What does fraud look like?

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14 November 2022

What does fraud look like?

Services:

Auditing,

Accounting

As with most things, fraud is not always immediately noticeable. And when it is noticeable, it may not be believable. Often, fraud is committed by valued employees trusted by business owners to make a success of their company. Instead, as Jade Quaintance highlights below, many employers are having to look at their control and security processes to ensure the risk of fraud is reduced and monitored as much as possible.

The Rise of Employee Fraud

Businesses are losing as much as 5% of their revenue to fraud committed by their own staff, according to the Association of Certified Fraud Examiners (ACFE). With the Cost of Living Crisis, we are all experiencing the risk of employee fraud is ever increasing.

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:

1. Opportunity - Do the systems and controls you have in place make it easy to commit fraud and get away with it.

As an example, in the south west region, 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 (as reported by BBC news, 2021).

2. 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 can be considered as contributing factors.

How can employee fraud occur?

Employee fraud can occur in a variety of ways, some examples are:

Changing bank payment details

For example, in the south west region, a finance manager set up an account with a name that was the same as 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' (as reported by Devon Live, 2021).
Falsifying supplier invoices

In another region, a finance manager stole £1,315,143 over a 10-year period through creating hundreds of false invoices and transferring the money to herself (as reported by South Wales Argus, 2022).
Expense and overtime fraud
Selling confidential information to persons outside of the business.
Kickbacks from suppliers not passed onto the business.
Payroll fraud e.g. creating fictitious employees and changing salary or bonus details.
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 (as reported by Love business. Hate fraud., 2022).

How to reduce the risk of employee fraud

There are ways that businesses help reduce the risk of fraud. Some suggestions are:

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.
Research by the ACFE in 2022 identified that nearly half of cases of fraud occurred due to lack of controls (24%) and override of controls (20%). 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.
Make sure that staff are aware of your controls in place and make it easy for staff to raise concerns or suspicions. The ACFE reported that 47% of fraud cases were detected by tip offs and more than half of those came from employees.
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.
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 fees, designer products)?
- Are they facing financial or family problems?
- Do they work excessive hours, outside of normal work hours, don’t share work responsibilities or rarely take holiday?

To conclude, employee fraud can have a significant impact on businesses and for small businesses the consequences can be devastating. In one such case mentioned above, a business owner 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.