December 2024 HR Newsletter

Employee fraud is when an employee knowingly lies to, steals from, or deceives their employer to make personal gains. According to the National Federation of Independent Business, this type of fraud occurs in approximately two-thirds of U.S. small businesses. In fact, small businesses face a higher risk of employee fraud than large corporations. This is often due to a lack of basic accounting controls and a higher degree of misplaced or assumed trust.

Organizations with the fewest employees have the highest median loss in employee fraud cases, according to the Association of Certified Fraud Examiners.

While employee fraud can take many forms, the following are the most common types:

• Asset misappropriation—This type of fraud accounts for the vast majority of fraud schemes and includes check forgery, theft of money, inventory theft, payroll fraud, and theft of services.
• Bribery and corruption—Such methods include kickbacks, shell company schemes, bribes to influence decision-making, manipulation of contracts, and substitution of inferior goods.
• Financial statement fraud—This type of fraud is the rarest yet costliest. It entails manipulating financial statements to create financial gains for an individual or entity. 

It can be difficult to spot employee fraud. Therefore, it’s important for small business employers to be aware of employee behavior and other signs that may indicate fraud occurring within the organization. Employers should look out for the following:

• An employee working longer hours than usual—Continually coming in early, staying late, working on weekends, and not taking sick leave or annual paid time off could be signs of employee fraud. Fraudsters often avoid taking time off because they don’t want people to review their work. In addition, fraudulent activities often occur outside of regular business hours, when the employee is less likely to get caught.
• An employee being secretive—If an employee is reluctant to share their processes or have someone review their work, they may be committing employee fraud.
• An employee who works in a position to commit fraud—Employees who have worked at a business the longest are often the most likely to commit fraud. This could be because they have more trust, know the company’s weaknesses, or can control what appears on paper.
• Accounts receivable that are suspicious or inconsistent—Excessive or unexplained cash transactions; unreconciled bank account statements; sudden activity in previously inactive accounts; and an unusual increase in expenses, supplies or employee reimbursements can all indicate employee fraud.

Employee fraud can be particularly devasting for small businesses, as they often have fewer resources available to help them recover from malicious acts. As such, it’s essential for small businesses to take the following actions to prevent employee fraud:

• Create a tip hotline. Whistleblower tips are the most common way employee fraud is discovered. Therefore, employers should take tips seriously and set up a hotline to catch fraud earlier and minimize losses.
• Perform background checks. Contacting references, performing background checks, and conducting online research can help small businesses vet candidates before hiring them. 
• Implement internal controls. While employees need a certain level of trust and authority to do their jobs, internal controls can help detect and hopefully deter fraudulent activities. Such controls can include clearly defining what constitutes fraud in the employee handbook, setting up an anonymous hotline, and performing monthly bank reconciliations.
• Create a culture of integrity. Consistent controls and policies can create a culture that empowers staff to be accountable for their actions and minimize risk while driving compliance.
• Purchase insurance. Insurance, particularly commercial crime insurance, can help small businesses protect themselves from business-related financial losses.