime, the less likely it is to happen. That’s why many companies require multiple individuals to authorize disbursements over certain amounts, or assign one employee to add vendors to the payables system and another to pay them. Separating duties also makes sense when reconciling bank accounts and other statements. The employee charged with making deposits or disbursements shouldn’t also reconcile the bank accounts, as doing so creates an opportunity to hide any wrongdoing. In small companies, having the bank statement delivered unopened to the owner for his or her review is an effective way to deter unauthorized activities.

Deposit daily and reconcile monthly

Leaving cash sitting around is too tempting for some employees, and reconciling the bank statement each month helps you catch irregularities sooner rather than later.

Use physical controls

Locking away checks and financial statements and allowing access only to employees who require them for their jobs not only makes it more difficult for other workers to misuse these instruments, but also sends a signal that management takes seriously the need to safeguard the company’s assets.

Check to make sure that travel expenses are supported by appropriate paperwork and that they are in line. For example, check hotel bills to make sure you aren’t paying for movies or massages.

Create a written fraud policy

Create a fraud policy and include things like:

Definition of what fraud is – surprisingly, many employees don’t understand the term.

Zero tolerance for fraudulent behavior – emphasize that one strike and you are out.

How an investigation will be conducted – describe in detail what the process will be like and how it will impact an employee’s privacy, reputation and employment.

Consequences – immediate termination – employees need to understand that there is no begging for forgiveness.

Outcome of fraud – prosecution – help employees understand the sober impact of their behavior.

Train employees

The best way to help employees and managers understand a fraud policy is to do a formal training on the policy. The policy should be updated annually and incorporated into the new employee orientation process. Helping employees understand the organization’s commitment to protecting its assets is a great deterrent to possible fraudulent behavior.

Implement a tips hotline

Tips from employees or vendors accounted for nearly 40% of all fraud detections in the ACFE report, making it the most common detection method. It pays to establish a means for employees to securely let the appropriate manager know if they have reason to suspect fraudulent behavior.

Consult with an employment attorney

(1) Find out your rights as an employer, (2) how to deal with suspected theft or embezzlement, (3) how to communicate this issue to the press and other employees, and (4) how to prosecute an employee.

How Can You Reduce Potential Losses?

You might not be able to completely eliminate fraud, but if you take these anti-fraud measures, you’ll greatly reduce any potential damage. Your financial advisor can help you develop the most effective employee fraud prevention plan for your business.

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