Employee fraud is a persistent threat to businesses of all sizes, leading to financial losses, reputational damage, and operational inefficiencies.
According to the Association of Certified Fraud Examiners (ACFE), organisations worldwide lose billions to occupational fraud each year. Their Occupational Fraud 2024 report found that the median loss per fraud case was $150,000, with 23% of cases resulting in losses of $1 million or more[1].
This guide explores the different types of employee fraud, strategies for prevention, detection methods, and the role of organisational culture in mitigating fraud risks.
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Understanding employee fraud
Employee fraud refers to deceptive actions by employees intended to secure an unfair financial or personal gain at the expense of their employer. It can manifest in various forms, including theft, financial misrepresentation, and payroll fraud. Recognising what constitutes employee fraud is the first step in preventing and mitigating its impact.
- Payroll fraud occurs when employees manipulate timesheets, create ghost employees, or alter salary records to divert company funds for personal gain
- Asset misappropriation involves employees stealing company assets, such as cash, inventory, or services, for personal use.
- Expense reimbursement fraud occurs when employees submit false or inflated claims to receive undeserved financial reimbursements.
- Financial statement fraud involves falsifying financial records to hide losses, inflate revenues, or gain unauthorised incentives.
- Corruption and bribery include conflicts of interest, kickbacks, or unauthorised dealings where employees act unethically for financial gain.
In one case reported by the ACFE, two employees colluded with vendors to inflate prices and deliver subpar products, siphoning funds from their employer. The fraud was uncovered through an anonymous whistleblower tip, underscoring the importance of strong reporting mechanisms[2] as well as the necessity for strong vendor risk management processes.
Another common scheme involves payroll fraud, with another case highlighted by the AFCE involving a manager who created fake employees to divert salaries into personal accounts. This highlights the critical need for internal controls to prevent unauthorised financial transactions. Similarly, an investigation into vendor invoice fraud revealed that employees were inflating invoices in exchange for kickbacks, reinforcing the necessity of rigorous financial oversight.
Preventing employee fraud
A study by Hiscox found that 39% of companies had experienced more than one instance of employee theft, despite 97% expressing confidence in their anti-fraud controls. However, only 29% reviewed these controls frequently, indicating a gap between perception and actual preparedness[3].
Effective fraud prevention starts with robust internal controls and oversight. Organisations should implement segregation of duties to ensure no single employee controls all aspects of financial transactions. Regular audits and reviews help identify anomalies and reinforce financial transparency. Additionally, clear policies and risk and compliance training programs educate employees on fraud risks and reporting mechanisms, fostering a proactive approach to fraud prevention.
These strategies enhance an organisation’s ability to protect from fraud and illustrate how to prevent employee fraud effectively.
Technology and data security
Technology plays a critical role in preventing and detecting employee fraud, particularly as financial crime becomes more sophisticated with an increasing risk posed by cyber-enabled fraud and unauthorised access to financial systems.
Organisations can leverage various tools to help prevent employee fraud:
- AI and data analytics: To identify unusual financial patterns, detect fraudulent transactions in real time, and flag inconsistencies in payroll and expense reports.
- Automated monitoring systems: To provide continuous oversight of high-risk areas, such as procurement and financial approvals, helping to uncover potential fraud before it escalates.
- Strong access controls and cybersecurity measures: To prevent unauthorised access to sensitive financial data. This includes multi-factor authentication (MFA), restricted user permissions, and encryption protocols to protect digital records.
The effectiveness of fraud detection technologies depends on their seamless integration into existing systems. While large enterprises may invest in sophisticated AI-driven fraud detection tools, smaller businesses can benefit from structured internal controls and basic automated monitoring solutions. Implementing the right mix of technology-driven solutions ensures that businesses remain resilient against evolving fraud threats.
Implementing these technologies enhances an organisation’s fraud detection capabilities and safeguards critical assets.
Organisational culture and fraud prevention
A company’s culture plays a pivotal role in fraud prevention. Encouraging a transparent, ethical workplace where employees feel valued and accountable reduces fraudulent behaviour. Key strategies include:
- Whistleblower protection programs: Encouraging employees to report suspicious activities
- Leadership commitment: Executives setting the standard for ethical behaviour
- Balanced oversight: Avoiding excessive scrutiny that may foster distrust while ensuring adequate controls are in place
Detecting and addressing employee fraud
KPMG’s Fraud Barometer 2023 revealed that fraud cases valued at nearly £1 billion were tried in UK courts, with the public sector being the most common target[4]. These statistics highlight the importance of proactive fraud detection methods, including behavioural monitoring and anonymous reporting tools.
Detecting employee fraud early often relies on identifying behavioural red flags and financial inconsistencies. Employees who are reluctant to share duties or take leave may be attempting to conceal fraudulent activity, while sudden, unexplained wealth can indicate potential misconduct. Frequent accounting anomalies – such as missing documentation or irregular transaction adjustments – are also warning signs of financial fraud.
Anonymous reporting tools such as hotlines play a crucial role in fraud detection by providing employees with a safe way to report suspicions without fear of retaliation. When combined with vigilant oversight and proactive monitoring, these mechanisms help organisations identify and address fraud before it escalates.
When fraud is detected, organisations should have clear protocols to ensure swift and effective action. Investigations should be conducted thoroughly, gathering evidence while maintaining confidentiality. If necessary, organisations should involve law enforcement and legal experts to address the fraud appropriately. Implementing corrective measures, such as improving internal controls and refining audit management procedures, helps prevent recurrence and strengthens fraud resilience. When fraud is detected, organisations should have clear protocols:
- Investigate thoroughly: Gather evidence while maintaining confidentiality.
- Take legal action: If necessary, involve law enforcement and legal experts.
- Implement corrective measures: Strengthen controls to prevent recurrence.
Different-sized organisations require tailored fraud detection approaches:
- Small businesses may lack resources for sophisticated fraud systems but can rely on strict internal controls.
- Large enterprises benefit from AI-driven fraud detection tools but must ensure seamless integration across departments.
Understanding the effectiveness of fraud detection technologies allows organisations to select the right fraud prevention measures.
Conclusions and next steps for your organisation
Preventing employee fraud requires a comprehensive approach that combines strong internal controls, advanced technology, and a risk-aware organisational culture. By educating employees on ethical behaviour, implementing robust financial oversight, and leveraging AI-driven fraud detection, businesses can significantly reduce their exposure to fraud.
However, managing controls effectively can be complex – unless you have the right tools. Protecht ERM’s integrated controls management solution:
- Centralises all controls in a single platform, ensuring visibility and consistency
- Automates control testing and assurance, reducing manual effort and improving accuracy
- Links controls to risks, obligations, incidents, and regulatory frameworks for a seamless compliance strategy
- Provides real-time analytics, helping you identify fraud risks before they escalate
Request a demo today and see how Protecht can help you strengthen your controls management:
References
[1] https://legacy.acfe.com/report-to-the-nations/2024/
[2] https://www.acfe.com/acfe-insights-blog/blog-detail?s=case-study-the-employee-and-vendor-nexus
[3] https://www.hiscox.com/documents/2018-Hiscox-Embesslement-Study.pdf
[4] https://kpmg.com/uk/en/home/media/press-releases/2024/02/fraudsters-stay-bullish-despite-efforts-to-curb-their-crimes.html