Fraud in Business: Understanding employee fraud
Employee fraud can cause significant financial and reputational damage, yet it often goes undetected for long periods. UK business leaders have reported losing the equivalent of 7.4% of annual revenue to fraud, highlighting the scale of the risk.
Financial pressure may increase the motivation to commit fraud, particularly where weak controls create an opportunity to act without being discovered. Understanding why employee fraud happens, how it can occur and how to reduce the risk is therefore essential for every business.
What is employee fraud and why does it happen
Employee fraud is when an employee uses their job to commit a fraud. It can occur by an individual or through collusion with other staff members or people outside of the business. Employee fraud can occur for a variety of reasons. Two of the main reasons are:
- Opportunity: Do the systems and controls you have in place make it easy to commit fraud and get away with it?
In Exeter a ‘model worker’ created a system to develop fake invoices for business purchases. The amounts began small but increased when the employee realised they could get away with it. In total £216,000 was stolen.
- Motivation: Many things such as debt, family or relationship issues, addiction, grievance against the business or its owners and more recently the cost-of-living crisis.
How can employee fraud occur?
Employee fraud can occur in a variety of ways, some examples are:
Changing bank payment details
In Devon a finance manager set up an account called L&G, which was the name of the businesses pension provider. Regular payments were made over an 8-year period totalling £877,000. The owner didn’t suspect anything as the name on the payment was as expected.
In Dartmouth, Devon the owners of a company thought their tax payments totalling £21,000 were being paid to HMRC when in fact their accountant was paying it to himself.
Falsifying supplier invoices
In Caerphilly a finance manager stole £1,315,143 over a 10-year period through creating hundreds of false invoices and transferring the money to herself.
Expense and overtime fraud
Over a 5 year period a school administrator made 220 personal bank purchases from sites such as Amazon and Asda costing the school £65,000
Selling confidential information to persons outside of the business
A business in the UK says an employee sold information from its customer-support database, including names and phone numbers, to a third party. They became suspicious after customers started receiving phone calls from scammers posing as their staff. The company said it believed approximately 70,000 of its 12 million customers had been affected.
Payroll fraud e.g. creating fictitious employees and changing salary or bonus details
A manager with control over payroll documents defrauded her employer out of more than £500,000 after inventing employees and having their wages paid into her bank through registering the family members as workers and forged fake time sheets and invoices to steal from the company.
Theft of stock
An employee, who was struggling with debt, who was working in a warehouse stole £42,000 of medical suppliers to fund debt problems. This was eventually identified by the security guard and confirmed by CCTV.
Kickback arrangements
Employee fraud can also involve receiving undisclosed payments, gifts or other benefits from suppliers in return for awarding contracts or approving inflated invoices. These arrangements, often known as kickbacks, may result in the employee benefiting personally at the expense of the business.
How to reduce the risk of employee fraud
Employee fraud can have a significant impact on businesses and for small businesses the consequences can be devastating. In one such case a business called Moore and Moore Design in Devon had to lay off nearly 40 out of its 50 employees, including 17 people in one day, after the finance manager siphoned off £877,000 from the business.
There are ways that businesses help reduce the risk of fraud. Some suggestions are:
1. Financial oversight
Segregate financial responsibilities and review finances regularly and carefully. If possible, the people involved with the bookkeeping should not have the ability to access the bank.
2. Control monitoring
A lot of fraud cases occur due to lack of controls or override of controls. It is therefore important to perform regular checks on systems you have in place to ensure they are sufficient and are being followed. This helps staff to know that you take procedures seriously.
3. Staff awareness
Make sure that staff are aware of your controls in place and make it easy for staff to raise concerns or suspicions. This is key control as staff may see more of the day-to-day happenings than owners.
4. Leaver controls
Have a process in place for when staff leave. For example, remove them from all IT, remove access to bank accounts and credit cards, remove from your payroll system.
5. Know your people
Take the time to know your employees. Strange behaviour could be a sign that something is wrong. For example:
- Are staff living beyond their means (holidays, expensive cars, school fess, designer products)?
- Are they facing financial or family problems?
- Do they work excessive hours, outside of normal work hours, don’t share work responsibilities pr rarely take holiday?
Concerned about employee fraud?
Employee fraud can continue for years when warning signs are missed or financial controls are too easy to override. Reviewing your processes now can help you identify weaknesses, protect your business and reduce the risk of financial loss.
Contact Gravita to discuss how we can help you assess your financial controls and strengthen the safeguards around your business.
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