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5 Tips to keep your organization safe from employee fraud

Baldev Kumar Puri
March 2, 2021

Any organization can have employee frauds, irrespective of its size. The term "employee fraud" incorporates many different ways to be frauded, and going through this situation can be very upsetting.

Businesses lose around 5% of their annual revenue due to employee frauds. In addition to this, small businesses with less than 150 employees are more vulnerable to such frauds.

This article will help you prepare against any unfortunate circumstances that may arise because prevention is always better than the cure. These tips might help you increase security in your company and detect suspicious behaviours from your employees.

Let us first look at the meaning of employee fraud and its types.

What is employee fraud?

Simply put, when an employee makes an unlawful gain while putting his/her interest over the business', it is known as employee fraud. It can be as minor as pocketing a small amount of money or theft of company documents.

Employees are usually driven to unethical behaviours due to external pressures like debt, difficult family circumstances, etc.

Nonetheless, fraudulent activity is always unlawful, as it often challenges the growth of the organization. It also gets the business into legal complications.

Before getting to the tips, we need to first understand the type of fraud that a worker is committing. So, these are the different types of fraud.

1. Theft of Cash

Theft of cash is one of the most common types of employee fraud. The employee either steals a small amount of money daily from the organization or takes a large amount for personal gains.

This type of employee theft is generally done by the cashier in businesses like retail outlets, restaurants, bars, etc.

A proper system that keeps records of inventory, cash flow, etc. is essential to avoid such dishonest activity.

2. Theft of Data and Confidential Information

Data stealing occurs when workers steal private and confidential data, which is of high value to the company.  They either use it for personal benefits or sell it to external parties, such as the organization's competitor.

Examples of theft of data can be theft of important digital credentials, a high profile concept of a product, confidential codes of software created by an IT Company, trading confidential ideas of a start-up, scripts of upcoming films, etc.

3. Theft/Misuse of Company Assets

Any misuse of company property or asset misappropriation for personal use or just a simple theft of company property is one of the most common kinds of employee fraud.

In this case, the employee usually uses the company property like laptops, cars, etc. to make a parallel profit through other uses.

In other cases, the employee also starts stealing office resources and company products and starts selling them in a black market for a higher rate of profit.

For asset misappropriation schemes, it is best to hire an accountant to make regular inventory checks. Apart from this, it is best to be vigilant to avoid this fraud.

4. Stealing the clients of the company

Client poaching is yet another significant problem that a lot of companies face, especially new ones when they don’t have a lot of clients in the first place.

Employees usually start a rival company without telling their employers and start stealing the company’s clients to begin sales with them.

a. Vendor Frauds

Such frauds are committed by employees acting alone or in collaboration with vendors. In other cases, the vendor can commit fraud on their own too. Here are some examples of vendor frauds.

First, an employee might present himself/herself as a vendor and generate payments on behalf of your company.

Second, an employee might ask or receive bribes from vendors in the exchange for company favors.

Third, an employee might forge or steal checks for a vendor or might steal the money of a vendor by forging their signature.

Now before we get into understanding the measures which can be taken to avoid employee fraud, we need to understand the intensity of damage that can be done and what factors contribute to it.

With this understanding, you will be able to easily spot any suspicious activity and stop it before it does any damage.

Thus, the different factors that affect the intensity of employee fraud are:

1. Instant or Long Term Planning

The duration of the scheme plays a major role in the impact of damage to the organization.

Short-term plans are often easier to catch over carefully planned offenses.

Long-planned fraudulent attempts often take place in small parts over some time, thus making them more dangerous over small instant plans.

2. Conducted by a Single Employee or a Group of Employees

It is easier to execute frauds in businesses alone than in a group. However, employee fraud carried out by a group of employees is much more dangerous than when the fraud is carried out by one employee.

3. Position of the Employee

The position or hierarchy of the employee committing the crime plays an important role in the level of fraud he/she is capable of.

Naturally, employees who are in a higher position have access to company information that is confidential and sensitive.  A lower-level employee will not have this advantage.

So the company becomes vulnerable and sensitive to leaks when employee fraud happens from someone at a higher level. In addition to this, the magnitude of damage is also high.

Therefore, strict measures to battle any sort of fraudulent attempts must be a high priority for any organization. Even the most trustworthy employees can sometimes shock their employer by engaging in such activities.

How can you prevent employee fraud?

Tips To Prevent Employee Fraud

a. Background Checks

Prevention is always better than cure. So, it is always best to make sure that you are hiring a trustworthy employee in your business.

A very simple and extremely important practice is to perform an extensive background check of the employee you hire. This process can reveal many red flags.

While any history of theft will be hidden by the employee, you can contact his/her previous employer in order to get more insight.

To perform such an investigation, you can hire Pre-Employment Detectives who are experts in this field. They will provide you with well-researched reports on your new joinee, including criminal background checks, financial pressures, past performance reviews and so on.

While these background checks might seem unnecessary and neurotic, it is best to put your organization first and perform this process.

b. Keep Proper Checks and Records

Business owners are always vulnerable to money and property being stolen.

Keep regular checks over financial statements, operations, invoices, and records to prevent petty crimes. This way, you can dig out any unauthorized communication with other companies and prevent confidential data from being leaked.

A proper digital and physical record of all the assets, inventory, payments, etc. can give you a transparent and organized view of your company. This way, you can point out missing records or suspicious activity.

c. Frequent Employee Verification Exercise

Every company is at risk of fraud and unethical behaviour from its employees. The company combats this risk from the long term employees too.

Thus, regular verifications and investigations of employee behaviour from inside and outside the company are essential.

This includes keeping tabs on unauthorized contact with external customers, sharing of information, suspicious cash transactions or extraction of company records.

This is necessary to keep the company safe from embezzlements.

Any unlawful behaviour of the employee outside the workspace should never be tolerated and strict measures should be taken towards any behaviour that puts the company at risk.

d. Employee Insurance Policy

Employee Insurance Policy can protect you from a lot of disasters.

Under an Employee Insurance policy, you can claim for any loss caused by illegal activity from a worker.

This policy is known as the commercial crime liability policy or fidelity insurance. It covers your organization from employee dishonesty, theft, cyber fraud, forgery, and any losses that occur as a result of this.

e. Good Treatment of Employees

A significant number of employee frauds can result from employees who either aren’t able to make enough money to sustain themselves or are hoping to make more money out of greed.

These problems lead to stolen money and office supplies or illegal sale of company merchandise.

Early prevention of this problem is through fair treatment of the employees. The undue stress of work, inflation, and rise in prices of necessary goods often lead to outbursts which then result in illegal activities.

Constant care for the mental health of employees or their financial needs might seem like a small thing, but it goes a long way in maintaining good relations with workers. This can eventually prevent fraud as the employee is loyal to the organization.

To sum up, spending a little time, money, and effort into avoiding employee fraud is a small price to pay in comparison to the damage these illegal activities do to an organization.

Statistics show that 95 % of all companies have experienced employee fraud.

This is a harrowing number that needs to be reduced.

In retrospect,  you should always perform a Pre-Employment Investigation. It will ensure that you only hire people with a clean record and good behaviour. Post hiring, you should always make sure to keep a regular check on employees, company accounts, and inventory along with a proper physical and digital record of everything.

Keeping an open mind about the financial and emotional problems of the employees also goes a long way in keeping making them happy. This will ensure their loyalty and keep your organization risk-free from any employee fraud.

If your company is looking for an HRMS Software to track attendance, manage payroll, review performance and more. Book A Free Demo with sumHR, an all in one HR Software for your business.

If you have any questions leave it down in the comments below and I will be sure to answer it.

Written by
Baldev Kumar Puri
Mr Baldev Kumar Puri is a professional, Private Detective and investigator experienced in this field for 30 years. He is also a distinguished member of the Association of Private Detectives and Investigators- India. He is working there as the Deputy General Secretary-National.
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