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How to Detect and Prevent Fraud in Your HR Department

How to Detect and Prevent Fraud in Your HR Department

Detect HR fraud schemes early and prevent future fraud with small changes to your company’s policies and procedures

The Association of Certified Fraud Examiners (ACFE) estimates that companies lose five per cent of their yearly revenue to fraud. If your company falls victim to an HR fraud scheme, not only will your finances take a hit, but employee morale and your professional reputation can be damaged, too.

To mitigate your company's risk, take proactive steps in preventing fraud in your HR department. Here's how to detect common schemes and keep them out of your organization.

If you detected fraud in your workplace today, would your employees know what to do?

Don't wait until you uncover fraud to decide how you'll react. Make a clear plan with descriptions and examples of different types of fraud, response procedures and employee responsibilities. Get started by downloading our free fraud response plan template.

Get the Template

What are Common HR Fraud Schemes?

Employees working in the HR department have access to employee data and spending authority for the office's needs. As a result, schemes often include data theft and fraud related to company expenses.

  • Expense fraud: HR staff claim to purchase items for their department. They might forge receipts for a fake purchase or inflate the expense claim, then pocket the money.
  • Ghost employee scheme: A staff member adds a fake employee to the payroll (or never removes an old employee) and diverts their pay to the HR staff member's bank account and/or address.
  • Misuse of company assets: An HR employee might use their company car and/or credit card for unauthorized personal use.
  • Procurement fraud: An employee over-purchases items for the HR department (anything from printer ink to coffee) and keeps the extras for personal use or to sell.
  • Theft of Personally Identifiable Information (PII): HR employees have access to every employee's sensitive information. They might steal contact information, banking information, Social Security numbers and more to sell or use in an identity theft scheme.

RELATED: 41 Types of Fraud and How to Detect and Prevent Them

Tips for Detecting and Preventing Fraud in Your HR Department

Look for Red Flags

Detecting fraud early is the most effective way to reduce your losses and risk. An employee might be committing fraud if they:

  • Live above their means
  • Refuse to let other HR team members help with their duties
  • Work long or odd hours (late nights, early mornings, weekends)
  • Never take days off

You might also notice signs of fraud in the HR department's expenses, such as:

  • Frequent or excessive ordering of supplies
  • Consistently going over the department budget
  • Missing or fraudulent expense reports or receipts

Implement Internal Controls

While you should trust your employees, you should also take steps to ensure they're behaving ethically. First, make sure no employee is responsible for all stages of a financial transaction. For example, if one HR team member writes a check for an office supply order, require another (e.g. their manager) to sign it.

Next, restrict the number of hours employees with accounting and purchasing responsibilities can work. Require them to take vacation. These controls ensure another team member takes over their tasks once in awhile, reducing the opportunity for fraud.

Finally, monitor the use company credit cards and bank accounts. Limit the number of authorized users on each. Require them to submit an itemized list of expenditures each month, along with original receipts for purchases.

Download our free cheat sheet with tips on how to detect payroll fraud for more information on common schemes and red flags.

Conduct Internal Audits

Internal audits aren't just for your accounting department. Bring in an external auditor to compare all departments' expenditures (including HR) with your books.

If the auditor finds a discrepancy, bring it up with the employee responsible. One offense might be a fluke, so let them off with a warning that you're monitoring their activity closely. A pattern of behavior might indicate fraud, though, and warrant an internal investigation.

Emphasize Ethics

Your HR department should take the lead on adopting your company's values and culture. That's why it's so disappointing when they commit fraud.

Emphasize that ethical behavior is a must at your organization. To start, require all employees, HR staff included, to complete anti-fraud training each year. Reward employees for ethical behavior and discipline any who violate company policies, regardless of department or position.

Most importantly, hire HR team members who are unlikely to commit fraud. Emphasize the importance of your company's values and code of ethics during the hiring process and choose candidates who fit them well.

RELATED: Prevent Fraud with These 9 Tips from the Codes of Conduct of the World's Most Ethical Companies

According to the ACFE, the average fraud scheme lasts 14 months undetected, with an average monthly loss of $8,300. Don't let your company fall victim to a fraudster. Early detection, thoughtful control measures and a culture of ethical behavior can help you avoid a devastating loss to fraud in your HR department.