What are the warning signs of employee fraud?

Billing schemes. Skimming. Check tampering. Employee fraud is a real risk for entrepreneurs of fewer than 100 employees.

In fact, according to the Association of Certified Fraud Examiners 30% of fraud cases take place in small businesses.

This article will help you identify the most common signs of fraudulent activity before an unscrupulous employee destroys your business.

Identifying high risk employees

When an employee has something to hide, their conduct may become suspicious; they may act closed off, secretive and defensive.

A common clue is a worker who won’t take time off for a holiday (because someone may take over their duties and discover the fraud). Others will try to cover up their improved financial status – a new car or home, for instance – with tales of a lottery win or inheritance.

In addition to employees acting suspiciously, high risk employees might also include those:

  • struggling with debt
  • dealing with mounting bills because of unfortunate circumstances (e.g. divorce, a family member’s poor health)
  • with a history of drug abuse
  • involved in risky financial ventures (e.g. gambling, investments)

If an employee has a motive for fraudulent activity at work, think of the following behaviors as red flags.

Access and opportunity

Unsurprisingly, the highest risk employees for fraud have trusted roles in financial services: AP, AR, accounting, and bookkeeping.

In order to commit fraud, an employee must have both access and opportunity – that is, access to funds, banking records, and accounting data. The ideal situation is someone entrusted with performing multiple roles; that is, they can both cut and sign checks, process AP and handle bank reconciliations.

Unmanaged control

Access is just one part of the equation when it comes to employee fraud. Also keep a watchful eye on employees who exert control over certain aspects of their job.

For instance the may insist on:

  • working unnecessarily long hours
  • working outside of regular business hours
  • performing specific job duties and refusing to share certain tasks
  • only dealing with a specific supplier or vendor*

* A common employee scam known as “purchasing fraud” occurs when a supplier or vendor inflates an invoice amount, the employee cuts a check, and both parties split the difference.

Red flag scenarios

Monitor your financial records closely, and investigate more closely if you come across the following discrepancies:

Mismatched payees: the name on a cashed check doesn’t match the name entered in the general ledger

Identical payments:  two checks have cleared for the same amount to different vendors in the same date range; one may have been authorized on the strength of supporting documentation for the legitimate payment.

Questionable companies: a supplier or vendor with unprofessional invoices (i.e. obvious errors, a missing or incorrect address, home address, and/or non-existent web presence)

Final thoughts

Now that you know how to spot the most common warning signs for employee fraud, it’s important your management team take steps to combat it.

Watch for suspicious behavior, segregate financial roles so no one has unlimited access, control, or opportunity – and ensure your bookkeeping is always up to date so any “red flag” scenarios can be dealt with promptly.  One of the best internal controls is outsourcing your bookkeeping to a professional firm like Daily Balance Inc.  This is especially true with organizations where too few people are responsible for too many tasks.  For more about that contact us at dailybalance.com. 

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