Payments security 5 min read

Employee fraud: 6 examples & how to avoid them

Shannon Trimble

Whether a colleague decides to bring everyone an iced latte in the morning or donuts on a slow Wednesday afternoon, there can be some real hero-worthy characters in every organization. 

Unfortunately, there could also be a villain or two. And we’re not talking about the one who takes a branded pen home from the office. 

But more often than not, it’s the employees who believe their impact is too small to notice that end up doing a lot of damage. Employee fraud occurs in approximately two thirds of US small businesses, and that simply can’t be a result of bad intentions across the board. 

In this post, we’ll discuss the six most common types of employee fraud - intentional or otherwise - and what your organization can do to prevent them.

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What is employee fraud?

Employee fraud refers to the deception or lies told by a worker to their employer in order to make gains. Typically, these gains appear in the form of extra, hidden compensation, but may also be other benefits. 

Employee fraud is troubling, but also incredibly common. 75% of employees in America have admitted to stealing from the workplace at least once. 

Reducing employee fraud relies on an open and collaborative workplace where everybody feels valued. Where employees are bought-in and feel the company needs them, they’re less likely to abuse their position. 

Case in point: increased workplace satisfaction is one of the top indicators for low levels of employee fraud

6 examples of employee fraud

This post explores six common types of employee fraud: 

  1. Credit card fraud
  2. Expense report fraud
  3. Payroll fraud
  4. Bribery
  5. Data theft
  6. Accounting fraud

Here’s how each may affect your business, and how to respond. 

Credit card fraud

Giving business expense cards to employees is a great way to build trust and empower your staff with their responsibilities. But cards can get lost or misused, which creates risk, extra work for the finance team, and jeopardizes overall company wellbeing.

Credit card fraud can range from more “benign” abuses, such as refueling a car for personal use, to full-on maverick spending. Any company that has a card system will likely be conscious of potential fraud. But there are some things that you can put in place to hopefully prevent it. 

Firstly, it’s important to use cards with real-time tracking so that your finance analysts can spot spending outliers as soon as they happen. Then, a great relationship with the bank (or card issuer) helps you raise a dispute as quickly as possible. 

Of course, ensuring you can find the guilty party is key. For this step, we recommend using an automated or digital expense card system that holds every employee accountable for their spending. No shared cards - every transaction can be tracked back to the individual purchaser.  

Expense report fraud

Scary stat: 1 in 10 employees admit to knowingly submitting expense claims filled with errors “all the time.” Month over month, this leads to huge gaps in the system, missing funds, and ultimately lower profits. 

Some examples of expense fraud include:

  • Exaggerating the price of a purchase
  • Claiming twice for the same thing
  • Claiming personal items as business expenses 

It’s a shame that such a huge proportion of employees find it acceptable to commit expense fraud. But with the right levels of respect and detail built into the expense report process, this can be avoided. 

For example, by creating visibility, setting up receipt capture and reconciliation automatically, sham expense claims won’t slip through the cracks. 

Payroll fraud

Payroll fraud typically occurs from inside the finance function. A member of the payroll department falsifies documentation to move funds out of the company. 

This type of fraud affects approximately 30% of companies annually, and can cause significant problems.

A few examples include: 

  • Ghost employee” schemes involve records for employees that don’t exist and then paying out monthly wages
  • Advance fraud sees teams paying a salary before it’s due
  • Paycheck and timesheet fraud may be perpetrated by other employees, who claim that they never received their paycheck, or falsify records on their timesheets. 

Payroll fraud is hard to prevent if digital programs aren’t in use. It’s also more difficult in a small company where only one individual oversees the payroll function. Alongside a written policy, we recommend getting hold of a modern timesheet system that keeps digital records with a clear version history. 

If you have the resources, surprise payroll audits are also a way to identify concerns and keep the company in compliance. 

Bribery

The US particularly has a long-standing relationship with corporate bribery. It used to be a very commonplace occurrence in contractual negotiations, for example. This is because American companies typically couldn’t compete with international offers, where the prices of labor and parts were much cheaper. Instead, brokers would bribe their counterparts in order to get the deal. 

All of this was outlawed in 1977 and updated only recently to prevent the likes of bribery in exchange for clientele. 

Hopefully these days, the law is enough to deter bribery fraudsters. If not though, there are other steps that your company can take in order to minimize the occurrence of employee fraud with bribery. 

Alongside transparency and visibility, the key is to create a workplace environment where everybody feels valued. By creating a culture of high satisfaction, your workers should, in turn, want to prevent harm to their employer. 

Data theft

A newer form of employee fraud appears in the form of data theft. Data theft is particularly relevant in the cases of corporate espionage or underhanded competition tactics

This includes intellectual property fraud, where a disgruntled employee from company A leaks sensitive information about a new invention to company B. Company B then patents the product before the original inventor has the chance.

As well as keeping new ideas on a need-to-know basis for as long as possible, the key to reducing data theft is through high security and information protection. Non-disclosure agreements and two-factor authentication log ins are good examples of this. 

Accounting fraud

When accounting fraud occurs, it’s usually covered up well. The culprit is likely going to be able to somehow boost the profits figure or shrink the appearance of liabilities in order to make it appear like there is no problem on the books. 

Moreover, accounting fraud may not be carried out to benefit the individual employee; it could be to fool potential investors or customers, especially in the case of an initial public offering. 

In order to prevent accounting fraud, it’s important to keep strict accountability. For example, separate login codes to any software so that individual behavior can be tracked. 

Alternatively, accounting automation may reduce the leeway for fraud, especially where caused by human error. While the most serious forms of accounting fraud involve intentional schemes, basic mistakes can still be a factor.

In small businesses, you may hire an outside contractor. Creating time to bring together yourself and the accountant for reports and explanations may be a good way to build the relationship. 

Simple strategies to reduce employee fraud

Unfortunately for most businesses, a certain level of employee fraud is the cost of doing business. As mentioned above, this can include both intentional and reckless or careless acts, and even simple errors.

Every instance is serious and needs investigation. But a few basic principles should help to reduce fraud cases: 

  • Build a culture of ownership over the future of the company. This might mean creating an employee equity scheme, but also includes letting teams build their own roadmaps and goals, and fostering trust. 
  • Digitize and automate manual processes. This not only saves time and effort, but also reduces the risk of manual human errors.
  • Choose tools and processes that increase visibility. In other words, move away from shared credit cards and employee expense reports. You should know in real time where company money goes and who authorizes each payment.

Employee fraud sounds scary and awkward, but it’s largely avoidable. Better processes and increased visibility are the perfect place to start.

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Shannon Trimble

Shannon Trimble founded The Search Cure, a fintech content marketing agency with a knack for content that converts.