Employee fraud accounted for $7 billion in annual losses, and few
businesses are immune to it.
8. Data or intellectual
property theft.
This can range from
stealing information on customer accounts—for personal use or to pass along to
a competitor—to making off with business plans, technical information, customer
personal information such as credit card account numbers or proprietary information.
Restricting access to
information of this type in a way that creates a traceable trail can help to
keep less-than-honest employees on the straight and narrow. (Photos:
Shutterstock)
7. Asset
misappropriation.
Using the company
credit card for personal purchases, padding an expense account, using a company
vehicle for personal errands and out-and-out theft of company property all fall
under this category, as do modifications or forgeries of company checks.
Careful and regular
auditing of company accounts, as well as paying attention to employees who
aren’t where they’re expected to be, can catch such schemes before they go far.
6. Health insurance
fraud.
Not just submitting
claims for medical treatment or health services that the employee didn’t
receive, but also conspiring with a health care provider to submit phony or
inflated receipts can be the hallmarks of this type of fraud.
Knowing one’s
employees can be the key to uncovering such tactics, particularly if an
employee is active in a way that doesn’t mesh with medical claims that have
been submitted for payment.
5. Worker’s compensation
fraud.
An employee faking or
exaggerating an injury or a disability can cost a company a sizeable amount of
cash, as can one who claims an injury happened at work when it took place
elsewhere.
Any of these can put
the company on the hook for a sizeable piece of change.
4. Benefits fraud.
Also expensive for
the company is the tactic of an employee putting in a claim for a massage or
other treatment covered by company insurance when they never actually got any
such treatment, or claiming the treatment cost more than it actually did.
In addition, a group
of employees going to the same service provider could be receiving receipts for
treatments that never actually happened. Once receipts are submitted, the
provider shares in the proceeds.
3. Procurement fraud.
Employees might be
ordering goods or supplies ostensibly for the company but taking them home, or
returning part of an order for a refund and pocketing the money.
They could also
engage in purchase order fraud by setting up a phony vendor account into which
fraudulent invoices are paid. Audits on both receipt of goods and payments made
can help to uncover such strategies.
2. Theft of cash.
Depending on the type
of business, this could be easy, with cash sales simply not recorded or phony
refunds recorded as issued to a customer.
Having specific
procedures in place for the handling of cash, as well as being alert to any
unexplained differences in money coming in or goods going out, can forestall at
least some cash theft plots.
1. Payroll fraud.
Claiming overtime
hours that were never worked, falsifying timesheets for regular hours or
getting an advance on pay and never repaying it are all forms of payroll fraud,
as is the grander scheme of a phantom employee who doesn’t exist—but who is
paid, with the money going to the person running the scheme.
Knowing one’s
employees, separating payroll duties so that a single employee isn’t in charge
of the whole process and verifying hours with employees themselves can uncover
such schemes and put an end to them.
The problem
presented by employee fraud is
very real—and very costly, according to “Report to the Nations: 2018
Global Study on Occupational Fraud and Abuse,” from the
Association of Certified Fraud Examiners.
In fact, in the
2018 study, employee fraud accounted
for more than $7 billion in total losses, at a median loss of $130,000 per
case, with 22 percent of cases causing losses of more than $1 million each.
And that, says the
report, is just “the 2,690 cases included in our study.”
Indeed, the
median estimate by Certified Fraud Examiners of losses a typical
organization faces in a given year due to fraud is 5 percent of annual
revenue. The report adds, “To place their estimate in context, if the 5 percent
loss estimate were applied to the 2017 estimated Gross World Product of USD
79.6 trillion, it would result in a projected total global fraud loss of nearly
USD 4 trillion.”
Facts about employee fraud that might be
surprising
The cases of
employee fraud the study examined “represent only a tiny fraction of the
frauds committed against organizations worldwide,” the report said. A look at
the findings reveals some interesting peculiarities:
1.
Losses caused by men are 75 percent larger than those caused by
women.
2.
The most common way employee frauds are discovered is via tips.
3.
Internal control weaknesses are responsible for nearly half of
frauds.
4.
Employees committing fraud who had been with their companies
longer stole twice as much.
5.
Small businesses lost almost twice as much to fraud per scheme
as larger ones.
Additionally, over
the past 10 years referrals for prosecution actually fell 16 percent – the
chief reason cited as fear of bad publicity.
Data monitoring
analysis and surprise audits resulted in the biggest reductions in fraud loss
and duration, but only 37 percent of businesses actually used such techniques.
And only 4 percent
of perpetrators had a prior conviction for fraud.
Perhaps most
disturbing of all—a majority of victim firms recovered nothing of their losses.
While the most
cases in the study occurred in banking and financial services, it points out
that the reason is likely because the industry is more apt to employ Certified
Fraud Examiners, not that it’s most susceptible to fraud.
What are effective ways to deal with employee
fraud?
According to a report in the CPA
Journal, it’s not enough to follow prescribed accounting principles such as
setting up governance and internal controls. They’re necessary, but “they
primarily address incentives and opportunities, and in most cases, these are
the easier two components to spot.”
The harder thing to
spot? Perpetrator thinking – that is, the ways employees who cheat tell
themselves it’s okay. “Rationalization is hidden and much more insidious,” the
report says.
The report suggests
“thinking like a crook” to spot how people rationalize what they are doing and
thus identify “lapses in ethical judgment.”
Such lapses
include choosing to follow instructions from a higher-up to take
fraudulent action, or seeing fraud done by multiple other employees
and thinking that makes it okay—or even harboring a mistaken notion that the
action taken is for the good of the company, fellow employees, stockholders or
some other “altruistic” reason.
Then there’s the
notion held by some that it is harder to do the right thing than the wrong
thing. Phys.org offers a
look at research published in the Journal of Applied Psychology that found some
people turn to bad behavior because they believe it’s easier than behaving
honestly.
The more a person
thought that it took extra work to be an honest employee, the more likely they
were to engage in dishonest behavior. In the presence of a strong
excuse to cheat, the theory that it’s harder to be honest provided
justification to engage in fraud.
Some red flags to
watch out for that can indicate potential employee fraud include the following:
·
An employee living beyond their means
·
An unwillingness to share duties
·
Being under pressure on the job
·
Family problems or divorce
·
Defensiveness
·
Past legal problems
·
Refusal to take vacations
Legal Line and iSight highlight
some common types of employee fraud that can result in some pretty hefty
losses. And the CFE report cited above contains a huge amount of information
about employee fraud, fraud prevention, and additional
resources. And if you haven’t already, check out the slides above for
eight common types of employee fraud and ways to prevent it.
https://www.benefitspro.com/2019/08/12/8-kinds-of-employee-fraud-and-how-to-prevent-it/
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