Employee fraud is a serious and costly issue that can have devastating effects on businesses of all sizes. According to PwC’s Global Economic Crime and Fraud Survey, 57% of fraud is committed by company employees, with insiders responsible for 43% of fraud cases involving over $100 million in losses.
Whether it’s asset misappropriation, payroll manipulation, or financial statement fraud, the consequences can disrupt operations, damage your company’s reputation, and erode trust within your organization.
In this blog, we’ll break down the different types of employee fraud, highlight key warning signs, and provide actionable solutions to help you detect and prevent fraud early. Understanding these risks is crucial for finance managers, CFOs, and internal auditors to protect their organizations from significant financial losses.
What is Employee Fraud?
Employee fraud is a type of financial fraud that happens when an employee intentionally deceives the company for personal gain, often causing financial loss or harm to the business. This unethical behavior can undermine trust, disrupt operations, and significantly impact your company’s financial health.
Employee fraud can range from misuse of company time to the direct theft of the company’s intellectual or physical property. Either way, big or small, employee fraud costs US companies $50 billion each year, making it incredibly important for businesses to recognize and shield themselves from the potential types of employee scams.
8 Types and Examples of Employee Fraud
Employee fraud can take many forms. As a finance manager, CFO or internal auditor, it’s critical to recognize the specific ways fraud can occur within your company, allowing you to implement targeted preventive measures.
Below, we compiled a list of some of the most common types of employee fraud you could encounter in your organization:
Asset Misappropriation
Asset misappropriation is the most common type of employee theft. It involves employees stealing or misusing company assets for personal gain. For instance, in a manufacturing company, an employee might remove finished goods from the warehouse and alter inventory counts or falsify shipping documents to reflect lower stock levels.
This not only leads to direct financial losses but also disrupts production planning and affects your company’s ability to meet customer demands.
Another example is an employee using a company car for personal vacations or using company machinery for side jobs during non-working hours. This misuse increases operational wear and tear and exposes the company to legal liabilities, especially if accidents or damage occur while the assets are being used off-hours.
Payroll Fraud
Payroll fraud occurs when employees manipulate the payroll system for personal gain. This could involve adding “ghost employees”—fictitious workers created in the payroll system whose salaries are diverted to the fraudster’s account.
Alternatively, it might involve inflating overtime hours or keeping terminated employees on the payroll for continued payments. These actions increase payroll expenses and distort labor cost reports, potentially leading to cash flow issues and inaccurate financial forecasting.
Data and Intellectual Property Theft
Data and intellectual property theft is when employees steal sensitive information, such as client lists, proprietary software, or trade secrets, often before leaving the company. For example, a sales manager may download customer databases before moving to a competitor, jeopardizing your market position and causing significant revenue losses.
Internal data breaches can be incredibly damaging. According to Verizon, the average data breach by an employee leads to 375,000 compromised files.
Financial Statement Fraud
Financial statement fraud involves deliberate misrepresentation of a company’s financial position, typically to meet earnings targets or secure financing. Employees may engage in activities such as overstating revenues, understating liabilities, or manipulating reserves.
For instance, recognizing revenue from a contract before the work is completed or inflating the value of assets can make the company appear more profitable than it is. This can lead to misguided decisions by stakeholders and potential legal ramifications if uncovered during an audit.
Accounts Payable Fraud
Accounts payable fraud occurs when employees exploit the accounts payable system to divert funds. This might include creating fictitious vendors or submitting inflated invoices for payment. For example, an employee could establish a fake account and process payments for services never rendered, funneling company funds into their own accounts.
This type of invoice fraud not only results in direct financial loss but can also lead to strained vendor relationships if legitimate payments are delayed or disputed.
Expense Report Fraud
Expense reimbursement fraud involves employees submitting false or exaggerated claims for reimbursement. A common scenario is an employee submitting receipts for personal meals or trips under the guise of business expenses, or inflating the mileage on a business trip to receive more compensation than warranted.
This not only increases operating costs but also undermines the accuracy of expense reporting, affecting budgeting and financial planning.
Credit Card Fraud
Credit card fraud occurs when employees misuse corporate credit cards for unauthorized personal purchases. For instance, an employee might use the company credit card to pay for personal entertainment, dining, or even vacations, under the pretense of business expenses.
This type of fraud can be particularly insidious, as small, frequent transactions can easily go unnoticed, leading to significant losses over time and complicating the reconciliation process during financial audits.
By understanding different types of employee fraud, you can better identify vulnerabilities within your organization and recognize signs of potential ongoing fraud.
5 Key Signs of Employee Fraud
Detecting employee fraud requires awareness of key warning signs. Here are five main indicators that could signal ongoing fraud within your organization:
- Unexplained Financial Discrepancies: Pay close attention to inconsistencies in financial records, such as unexplained variances between actual and reported figures, missing documentation, or frequent adjustments in accounts. For example, if monthly reconciliations show persistent differences that can’t be easily explained, it might be a sign that someone is manipulating the numbers.
- Unusual Transactions: Be wary of transactions that seem out of place, such as unusually large or frequent payments, especially those made outside of normal business hours or with vague descriptions. For instance, a sudden spike in payments to a rarely used vendor or multiple small transactions just under approval thresholds could indicate fraudulent activity.
- Lifestyle Changes: Something that may seem obvious, but if an employee suddenly exhibits a noticeable upgrade in their lifestyle without a corresponding increase in salary, it could be a sign of fraud. For example, an employee driving a luxury car or taking expensive vacations despite a modest income might be funding these expenses through illicit means.
- Resistance to Audits: Employees who consistently push back against audits, resist changes to processes, or avoid oversight could be hiding fraudulent activities. If someone frequently insists on handling certain tasks alone or is reluctant to share information, it may warrant closer scrutiny.
- Frequent Override of Controls: Overrides of internal controls should be rare and well-documented. Regularly bypassing controls, such as ignoring approval processes or circumventing segregation of duties, can be a clear indicator that someone is trying to conceal fraudulent behavior.
By focusing on these key signs, you have a chance to detect potential fraud early and take appropriate action to protect your organization.
How to Detect Employee Fraud Early-On
According to the Defence Logistics Agency, employee fraud schemes last on average between 12-18 months prior to detection. How quickly a fraud scheme is detected has a significant impact on the overall impact of the scheme.
Here are practical tips and strategies to help you identify and prevent fraud before it escalates:
Automate Your Expense Management
Invest in expense management software that automates expense management and provides real-time visibility into company expenditures. This technology allows you to monitor spending patterns, enforce compliance with financial policies, and quickly identify anomalies that could indicate fraud.
By automating expense claim tracking and approvals, you not only streamline processes but also create an audit trail that makes it harder for fraudulent activities to go undetected.
Implement Strong Internal Controls
According to the Association of Certified Fraud Examiners (ACFE), more than half of workplace frauds occur due to a lack of internal controls or an override of existing internal controls.
Establish and enforce internal controls such as segregation of duties, approval hierarchies, and regular audits. By ensuring that no single employee has control over an entire financial process, you reduce the risk of fraud going unnoticed.
Monitor Financial Transactions
Regularly review financial transactions for irregularities. Automated alerts for unusual activity, such as transactions outside business hours or multiple payments just under approval thresholds, can help you spot potential fraud early.
Conduct Regular Audits and Spot Checks
Schedule both announced and surprise audits to review financial records and processes. Regular spot checks can uncover discrepancies that might otherwise be missed, providing an early indication of fraudulent activity.
Foster a Culture of Transparency
Encourage open communication and foster an environment where employees feel comfortable reporting suspicious behavior. An anonymous reporting system can be particularly effective in bringing potential fraud to light without fear of retaliation.
According to the 2024 report from the ACFE, 43% of occupational frauds are detected by a tip, with 52% of these tips coming from employees and nearly one-third from vendors and customers.
Implementing all of the strategies listed above may seem like a lot of work and require long-term planning. Fortunately, tools such as expense management software enable companies to immediately strengthen internal controls through automation, reducing the necessity for extensive restructuring and time investment in current operations.
Prevent Employee Fraud with Klippa
Prevent employee fraud by automating expense and invoice processing with an expense management solution. Gain control over your expenses by eliminating paper-based workflow, manual data entry and unsupervised physical approvals with Klippa SpendControl.
Klippa SpendControl is an all-in-one digital pre-accounting software that combines invoice processing, expense management, and corporate credit card modules for all your financial needs.
Our software utilizes Optical Character Recognition (OCR) technology to ensure 99% accurate document data capture, which eliminates manual data entry for secure approval, archiving, and booking of statements directly to your financial administration.
- Manage your invoices, expenses, and credit card transactions in one platform
- Control the submission, processing and approval of transactional documents via email, web or mobile app
- Ensure segregation of duties with custom roles and controls
- Customize your approval management with multi-level authorization flows
- Prevent expense report fraud with built-in duplicate and fraud detection
- Accurately track business mileage through our Google Maps integration
- Set strict business spending limits with our company credit cards
- Get real-time insights into your finances with our statistics dashboards
- Never fail to comply with your local tax and data privacy regulations with our ISO27001-certified and GDPR-compliant solution
- Integrate SpendControl with your accounting and ERP software, like Quickbooks, NetSuite, or SAP
FAQ
Employee fraud occurs when an employee intentionally deceives the company for personal gain, resulting in financial loss or harm to the business.
The three categories of employee fraud are asset misappropriation, payroll manipulation, and financial statement fraud.
The most common type of employee fraud is asset misappropriation, where employees steal or misuse company assets for personal benefit.
To catch employee fraud, implement strong internal controls, automate expense management, monitor financial transactions, conduct regular audits, and foster a culture of transparency where employees feel comfortable reporting suspicious activities.