At some point, the odds are that every company will be affected by some form of employee theft or outright fraud.
According to the Association of Certified Fraud Examiners’ global “Report to the Nations on Occupational Fraud and Abuse” for 2016, the median loss from a single case of employee fraud was $120,000 in 2015 in the U.S. and in nearly 25% of the cases, losses were more than $1 million.
With technology, fraud has in some ways become easier, but at the same time, it typically leaves a trail of electronic breadcrumbs that may be hard to disguise.
Here we look at the five main types of employee fraud, and what you can do to thwart it from occurring.
- Purchase order fraud
This is typically carried out in one of two ways:
- The employee initiates purchase orders for goods that he diverts for personal use, or
- The employee sets up a phantom vendor account, into which he pays fraudulent invoices – with funds eventually being diverted to the employee.
- Company credit cards
Employees that have company credit cards may use them for illegitimate purposes to purchase items, or on entertainment and travel. Some of the common types of fraudulent use of credit cards are fuel purchases, airfares, home supplies, meals that are not work-related and entertainment.
- Payroll fraud
There are typically three ways that an employee can pull off payroll fraud:
- Setting up phantom employees on your payroll systems, who are paid like regular employees but the funds are diverted to the perpetrator’s account.
- Paying out excessive overtime.
- Continuing to pay employees after they die or after they leave your employ.
You should have systems in place to detect whether you have more than one employee with the same bank account number or the same address, unusually high overtime payments and if dead or terminated employees are still on your payroll.
- Sales and receivables
Some employees may collude with vendors to make payments for services never rendered or products never received.
Other times, you may have sales reps who inflate sales to receive higher commissions or bonuses.
- Data theft
This involves an employee stealing important company data, like trade secrets, personally identifiable information, client credit card numbers or client lists. In some cases, the employee would provide this data to third parties.
You may be able to detect this kind of theft by running tests to see if a database has been accessed by an employee without access privileges, or if reports were generated by employees without authorization. You may be able to also run tests to find out if any employees have sent e-mails with attachments that include sensitive company data.
Focusing your efforts
According to the report, most theft occurs at one or more of the following stages:
If you are going to do any employee monitoring, these are the places that you may want to first focus your efforts and monitoring.
The Association of Certified Fraud Examiners says that by analyzing transactions in these areas (such as with continuous monitoring systems that are driven by data analysis), it is often possible to test for a wide range of employee fraud, as well as bribery and conflicts of interest.
Higher positions, higher losses
Finally, it is worth noting that when owners, executives or directors commit the fraud, financial damages are steepest.
Median losses from fraud are:
- Owner/executive: $703,000
- Manager: $173,000
- Employee: $65,000