Proper Employee Management to Reduce Fraud

employee fraud

It’s an employer’s worst nightmare – an employee is unhappy with his or her job and decides to defraud or steal from the company. There are plenty of stories about employees committing these crimes and causing enormous damage. By recognising signs of occupational fraud and implementing practices to prevent it, you can lead a happy productive workforce.

Fraud Facts

Types of fraud include embezzling, insider trading, forging cheques, expense reports and vendor invoices, or any other type of internal.

Small businesses are more at risk because owners inherently treat their employees like family, leading to complacency and lax security measures. Small businesses also tend not to have anti-fraud measures in place as many lack the know-how and enforcement capabilities of larger businesses. Nearly half of the victim organisations do not recover any losses that they suffer due to fraud.

The Fraud Triangle

Certain conditions are present when an employee commits fraud- these three conditions are known as the ‘fraud triangle’.

  1. Motive – The defrauder must have a motive to commit fraud, and this motive is often pressure. This can come from feeling too much stress at work to meet deadlines or trying to live a lifestyle that is above his or her means. Outside problems exist as well, such as a gambling addiction. Monetary gain is often the motive behind this.
  2. Opportunity – If anti-fraud measures are too lax, the opportunity can be there for fraud to occur. Even if the perpetrator is financially stable, the opportunity to commit fraud for financial gain might be too much to pass up. Being employed in a high-level, trustworthy position can also lead to an opportunity.
  3. Rationalisation The perpetrator must be able to justify his or her actions. If employees sense some sort of wrongdoing from the company, they might be able to justify the fraud. They may also tell themselves they are just ‘borrowing’ money from the company with no intention to pay it back. They may also feel entitled to a raise and will commit fraud to give themselves that ‘raise’.

Understanding these conditions can be key to recognizing if fraud is occurring in your business.

Recognising Employee Fraud

It is often difficult to recognise when a fraudulent act has occurred. Frauds last a median of 18 months before being detected. According to the Association of Certified Fraud Examiners’ study, workplace frauds are much more likely to be detected by an anonymous tip than by other means. Because of this, many companies have set up employee tip lines to try and catch the person(s) responsible for wrongdoing.

While detecting fraud may be a difficult task, there are a variety of warning signs that an employee might be defrauding your business including the following:

  • Invoices from the fake supplier- an employee can create a bogus supplier, post a cheque to the fake supplier with your business’s name on it and then cash the cheque for themselves.
  • Missing property – laptops or other computing equipment can be an easy target for employees.
  • Fraudulent expense reports – if an employee consistently works around a high-level executive, it becomes easy for the employee to forge signatures.
  • An employee lives beyond his or her means – if an employee is living a lavish lifestyle on a modest salary he or she could be defrauding the business. Alternatively, an employee who is having financial troubles yet seems to be living within his or her means may indicate fraud is a possible cause.
  • Unusually close association with a competitor – if an employee seems to have a close relationship with a direct competitor, he or she could be sharing your trade secrets in return for money.

Preventing Employee Fraud

preventing employee fraud

If you run a small business, chances are you have a few employees that are in charge of several different areas of the organisation. Split up the duties among a larger pool of employees to decrease the likelihood of fraud.

Perform a pre-employment screening on all potential employees. A resume might not tell the entire story about a prospective employee’s past.

Let employees know there are policies on employee theft in place. Don’t assume they are already aware of the policies and the consequences of fraud.

According to the ACFE’s study, more than 80 per cent of the frauds in the report came from employees in one of the six departments: accounting, operations, sales, executive/ upper management, customer service or purchasing. Recognize these high-risk departments as potential sources of fraud and implement the proper policies to prevent it.

Establish an anonymous tip line that employees, clients or suppliers can use to report cases of fraud.

Don’t get complacent. Any employee can commit fraud at any time. While fraud is committed for monetary gain, that doesn’t mean an employee won’t commit fraud if the opportunity is there.

Conduct random audits. Work with an accounting professional to set up and maintain effective internal financial controls to ensure you’re not losing money.

Proper Employee Management

One of the best ways to prevent employee fraud at your company is to ensure all your employees are satisfied with their work and the company as a whole. Lead by example- if you and your high-level management team conduct business properly and ethically, your employees will likely do the same. Good ethics also carry over into the market, where your company will be looked on favourably. This can lead to higher revenue and greater goodwill from the community.

Reward employees for doing well. Let them know how important they are to the success of the business. Don’t emphasize on things that haven’t been achieved- focus on the positive too.

Insuring Against Employee Fraud

Recognising and preventing occupational fraud can be an off-putting task. Contact us today or speak to one of our brokers on 0207 537 6603 to see how we can give you a Cyber Insurance policy against fraud. We have all the tools needed to make sure you have the proper coverage to protect your company from employee fraud.


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