8 effective strategies for employee fraud prevention

employee fraud

Last modified on May 24th, 2024

Employee fraud prevention is necessary to protect your company’s assets. According to the Association of Certified Fraud Examiners (ACFE), businesses lose 5% of their annual revenue to employee fraud and abuse – with an average loss per case of 1,5 million dollars. More than the direct financial losses, fraud can also cause reputational damages. What strategies should you set up for employee fraud prevention?

Trustpair blocks the effects of employee fraud by monitoring payments before they are executed, making it impossible for dishonest employees to commit wire transfer fraud. Contact an expert to learn more!

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What are the signs of employee fraud?

Employee fraud, a definition

As they work in your business, employees have access to privileged information and resources. Some may decide to use this as leverage for their own gain by committing employee fraud.

Also known as internal fraud or occupational fraud, it can show up as different types of fraud:

  • Corruption: an employee leverages their position in business relationships for their personal gain, to the detriment of the company. For example: receiving kickbacks, bribery, or being involved in a conflict of interest.
  • Financial statement fraud: like tampering with a company’s books by creating fictitious revenues, hiding liabilities or assets – all contributing to money laundering.
  • Asset misappropriation: a fraudster steals or takes advantage of their organization’s resources (like stealing cash, making false expense reimbursement claim, or taking non-cash assets).

Employee theft tends to happen more in small businesses, where employees have more leeway over their duties. However, large corporations also suffer from it, often with bigger fraud losses. Fraudsters take advantage of the lack of transparency and organizational complexities of big companies to commit fraud more easily.

The red flags of employee fraud

Because it comes from the inside, occupational fraud can be hard to detect. The 2014 ACFE Report revealed fraudulent activities lasted an average of 18 months before being detected. Undetected internal fraud creates additional opportunities for fraud – a vicious circle where only criminals win.

To prevent employee fraud, here are the warning signs to watch out for:

  • Presence: employee spends a lot of time on the premises, often being the first to arrive and the last to leave. They never take a sick day or a holiday.
  • Protective attitude: the employee gets over-protective over their duties, not letting outsiders get involved. They may refuse to use new tools or fail to adhere to new processes.
  • Personal circumstances: do they seem to live beyond their means with no explanation? Are they in a difficult financial situation? Do they have family problems? Those can all be flags of employee fraud.
  • Change of behavior: an employee suddenly shifting their habits (coming in late for work, isolating themselves, or something that’s cause for misconduct) should be monitored, as those changes could be signs of fraud. Either way, it’s good managerial practice to investigate what’s going on. Employees who feel undervalued can start harming the company, or leave.

Logically, employee fraud happens more in roles where employees have to deal with money, either as accounts or cash. Departments like operations, sales, procurement, or accounting have a higher risk of fraud.

It’s worth noting that internal fraud is mainly a white-collar crime: 85% of embezzlement cases were perpetrated by an employee at the managerial level or above.

While it’s important to know the red flags, it’s not enough to protect yourself. An efficient employee theft prevention policy also includes ways to prevent fraud in a company.

 

How to Efficiently Protect Your Organization against Employee Fraud?

Efficient protection against fraud includes both fraud prevention and detection. Your employees should follow the protective measures as well as be able to detect malicious attempts.

Here’s what you can do:

Establish a written fraud policy

All employees need to know where you stand regarding fraud. And what better way than to write a written policy? It’ll set your approach into stone (or pixels) for everyone to refer to it.

Your written fraud policy should include:

  • What is considered fraud,
  • How to report it,
  • If you plan to prosecute offenders,
  • Cybersecurity best practices.

Taking a public stand against fraud raises awareness and goes a long way to deter it. Just knowing you have measures set up against employee fraud provides a layer of protection against it.

That document can be sent to recruits during their onboarding and regularly reminded to everyone. You can even make nice visuals out of it to display next to the coffee machine. Any measure that raises fraud awareness is a good idea.

Provide ongoing training

Make employee fraud prevention a recurring topic in your organization. You can do so by providing regular (quarterly is ideal) training on fraud that includes internal fraud.

It helps keep it top of mind for everyone and teaches your employees how to spot fraud like phishing attacks and CEO fraud. Those two types of payment fraud often require social engineering and access to confidential information. Your employee could be an (intentional or not) accomplice to these types of scams.

As a leader in your organization, you need to strike the balance between creating a create of careful vigilance, without falling into paranoia.

Implement strong internal processes

When was the last time you reviewed your internal processes? Now might be the time to review and improve them.

Strong employee fraud prevention includes making sure your processes aren’t conducive to employee fraud (or even fraud in general). From handling petty cash to paying invoices, setting up safety measures is important.

Think about restricting access to certain activities or information, or even requiring double authorizations and authentication for key operations.

For example, a good way to prevent wire transfer scams is to have two different employees approve payment campaigns. The 4-eye principle can also safeguard you against employee fraud.

Implement segregation of duties

Segregation of duties means dividing operations into smaller steps, to prevent an employee from having too much control over one process. It can look like this:

  • Accounts payable process: having one employee make a purchase order, another one reception the goods, a third one pay the invoice, and a fourth reconcile the payment.
  • Payroll: one person to enter bank account information, another to prepare payment campaigns, and a third to approve everything.

It’s very helpful to deter fraud, as no one has complete power over one activity.

Establish investigation procedures

Internal controls are important to ensure your safety standards are respected across your company. Conducting regular and irregular internal audits ensures that suspicious activities can be detected early on.

Detective controls help you spot any irregularities and fight poor practices, non-compliance, and fraud. Constantly monitoring your finance, accounting, and sales processes (the ones most at risk) helps spot vulnerabilities before the situation becomes bad – or worse.

In the worst-case scenario, forensic accounting can help uncover financial crimes and may even lead to funds restitution. Employing auditors for fraud investigation also sends a strong message that your company is dedicated to its anti-fraud strategy.

Set up a confidential tip hotline

While fraud prevention is essential, you also need adequate fraud detection measures. And what better to spot suspicious activity than other employees? It’s easier for them to report fraud as they already know the perpetrator.

However, that’s also what can make it harder for them, especially if they know it’ll be escalated to law enforcement. Setting up an anonymous hotline (or another channel of communication) can help leverage your employee’s seeing eyes without the risk of retribution for them. It’s a similar principle to whistleblower protection.

And just knowing it’s there can help further deter thieves from even committing fraud in your company.

Enforce mandatory vacation time

While never taking holidays can first appear to be a sign of dedication to the company, the reality could be the opposite. Never leaving their duties means they can hide potential fraud from others.

Employees who are reluctant to take time off should therefore be carefully monitored. You can remedy that by ensuring that:

  • Every employee takes their vacation time.
  • Their duties are done by someone else during their time away.

It’s harder to deceive people on holidays, so any fraudulent activity should be brought up during their time off.

Utilize a secure safe for cash

One of the most concrete employee fraud prevention tactics is to store your cash in a locked safe. Only give the password to one or two trusted employees – maybe ones you run background checks on and who haven’t been previously sentenced.

It’s especially necessary if you’re in retail, but any company has some petty cash laying around. Storing it away in a safe prevents people from accessing it. It’s the equivalent of needing passwords to access your business’ bank account requires to prevent online fraud.

Cash on hand is the second most common form of fraud from employees, after billing fraud.

 

How to Use Automation to Block the Effects of employee fraud?

According to the ACFE, the top concealment method of employee fraud is to create or alter documents – either physical or electronic.

In many fraud cases, offenders create fake invoices for fictitious suppliers and proceed to send funds to their bank accounts – we call it vendor fraud. They can also impersonate your real merchants, sending bogus or inflated invoices to your company.

Spoofing – or identity theft – is a prevalent form of corporate fraud. One way to put a stop to employee fraud through wire transfer scams is to use an anti-fraud software solution.

Trustpair stops the misappropriation of your assets by detecting and blocking any suspicious payment before it is sent.

Our digital tool runs continuous audits of your third-party data in real-time. We use machine learning to detect possible fraud and use three-way matching to check payment is sent to the person you think it is.

Any transfer to unauthorized accounts is blocked and a fraud alert is sent immediately, so you can check fraud attempts manually.

Fraud detection and prevention can be done seamlessly, making your processes more efficient and secure. 200+ companies so far have used Trustpair to stop fraud in their organization. Contact an expert to learn more!

To learn about all types of corporate fraud and how to fight them, download our latest fraud report!

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Key Takeaways:

  • Preventing fraud from employees requires a proactive approach that includes safety measures, employee involvement, and a culture of fraud awareness.
  • Using anti-fraud solutions like Trustpair helps to prevent and detect fraud before payment is sent, blocking the effects of employee fraud.

FAQ

Financial fraud committed by employees takes various forms, like embezzlement, stealing petty cash, or creating fake invoices.

You can prevent fraud by applying a few key security measures: segregation of duties, double authorization for important operations, internal control, and training your employees to recognize fraud.

Manage the risks related to corporate treasury.

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