41 Types of Workplace Fraud + Top Prevention and Detection Tips
Know the fraud schemes and red flags to protect your company from harm.
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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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.
Most common in retail environments where cash exchanges are common, this type of fraud covers:
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.
Also called expense fraud, this type of fraud includes:
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:
The wide umbrella of payment fraud includes:
This type of fraud occurs any time an employee lies in order to collect a workers’ compensation payment. They might:
Head over to our “31 Warning Signs of Workers’ Compensation Fraud” article for more tips for preventing workers’ compensation 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:
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.
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.
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).
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.
To prevent and detect vendor fraud, you need to diligently analyze your vendor records. Start with this checklist:
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.
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 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.
To prevent and detect accounting 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:
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:
One employee steals another employee’s check and cashes it.
To prevent and detect payroll fraud:
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:
Theft of proprietary information to sell to a competitor. This includes everything from formulas and recipes to prototypes and blueprints.
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.
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.
To prevent and detect data theft:
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:
To prevent and detect bribery and corruption:
When you know the red flags of employee fraud, it’s easier to catch schemes sooner. Watch for employees who:
In addition, look out for:
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.
Knowing how to conduct effective fraud investigations can save your organization time, money, and stress. Learn how in our free eBook.
If you’re still simply reacting to fraud and theft, you’re putting your organization, your employees, and your reputation at risk.
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Learn more about how i-Sight can improve your organization’s investigations here.
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