Employee Fraud and Prevention

According to the Association of Certified Fraud Examiners’ “Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse,” the problem of employee fraud is extremely real and very costly.

Employee fraud accounted for more than $7 billion in overall losses in the 2018 research, with a median loss of $130,000 per case and 22% of cases producing losses of more than $1 million each.

And that’s just “the 2,690 cases included in our study,” according to the article.

Indeed, Certified Fraud Examiners estimate that a typical firm will lose 5% of its yearly revenue owing to fraud in any given year. “To put their estimate in context, if the 5% loss estimate were applied to the expected 2020 Gross World Product of USD 79.6 trillion, it would result in a projected total global fraud loss of roughly USD 4 trillion.

A closer examination of the findings reveals some intriguing anomalies:

  • The losses incurred by men are 75 percent greater than those incurred by women.
  • Employee fraud is most commonly uncovered through tips.
  • Internal control flaws account for approximately half of all frauds.
  • Employees who had been with their organizations longer when they committed fraud stole twice as much.
  • Small firms lost nearly twice as much per scheme to fraud as larger businesses.

Furthermore, during the last ten years, referrals for prosecution have decreased by 16 percent, with the primary reason indicated being a fear of negative publicity. The highest reductions in fraud loss and length came from data monitoring analysis and surprise audits, however only 37% of organizations adopted these strategies.

Common types of employee fraud

Theft of money

Depending on the type of business, stealing money from an employer can take several forms. Consider the following scenario:

  • In a bar or restaurant, the cashier may simply leave the register open without entering the transaction, or the bartender and waiter may be working together, collecting money from customers and pocketing it.
  • In a retail store, the manager may steal from the register or the deposit bag, provide fraudulent receipts by overriding legitimate purchases on the computerized register, or falsely misrepresent a customer’s return of monies, and so on.

Unauthorized billing, money transfers, and overpayments are all examples of fraud

When an employee commits this form of employment fraud, he or she:

  • money is transferred into personal accounts,
  • inflates invoice amounts and retains the excess payment, or
  • Using the firm’s vendor payment system, they make bogus payments to themselves, either by creating a fictitious supplier and invoicing the company for products or services not given, or by manipulating the account of an actual vendor.

Misappropriation of assets

Employee theft of corporate assets is known as asset misappropriation, and it can take several forms, including:

  • Using a personal credit card issued by a firm
  • Taking advantage of other corporate assets or equipment for personal gain
  • falsifying a corporation check
  • modifying the amount or other elements of a firm check
  • Theft of money or goods
  • filing fictitious or exaggerated expense claims
  • reporting personal expenses as business expenses utilizing a company expense account
  • use of business vehicle for personal purposes

Payroll fraud 

Payroll fraud occurs when an employee steals from the company while using the payroll system. Employees that conduct payroll fraud include:

  • retaining a non-existent or ex-employee on the payroll and transferring the money to themselves
  • seeking a payroll advance and failing to repay it
  • Inflating hours through falsifying time sheets, clocking in and out for another employee when they are absent, or manually inflating hours on an employee’s timesheet
  • stealing and cashing another employee’s paycheck

What are the most successful strategies for dealing with employee fraud?

According to an article in the CPA Journal, following mandated accounting concepts such as governance and internal controls isn’t adequate. They’re important, but “they largely target incentives and opportunities, which are the easiest two components to discover in most circumstances.”

What’s the trickiest thing to find? That is, the methods in which employees who cheat tell themselves it’s okay. Rationalization is more subtle and difficult to detect.

According to the paper, “thinking like a crook” can help discover “lapses in ethical judgment” by observing how people rationalize their actions.

Such lapses include choosing to follow orders from a higher-up to commit fraud, or seeing fraud committed by multiple other employees and believing it is acceptable, or even believing that the action taken is for the benefit of the company, fellow employees, stockholders, or some other “altruistic” reason.

Then there’s the belief among some that doing the right thing is more difficult than doing the wrong thing. According to Phys.org, some people engage in negative behavior because they believe it is easier than behaving honestly, according to research published in the Journal of Applied Psychology.

The more a person believed that being an honest employee required extra effort, the more likely they were to participate in dishonest activity. The argument that it is more difficult to be honest provides justification for cheating in the presence of a compelling excuse to cheat.

The following are some red indicators to look out for that could suggest employee fraud:

  • An employee who is living beyond his or her means
  • A refusal to share responsibilities
  • When you’re at work, you’re under a lot of strain.
  • Divorce or family issues
  • Defensiveness
  • Previous legal issues
  • Unwillingness to take vacations

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