5 Warning Signs of Employee Fraud

What does it mean when an employee commits fraud?

When you start a small business, you take a risk by hiring employees. You have to believe that you have found trustworthy workers who believe in your business as much as you do. It can be hard to think the worst of your employees, even when there are signs of issues. Perhaps you notice suspicious patterns or questionable circumstances. Employees should be reminded to be vigilant and report any unusual behavior or signs of employee fraud they might observe in their colleagues. To ignore these red flags could mean disaster for your business. Therefore, it is important to know how to identify potential issues and stop fraud before it happens.

This writing is informed by our employment attorney for employers representing thousands of business owners; additionally, the best data comes from my first-hand conversations with business owners and their leadership team.

Employee fraud happens when a worker deceives their employer and steals from them. They do so for their own personal benefit, harming the company in the process. Believe it or not, employee fraud is quite common. Almost 50% of companies report that they have dealt with fraud in the past two years. When you think of fraud, you might imagine an external party deceiving your business. However, more than 30% of reported fraud comes from people inside the company. A further 25% came from internal parties acting alongside external actors. This means that almost 60% of fraud happened with the participation of an employee.

How do you identify employee fraud?

Luckily, you can keep an eye out for certain indications of employee fraud. Keep an eye out for the following red flags:

1. An employee is living a luxurious lifestyle.

You want to keep an eye out for an employee who appears to be living beyond their means. If their lifestyle does not match their salary, this could be a sign of fraud. For example, if an employee is making $50,000 a year and suddenly buys a yacht, there could be an issue.

2. An employee acts secretively.

If a worker is hesitant to have someone look over their work or otherwise keeps their activities close to the vest, this could be a sign of fraud. They could be keeping their unlawful activity secret. The HR department should organized training sessions to educate employees on recognizing the signs of employee fraud and the importance of reporting any suspicions promptly.

3. You have received tips about an employee.

Over 40% of fraud is revealed thanks to tips from other workers. Therefore, if you are notified by another employee that there is something fishy going on, take them seriously.

4. Cash missing, inconsistencies, or discrepancies
   

Perhaps you notice unexplained sales or inaccurate bank account statements. Maybe there is an unusual number of reimbursements or expenses. These signs point to potential fraud. It is wise to use an expense tracker to monitor reimbursements and accounting reports.

Regular discrepancies in cash handling or petty cash shortages could imply theft or embezzlement. Pay attention to inconsistencies in financial records. Management should implement stricter financial controls after noticing signs of employee fraud within the organization, such as irregularities in cash handling.

5. Unusual relationships with vendors

An pattern of connections with vendors, such, as consistently using certain suppliers without proper justification might raise suspicions of kickbacks, bribery or other forms of unethical conduct.

Remember that these signs should serve as red flags and warrant further investigation before concluding any wrongdoing by an employee. When it comes to missing documentation or records one potential red flag is if an employee who is responsible for records consistently has gaps or missing records that cannot be adequately explained. This could potentially indicate activity, such as tampering with or destroying evidence of wrongdoing.  It is necessary to address the signs of employee fraud promptly to maintain the company’s reputation and financial stability.

However it’s important to remember that these signs can also have explanations so it’s crucial not to jump to conclusions without concrete evidence. If you have suspicions of employee fraud it’s essential to conduct an investigation following proper legal and organizational procedures. It would be wise to seek guidance, from financial professionals to ensure that your investigation is conducted appropriately and fairly.

What are the different ways employees commit fraud?

There are many kinds of employee fraud, so it is important to be aware of the red flags. Let’s go over the different types below:

• Theft: when an employee steals property, resources, or money from your company, this counts as theft.
• Embezzlement: when the accountant in charge of the company’s finances steals money, this is called embezzlement.
• Bribery/kickbacks: this occurs when an employee takes money in exchange for favors or preferential treatment.
• Benefits fraud: when an employee abuses a company’s benefits, they are committing benefits fraud. An example of this would be using a sick day when healthy.
• Payroll fraud: an employee can also defraud a company by altering timesheets to claim they are present when they are not.

Indeed, one of the most common forms of fraud is known as time theft. This happens when employees are working less than they report. The audit team should conduct a thorough review of the company’s financial records to identify any signs of employee fraud that may have gone unnoticed.

The above are just a few examples of the most common forms of fraud. However, there are many ways scammers can defraud a business, so always be wary.

What puts a company at risk for fraud?

The smaller businesses, the more at risk it is for fraud. In this case, a small company is defined as a business with fewer than 100 employees. There is also the fact that small companies can have a harder time recovering from fraud than large corporations. As part of the internal investigation, experts were brought in to analyze the signs of employee fraud and determine the extent of the financial losses incurred.

The risk of fraud will also depend on the particular industry. Industries with the highest rates of fraud include real estate, manufacturing, banking, and healthcare. The most fraud exists in for-profit companies, though public agencies and government entities also have high rates. The least at-risk companies are nonprofit agencies.

Why do employees commit fraud?

If you believe your company may be experiencing fraudulent activity, the first place you should look is in the financial service sector. Employees like the CFO, bookkeeper, and accountant have access to financial data. If they are abusing their position, they can cause significant harm to the business.

When it comes to why employees commit fraud, there are four key elements:

1. Opportunity: When a company does not have sufficient internal controls, there is an increased likelihood of fraud. Often, smaller companies have fewer internal controls, which exposes them to fraud.
2. Rationalization: scammers will justify their actions.
3. Pressure: if an individual is feeling pressure from personal issues like debt or addiction, they are more likely to commit fraud.
4. Capability: to commit fraud, an employee has to have the necessary access and knowledge.

How does fraud impact a company?

Employee fraud is a serious problem for businesses, costing a company $8300 on average. It often takes about a year for a company to discover a case of fraud and take action. You can see how costs can quickly amount during this time.

Fraud can have an enduring impact on any business, though smaller businesses often suffer more due to a lack of resources. It is therefore essential for small business owners to keep an eye out for red flags and to take appropriate action. It is also critical that smaller companies devote resources to establishing internal controls. This can help prevent fraud from happening in the first place.

Summary

Employees can make or break a business. As a business owner, you are placing your trust in them and giving them the keys to the car. That is, they have the ability to steal money, delete files, and ruin client relationships. They can even destroy the business. To reduce the risk of fraud, ensure that you have the proper internal protocols in place. By being proactive, you can protect your business.