Employee fraud is not just a rare occurrence, but a prevalent issue in the American workplace. Shockingly, three out of four employees have confessed to stealing from their workplace at least once for personal gain. The types of fraud are diverse, ranging from petty theft to complex schemes involving benefits, accounts receivable fraud, or intellectual property.
The risk of employee fraud affects both small and large businesses. While larger businesses often have the resources to withstand losses, the impact of employee fraud on smaller companies is far more severe. In some cases, it can even lead to bankruptcy, highlighting the need for robust preventive measures.
In this post, we’ll cover the 18 types of employee fraud to watch out for. The table below quickly summarizes the 18 types of fraud, but a more detailed explanation of each type of fraud is below.
| Type of Employee Fraud | Summary |
| 1. Theft | Direct stealing of cash or merchandise from the company. |
| 2. Tax Evasion | Underreporting income or misclassifying employment status to avoid taxes. |
| 3. Bribery | Accepting kickbacks or gifts in exchange for business opportunities or decisions. |
| 4. Embezzlement | Misappropriation of company assets by a trusted employee for personal gain. |
| 5. Expense Account Fraud | Submitting falsified or inflated expense claims for reimbursement. |
| 6. Asset Misappropriation | Theft of company assets by an employee with insider knowledge. |
| 7. Financial Statement Fraud | Manipulating financial statements to create financial opportunities. |
| 8. Kickbacks | Accepting payments from external parties in exchange for preferential treatment. |
| 9. Intellectual Property Theft | Stealing and potentially selling company’s innovative ideas or designs. |
| 10. Inventory Theft | Taking inventory items home for personal use. |
| 11. Billing Schemes | Creating fraudulent purchase orders to divert payments for personal use. |
| 12. Forgery | Creating fraudulent documents or signatures for financial gain. |
| 13. Skimming | Stealing cash before it’s recorded in the company’s accounting system. |
| 14. Pay Rate Alteration | Manipulating payroll systems to inflate paychecks. |
| 15. Payroll Fraud | Manipulating the payroll system, including creating ghost employees. |
| 16. Benefits Fraud | Exploiting company benefits for personal gain, such as misusing sick days. |
| 17. Commission Fraud | Exploiting commission policies to claim unearned commissions or bonuses. |
| 18. Ghost Employee Fraud | Creating fictitious employees or keeping departed employees on payroll to collect their wages. |
1. Theft
Many forms of employee fraud involve the actual theft of cash. It can be as simple as taking money from a petty cash drawer. Or, an employee may steal money by taking a little extra off a cash deposit and not registering it. They might falsely ring up a sale but lift the cash, solely for personal benefit. This type of financial fraud drains company resources and can go unnoticed for a long time.
How it hurts your organization
Stolen cash, merchandise, or inventory directly reduces the company’s resources by thousands of dollars. The overall impact of employee fraud can be devastating, potentially leading to business failure in severe cases. By implementing robust preventive measures like random audits and fostering a culture of honesty, companies can minimize the risk of employee fraud and protect their financial well-being and reputation.
2. Tax Evasion
Employee tax evasion fraud can involve various tactics. An employee might underreport income by requesting cash payments instead of checks or convince the employer to misclassify them as independent contractors, avoiding payroll taxes. These are signs of fraud, which robust cybersecurity measures are designed to flag.
How it hurts your organization
This deception hurts businesses and organizational culture. First, the business is liable for the unpaid taxes withheld from employees’ wages. If caught, it faces hefty fines and penalties from the IRS. Second, this type of fraud erodes trust within the company and can damage its reputation and ethical culture. Finally, legal trouble disrupts operations and scares away potential investors and customers.
3. Bribery
Bribery and corruption include kickbacks, shell company schemes, bribes to influence decision-making, contract manipulation, or substitution of inferior goods. They also include accepting lavish gifts from vendors in return for business opportunities.
How it hurts your organization
Bribery may seem like a shortcut to success, but it ultimately undermines a business and its culture of integrity. The initial bribe is a financial drain, diverting resources from productive areas. More importantly, it fosters a culture of dishonesty, which can lead to a decline in morale and a breach of trust. Bribery can also result in hefty fines and severe reputational damage, driving away customers and partners.
4. Embezzlement
Embezzlement is the misappropriation of company assets by an employee entrusted with their management for personal gain. Can you imagine a trusted finance manager discreetly siphoning funds into their personal account? Like many criminal activities, it’s an inside job that can bleed your organization over time, without proactive measures in place.
How it hurts your organization
Embezzlement directly reduces the company’s financial resources, impacting its ability to invest in growth, meet payroll, or cover operational costs. Uncovering embezzlement can be a lengthy and expensive process in order to rebuild a culture of trust. It requires regular audits, forensic accounting investigations, and potential legal battles
5. Expense Account Fraud
How do you catch an employee submitting falsified receipts for meals, accommodations, or mileage? What about an employee inflating their travel expenses or fabricating business-related costs? Expense account fraud involves manipulating expense claims to pocket undeserved reimbursements. It’s unethical behavior that can kill your profits.
How it hurts your organization
Expense account fraud occurs when employees misuse the system meant to reimburse legitimate business expenses. While seemingly small, expense account fraud can chip away at a company’s profits over time. Additionally, a culture of unchecked expense abuse can erode employee morale and encourage more serious forms of fraud.
6. Asset Misappropriation
Asset misappropriation is the theft of company assets by an employee who has detailed knowledge about business methods, so it’s an insider threat. The malicious actor circumvents internal controls and uses false or misleading records or documents.
How it hurts your organization
When employees steal assets, they reduce the company’s resources, impacting its ability to operate efficiently. Lost inventory disrupts production or sales, while stolen cash creates a cash flow shortage. Furthermore, uncovering asset misappropriation can damage employee morale and erode trust within the organization.
7. Financial Statement Fraud
Accounting fraud is usually well hidden, as the fraudster might boost the profits figure or shrink the appearance of liabilities cover their tracks. This type of fraud centers on the manipulation of financial statements to create financial opportunities for a person.
How it hurts your organization
Financial statement fraud, though less frequent, poses a severe threat. Deceptive financial statements mislead investors, creditors, and regulators. This can result in bad investment decisions, loan defaults, and regulatory fines. The damage to the company’s reputation can be catastrophic, making it difficult to attract future funding or partnerships.
8. Kickbacks
Kickback schemes involve employees accepting payments or favors from external parties. For example, an employee receives cash incentives from a supplier in exchange for awarding them contracts. Or, imagine an employee accepting money from vendors in exchange for preferential treatment in a bidding process.
How it hurts your organization
Kickbacks undermine fair competition and hurt companies financially. They often lead to inflated prices for goods or services, reducing the company’s profit margins. If the kickbacks are discovered, the business faces legal repercussions, including fines and potential lawsuits.
9. Intellectual Property
Intellectual property includes the innovative thoughts, designs, methodologies, prototypes, and original creations of a company. These intangible assets are pivotal for a company’s competitive stance, growth, and overall value. When a disgruntled employee steals sensitive information about a new invention and sells it to another company it is intellectual property theft, and is a federal crime in the US.
How it hurts your organization
Whether it’s an employee leaving the company to start a competitive venture using stolen trade secrets or an external entity replicating a patented product, the repercussions can be long-lasting and damaging. Such theft not only results in potential revenue loss but dilutes brand value, compromises market standing, and impedes future innovation.
10. Inventory Theft
Employees may actually take inventory home because they feel entitled, whether it is small paper clips or large items such as electronics, automotive parts or similar items. The stolen items often are not noticed until inventory is counted.
How it hurts your organization
Employee fraud through inventory theft can hemorrhage a business’s resources. It reduces the company’s sellable product and out of stock notices, which frustrates customers and disrupts sales. Stolen inventory throws off internal records, making it difficult to accurately forecast demand and order new supplies. This leads to production delays and lost sales opportunities.
11. Billing Schemes
This type of fraud is more difficult to detect since to commit this financial fraud, the fraudster has to have a higher level of authority. Using online templates, they create a purchase order and payment is diverted for personal use.
How it hurts your organization
Billing schemes directly siphon money from the business, impacting its cash flow and profitability. Unidentified fraudulent invoices can also lead to over payments to vendors, further straining finances and vendor engagement.
12. Forgery
Forgery in the workplace involves creating fraudulent documents or signatures to deceive others for financial gain. It’s a deceptive art that can wreak havoc on your finances. A common example is forging a supervisor’s signature on a pay raise request.
How it hurts your organization
Forged documents can be used to steal company funds, divert resources, or commit other forms of fraud. Forgery exposes the business to legal liabilities, as it can be used to create fake debts or contracts. The erosion of trust within the organization can also damage employee morale and hinder collaboration.
13. Skimming
This type of employee theft involves pinching cash prior to its entry into the company’s accounting system. It requires no sophistication and skill on the part of the thieving employee. Some examples include accounts receivable skimming, fake billing schemes, and tampering of checks.
How it hurts your organization
While the individual amounts skimmed might seem insignificant, this type of theft adds up considerably over time, causing financial losses for the business. This misuse of company assets chips away at a business’s profitability and decreases its ability to meet financial obligations.
14. Pay Rate Alteration
This occurs when an employee with access to the payroll system adjusts a pay rate to inflate their paycheck. After payday, they correct the pay rate to avoid detection. Or, a worker falsifies their reported hours on their times sheet.
How it hurts your organization
The stolen funds directly reduce the company’s profits. If the fraudster is not caught, the business is liable for paying taxes and social security contributions on the inflated wages. This means hefty fines and penalties from government agencies.
15. Payroll Fraud
Payroll fraud happens when an employee manipulates the payroll system to divert funds illicitly. For example, a real employee may create ghost employees and direct their salaries to a fraudulent account.
How it hurts your organization
Payroll fraud drains a business’s finances because you pay for non-worked hours (aka time theft). It leads to financial losses and strained employee morale. There are also tax penalties if the business fails to withhold proper taxes from inflated wages. The erosion of trust damages employee morale and hinders productivity.
16. Benefits Fraud
Benefits fraud occurs when employees exploit company benefits for personal gain. For example, employees use sick days while healthy, which increases the work load for others.
How it hurts your organization
Benefits fraud directly increases the company’s healthcare and insurance costs, and these fraudulent claims lead to higher premiums. This makes it more difficult for the business to maintain its benefits program in the future with the increased cost of financial transactions.
17. Commission Fraud
This fraud happens when a dishonest employee exploits weaknesses in a company’s commission policy to claim unearned commissions or bonuses. For example, a sales reps shouldn’t be able to keep commissions for sales that go uncollected. If commissions are up when sales are down, that’s cause for concern.
How it hurts your organization
If inflated sales figures create a false impression of demand, commission fraud reduces a company’s profitability and leads to lost sales opportunities. When discovered, commission fraud tarnishes the company’s reputation with clients and partners who were misled by false sales reports.
18. Ghost Employee Fraud
Imagine an employee in HR or the payroll department adds a fictitious employee, or keeps someone on the payroll after they’ve left the company. Payments are sent to the bank account or address of this ghost employee and collected by the scammer. The absence of withholding elections or benefit elections is an indication a ghost employee may exist.
How it hurts your organization
Ghost employees directly siphon money from the business, impacting its cash flow and bottom line. The presence of ghost employees can distort internal data, making it difficult to accurately track labor costs and resource allocation. The discovery of ghost employees can also damage the company’s reputation and raise concerns about its internal controls.
How To Prevent Employee Fraud with Teramind
What if your employees were putting your business at risk? Teramind’s insider fraud detection solution relies on user activity monitoring, automated alerts and comprehensive behavior analytics to detect the subtle signs of insider fraud and then prevent it. Defend your company and customer data against fraudulent activity by leveraging behavior analytics.
Fortify Insider Fraud Detection
By implementing analytics tools and insider risk management software, you can proactively identify suspicious activity. Early detection allows for swift intervention and minimizes potential losses. For example, you can enforce role-based access controls (RBAC) that limit data access based on job titles or apply strict monitoring controls.
Monitor Privileged Users
It is crucial to closely monitor employees with access to sensitive data and financial systems. This involves implementing multi-factor authentication, restricting access based on the principle of least privilege, and regularly reviewing user activity logs. Monitoring privileged users helps deter fraudulent behavior and identifies potential insider threats before they can cause significant damage.
Protect Company Data
Safeguarding sensitive company data through robust security measures is essential. This includes encrypting confidential information, implementing strong password policies, and regularly updating security software. Use Teramind for focused monitoring and protection of the confidential and sensitive data most at risk of being used to commit insider fraud: Personally Identifiable Information (PII) and PFI.
Collect Evidence
Having a clear and documented process for collecting evidence in case of employee fraud or suspicious activity is vital. Accurate investigations might involve securing electronic records, interviewing witnesses, and preserving physical documents. Following proper evidence collection procedures ensures a stronger case if legal action becomes necessary and helps deter future fraudulent activity by demonstrating the company’s commitment to accountability.
FAQs
What constitutes fraud in the workplace?
Fraud in the workplace refers to any deceptive behavior by an employee that results in financial loss or harm to the organization. Examples include theft, embezzlement, and falsifying documents. It is important for businesses to have strong internal controls and policies that deter and detect employee fraud.
What type of employee most often commits fraud?
Employees in positions of trust and responsibility, such as those working in finance or at senior management levels, are more likely to commit fraud. However, it’s important to note that fraud can occur in any role, so businesses should implement strong internal controls and keep a vigilant eye on all employees to deter and detect fraudulent activities.
What are the red flags for internal fraud?
Red flags for internal fraud include unexplained financial discrepancies, frequent cash shortages, excessive personal spending by an employee, and a lifestyle that doesn’t match their salary. Other warning signs may include resistance to sharing job duties, an employee who doesn’t take vacations, and a lack of documentation or records.
