41 Types of Workplace Fraud + Top Prevention and Detection Tips
41 Types of Workplace Fraud + Top Prevention and Detection Tips
Know the fraud schemes and red flags to protect your company from harm.
A former Apple employee recently pleaded guilty to defrauding the company to the tune of more than $17 million during his seven-year tenure. As a buyer in the Global Service Supply Chain department, he used his purchasing powers and relationships with vendors to take kickbacks, inflate and falsify invoices, and steal supplies.
Employee fraud is one of the most expensive liabilities organizations face. In fact, the ACFE’s Report to the Nations found that companies lose, on average, five per cent of their revenues to employee fraud.
As the news story above proves, even the world’s largest companies aren’t immune to internal fraud schemes. No organization can afford to wait until fraud occurs to implement controls.
In this guide, you’ll learn about nearly every type of employee fraud you could possibly encounter, warning signs of fraud schemes, and how to detect them early or prevent them all together to protect your company’s finances.
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Types of Fraud and Theft
One of the biggest challenges of detecting, investigating, and preventing employee fraud is the sheer number of types of fraud and theft. Each requires a different discovery method and needs to be handled in a different way.
While every department presents opportunities for employees to steal, operations and accounting are the most frequent offenders. In addition, about 62 per cent of theft is carried out by employees at the managerial level and above (ACFE).
Most types of fraud schemes within organizations fall into the following categories:
Asset misappropriation is a broad term that describes many employee fraud schemes. Put simply, it’s the theft of company assets by an employee, also known as insider fraud.
Asset misappropriation schemes include:
An employee makes out a company check to him/herself or someone else. They might forge a signature or use their own if they have signing authority.
An employee writes checks on an account that doesn’t have sufficient funds with the expectation that the funds will be in the account before the check clears.
This type of fraud scheme is less common nowadays, with faster check clearing times and more widespread use of electronic banking.
An employee alters the payee, amount, or other details on an existing signed check, or creates an unauthorized check.
An employee steals product from the company, either by physically taking it or diverting it in some other way. This is especially common in industries selling high-value goods (such as luxury clothing or accessories, pharmaceuticals, or electronics) that the employee can then resell.
Theft of Cash
Most common in retail environments where cash exchanges are common, this type of fraud covers:
- Stealing cash
- Skimming (not registering a sale and pocketing the cash)
- Return fraud (an employee colludes with someone else to return goods fraudulently for a refund)
- Any other scheme that involves the removal of hard currency
Theft of Services
An employee misuses company services or company-funded services. For example, a secretary at an auto shop might get the mechanics to do their oil changes for free.
Expense Reimbursement Fraud
Also called expense fraud, this type of fraud includes:
- Forging receipts
- Double claiming for expenses
- Submitting false reimbursement claims
- Inflating expense claims
Expense Account Fraud
An employee uses a company expense account for personal expenses, then submits them as business-related. This can also include expense reimbursement fraud, above.
This type of fraud includes schemes such as:
- Over-ordering product, then returning some and pocketing the refund
- Purchase order fraud, where the employee “purchases” goods for the company from a fictitious vendor account they create
- Purchasing goods for personal use/resale
The wide umbrella of payment fraud includes:
- Vendor fraud schemes
- Creating false customer accounts to generate false payments
- Altering payee details on checks and payables
- Self-authorizing payments
- Colluding with others to process false claims for benefits or payments
Workers’ Compensation Fraud
This type of fraud occurs any time an employee lies in order to collect a workers’ compensation payment. They might:
- Exaggerate the severity or duration their injuries or disability
- Invent injuries that did not occur
- Attribute injuries that occurred outside of the work environment to the workplace
Head over to our “31 Warning Signs of Workers’ Compensation Fraud” article for more tips for preventing workers’ compensation fraud.
Health Insurance Fraud
An employee conspires or colludes with health care providers to defraud an insurance company by submitting false or inflated receipts. They could also claim a reimbursement for medical or health services not received.
To increase their commission pay-out, an employee might:
- Inflate their sales numbers
- Log sales that did not occur
- Collude with customers to record and collect commissions on falsified sales
Personal Use of Company Vehicle
This is similar to theft of services but involves the employee using a company vehicle for unauthorized personal activities. Often, they also use the company credit card or submit reimbursements for gas fill-ups.
Preventing & Detecting Asset Misappropriation
With so many different schemes under this category, it’s hard to know where to start your preventive efforts. The steps below should deter potential fraudsters regardless of your company’s size or industry.
- Conduct thorough background checks on candidates before hiring them.
- Implement checks and balances for financial tasks.
- Separate the functions of check preparer and check signer.
- Rotate duties of employees in accounts.
- Conduct random audits of company accounts.
- Don’t pay commission until goods are services have been delivered.
- Keep checks in a locked cabinet and destroy voided checks.
- Implement an anonymous ethics hotline to encourage employees to report wrongdoing.
Vendor fraud can be committed by employees acting alone or in collusion with vendors. This type of fraud can also be committed by vendors on their own.
Examples of vendor fraud include:
An employee generates false payments to themselves using the company’s vendor payment system. They achieve this by either by creating a fictitious vendor (shell company) or by manipulating the account of an existing vendor (i.e. changing address or bank account number in the file).
Bribery and Kickbacks
An employee accepts (or asks for) payments from a vendor in exchange for an advantage. Bribes and kickbacks are often cash, but could also be guaranteed contracts, discounts, or inventory.
An employee steals checks for payment to a vendor and alters the payee or forges the vendor’s signature to deposit them in his or her personal account.
A vendor pads invoices to charge the company for more goods than it ships or to charge a higher price than was agreed upon.
This can be done in collusion with an employee who receives a kickback, or by the vendor alone to defraud the company.
Competing vendors work together to set a minimum price or price range. This makes both vendors’ prices appear competitive and ensures the company pays an inflated price no matter which vendor is chosen.
While employees of the company are not usually involved, they sometimes provide information to the vendors about pricing and budgets, often in exchange for kickbacks.
Preventing & Detecting Vendor Fraud
To prevent and detect vendor fraud, you need to diligently analyze your vendor records. Start with this checklist:
- Complete a vendor risk assessment before signing a new contract.
- Separate the functions of check preparer and check signer for vendor payments.
- Rotate duties of employees in procurement.
- Conduct random audits of vendor files.
- Conduct due diligence when setting up vendors by verifying:
- Business name
- Tax Identification Number (TIN)
- Phone number
- PO box and street address
- Bank account
- Contact person
- Use data mining to uncover anomalies and patterns.
- Compare vendor addresses with employee addresses.
- Implement a dual review process for vendor file management.
- Review vendor files to check that volume of billing is reasonable and consistent.
Accounting fraud occurs whenever an employee manipulates their company’s accounts. They might do this to cover up theft or use the company’s accounts payable and receivable to steal.
Employees involved in these types of fraud often have access to a company’s accounts with little or no oversight due to their positions.
Accounting fraud includes:
Also called larceny, this is any fraud conducted by a person who controls the funds being used.
Accounts Payable Fraud
An employee manipulates a payment from their employer so that they receive the funds or another advantage. This could include schemes such as billing fraud, check tampering, and kickbacks.
Accounts payable fraud is among the easiest frauds to perpetrate, since most of the money leaving a company legitimately goes through the accounts payable function. To learn more about AP fraud, visit our Essential Guide to Accounts Payable Fraud.
An employee sets up a fake supplier file and bills the company for good or services not provided. This is most easily carried out in industries with lots of suppliers, such as retail or hospitality.
An employee uses company funds to pay for personal purchases and records the payments as legitimate business expenses in the accounting system.
COVID-19 and the rise of remote work have muddied the waters on detecting this type of scheme. It can be hard to determine if a purchase is strictly personal or also work-related, such as office supplies or WiFi access.
An employee writes a check to pay an invoice, then writes a second check to him/herself. They then record the disbursement in the accounting system as a payment to the same supplier.
Accounts Receivable Fraud
Accounts receivable fraud takes place through many different types of schemes: lapping, fictitious sales, skimming, and more. It occurs whenever an employee manipulates incoming financial records to steal money meant for the company or to inflate the company’s value.
Check out The Definitive Guide to Accounts Receivable Fraud for a full look into this type of fraud.
Preventing & Detecting Accounting Fraud
To prevent and detect accounting fraud:
- Implement tight internal controls on accounting functions.
- Separate the functions of account setup and approval.
- Conduct random audits of accounts payable and accounts receivable records.
- Assign a trusted outside contractor to review and reconcile accounts at regular intervals.
- Rotate duties of employees in accounts payable and accounts receivable.
- Make it mandatory for employees to take vacation time.
- Set up an automated positive pay system to detect fraud.
Payroll fraud is theft via a company’s payroll system. Small businesses with fewer controls are especially at risk for this type of fraud.
Payroll fraud schemes include:
Ghost Employee Schemes
The fraudster diverts pay from a fake employee or former employee to their own bank account.
An employee requests a payroll advance and doesn’t pay it back.
When committing timesheet fraud, an employee might:
- Inflate their worked hours on their timesheet
- Clocks in and/or out for another employee in his or her absence
- Manually inflates hours on an employee’s timesheet (if they work in the payroll department)
One employee steals another employee’s check and cashes it.
Preventing & Detecting Payroll Fraud
To prevent and detect payroll fraud:
- Reconcile balance sheets and payroll accounts each quarter.
- Require managers or supervisors to approve timesheets and overtime claims.
- Institute mandatory vacations for payroll employees.
- Restrict payroll department employees’ abilities to modify pay rates and hours.
- Perform data analytics on payroll records to look for matching addresses, names, bank accounts, etc.
- Check payroll records to ensure terminated employees have been removed from the payroll.
- Separate tasks of preparing payroll checks and reconciling payroll account.
- If you still pay employees by check, hand paychecks to each employee in person, rather than leaving them on their desks.
Data theft or theft of trade secrets can be devastating if your company relies on its intellectual property for its product or service.
This type of theft can also compromise marketing and sales efforts and/or put the company in a precarious position with authorities when personally identifiable information is stolen.
Data theft schemes include:
Trade Secret Theft
Theft of proprietary information to sell to a competitor. This includes everything from formulas and recipes to prototypes and blueprints.
Theft of Customer or Contact Lists
A departing employee copies or downloads lists of the company’s contacts to either sell or use. For example, they might leave to open their own consulting firm and take your customer list to try and poach them.
Theft of Personally Identifiable Information (PID)
An employee steals or shares credit card numbers, bank account numbers, client lists, or other valuable PID to sell to other parties. The PID could belong to either employees of the organization or to customers, vendors, or clients.
Preventing & Detecting Data Theft
To prevent and detect data theft:
- Restrict access to company proprietary information to only those who need it for their jobs.
- Set up IT controls to alert management of data downloads or transfers that are large or occur at odd times.
- Purchase software that alerts management of suspicious activity on a company network, such as an employee trying to access sensitive information.
- Dispose of confidential information properly, by shredding documents and completely removing data from electronic devices before redeploying or disposing of them.
- Use strong passwords for all computers and devices that can access sensitive information.
- Implement a clean-desk policy that prohibits employees from keeping sensitive information on their desks while they are not present.
Bribery and Corruption
High profile employee frauds, such as bribery and kickbacks, can damage much more than a company’s finances.
The reputational hit from a corruption accusation can deter business, affect employee morale, and even tank your organization’s stock price.
These schemes can include:
An employee pays or provides a benefit to an official to secure an advantage for the company or for the employee.
An employee receives payments or benefits from third parties in return for business advantages or for unauthorized discounts.
Shell companies (or shell corporations) have no real operations and are simply “created to hold funds and manage another entity’s financial transaction” (SmartAsset). An employee or company officer may use a shell company to launder money, pay bribes, divert assets, or evade taxes.
A contractor, acting on its own or in collusion with an employee in the purchasing company, substitutes inferior or counterfeit materials for the materials specified in the contract. Substitutions could include:
- Products of lower quality or price than purchased
- Knock-off versions of brand-name products
- Old or expired products
Preventing & Detecting Bribery and Corruption
To prevent and detect bribery and corruption:
- Have a strong code of ethics and ensure everyone in the company, from the top down, knows what it says and puts it into practice.
- Ask the C-suite to set an example, making it clear that bribery and corruption are not tolerated.
- Consistently discipline employees who breach the company’s code of ethics.
- Conduct due diligence on all third parties your company does business with.
- Look for product substitution red flags such as:
- High numbers of tests or failures
- Unusually high numbers of repairs or replacements
- Lack of warranty information in packaging
- Unbranded packaging
- Products that don’t look like the product ordered
- Conduct a risk assessment to look for areas of risk
- Train all employees on bribery and corruption prevention
- Reward employees for ethical behavior
Employee Fraud Detection Tips
When you know the red flags of employee fraud, it’s easier to catch schemes sooner. Watch for employees who:
- Live a lavish lifestyle that doesn’t match their salary
- Don’t take vacation
- Routinely stay late, come in early, and/or work on weekends
- Act reluctant to share their job duties
- Seem to feel the rules don’t apply to them
In addition, look out for:
- Inventory shortages
- A large number of write-offs in accounts receivable
- Frequent tips/complaints/reports about an employee
The best way to detect employee fraud is through tips, which is why implementing a whistleblower hotline can be the best deterrent. According to the ACFE, the most common detection method is tips, with 47 per cent of frauds being detected this way.
In a company culture that encourages hotline use, every employee becomes the eyes and ears of the company.
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How Case IQ Can Help
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Learn more about how Case IQ can improve your organization’s investigations here.