Avoiding employee fraud

Hiring the right employees is one of the most important decisions you’ll make. You could find someone who’s honest and genuine, or you could find someone who betrays your trust and commits employee fraud.

Employee fraud can come in many forms and can have far-reaching consequences. That’s why it’s important to recognize the warning signs and prioritize fraud prevention.

What is employee fraud?

Employee fraud, also known as occupational fraud, is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. Simply put, it’s when an employee lies for their own financial benefit.

The Association of Certified Fraud Examiners (ACFE) estimates that organizations lose an average of 5% of revenue to employee fraud every year. In addition to revenue loss, employee fraud may also require organizations to reimburse affected customers and pay countless fines and legal fees. Above all, employee fraud could tarnish an organization's reputation forever.

How to spot it

To spot employee fraud, you must first know some of the warning signs:

Signs of fraud in your business operations

  • Large and unusual cash transactions that can’t be explained
  • Bank statements that don’t match transaction history
  • Increases in supply and/or employee reimbursement expenses
  • Transactions on accounts that have been closed for a while

Signs of fraud in employee behavior

  • Personal financial difficulties
  • Recent divorce or family problems
  • Substance abuse or addiction problems
  • Unusually close association with a vendor or customer
  • Excessive control issues and/or unwillingness to share duties
  • Unusual irritability, suspiciousness or defensiveness

If you begin to see any of these signs, it’s time to start investigating.

Types of employee fraud and how to prevent them

Fraud prevention comes in many forms. Let’s look at the different types of illegal schemes and ways to stop them.

Property and data fraud

With property or data fraud, an employee steals company property and/or customer data for their own gain. The following preventive measures can help prevent theft.

  • Maintain an up-to-date list of equipment and supplies.
  • Limit employee access to only the areas they need to be in, and during times they need to be there.
  • Protect all customer and company information so that only those who need it can access it.
  • Assign all keys, and periodically ensure they have not been lost or stolen.
  • Reclaim all keys and badges when employees are terminated.
  • Perform regular data backups.
  • Password-protect all computers and programs with strong passwords and change those passwords frequently.

Employee confidentiality

Employee confidentiality fraud happens when employees steal co-workers’ personal information. Consider taking these steps.

  • Keep company and customer files in restricted areas.
  • Destroy important information. Shred paper files and properly dispose of any electronic data.
  • Omit Social Security numbers from paychecks and encourage employees to adopt direct deposit.

Financial fraud

Financial fraud can occur when an employee manipulates your business’s accounts to cover up theft. Here’s what you can do before it happens:

  • Divide responsibilities; never allow one employee to be responsible for all stages of a financial task. 
  • Require all purchases to be authorized by a select group of employees; do not grant blanket authority to all employees, even on a limited dollar-amount basis.
  • Set spending limits on purchase approvals, including with yourself.  
  • Try to eliminate cash transactions when possible. 
  • Make sure no checks can be cashed or deposited without your personal signature. If that sounds too time-consuming, require two signatures on checks over a pre-determined amount. Also, audit your checks on a regular basis to make sure no checks are missing.
  • Hand out paychecks personally. If you run a small business, this also allows you to say "thank you" for employees’ hard work.
  • Keep checks and financial documents in a safe place where only those who need access to them have it.
  • Match timecards, work hours, etc., with payroll records in case there are overstated work hours or "phantom" employees (when someone creates a fake employee in the system to pocket their “earnings”).
  • Shred all documents containing sensitive data, including unused or unneeded credit card charge slips.
  • Keep original copies of all purchase orders and invoices. This will give you a comparison point to use if you need it.
  • Hire an external accounting firm to regularly review your books.
  • Check in with your vendors often to see what supplies and services your company purchases, and make it easy for them to notify you if they think fraudulent activity is happening.
  • Perform credit and reference checks on other companies before you start to do business together and/or extend any lines of credit.
  • Check on partner companies regularly to see if their numbers match up with yours.

What’s an employee confidentiality agreement, and when should you use one?

Employee confidentiality agreements describe the sensitive information employees may see, as well as the rules they commit to following in order to protect it. If confidentiality is expected of your employees, you should have them review and sign an agreement when they begin their employment.

A bank employee is a great example. They’ll see customer financial information including bank accounts, loan information, home addresses, Social Security numbers and more. If that information fell into the wrong hands, many lives could be impacted.

Once they’ve signed the agreement, you can put safeguards in place, train employees and explain what actions you’ll take if you discover employee fraud. While that may feel like an awkward conversation to have, don't worry; honest employees won't be offended, while potentially dishonest employees may think twice.

Next steps

Finally, in addition to preventing and recognizing fraud, it’s important to have an established resolution process for fraud cases, and that your employees understand the consequences. Simply having such a process and communicating it is yet another fraud deterrent.

Completely eliminating employee fraud can be difficult, but protecting yourself against the worst-case scenario may prove vital. Be sure to check your business insurance policy to see if it covers employee fraud. That coverage may allow you to minimize the damage in the case fraud does occur.

To learn more and see other resources to help you with your business, check out our Nationwide Business Solutions Center.

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The information contained in this blog was obtained from sources believed to be reliable to help users address their own risk management and insurance needs. It does not and is not intended to provide legal advice. Nationwide, its affiliates and employees do not guarantee improved results based upon the information contained herein and assume no liability in connection with the information or the provided suggestions. The recommendations provided are general in nature; unique circumstances may not warrant or require implementation of some or all of the suggestions. Nothing in this brochure is intended to imply a grant of coverage.