5 Common Ways Employees Commit Fraud

Small business owners have so many things to consider at any given time. As a small business ourselves, we understand this. Day to day concerns regarding employees, inventory, pricing, and customer satisfaction take a significant amount of time and effort, leaving little room to worry about potential crises that could eventually happen like employee theft. We do not like to imagine the worst, and often try to live our day to day lives assuming the best. Unfortunately, this lack of focus on security makes small business owners especially vulnerable to employee theft.

Employee theft is the cause of failure for 30% of failed small businesses, and the median amount lost is $147,000.00 This is why it is so important to learn the signs of employee theft so that you can detect it early on. This blog article explains five common ways that employees commit fraud so that you can be on the lookout and catch problems before it is too late.

1. Billing fraud- In this case of fraud, an employee would send out invoices to customers for products and services that were not actually rendered. This sort of fraud is common in the healthcare industry as well as for online subscriptions like web domain renewal invoices. Make sure that you have an extra set of eyes overlooking all invoices: not just the ones that come to your company, but the ones that are sent out. If you are a small business, you may have an employee that is sending out extra invoices to your clients and collecting the extra cash without you even realizing it.
2. Kickback arrangements– Kickback arrangements are a type of fraud where an employee makes a deal with a certain supplier or partner to participate in a corrupt act such as inflating an invoice for products, and then gets a “kickback” payment as a reward for colluding with them. A recent example of this is the nearly 1 million dollar kickback scheme involving the Detroit Public Schools, where a school supply vendor provided kickbacks to more than 12 school employees in the Detroit Public School district in exchange for fraudulent invoices. Kickback arrangements are dangerous and highly illegal, but they can go on for years without being perceived. Again, make sure you look over all of the invoices coming in and out of your office to make sure that there are no extra or non-existent payments.
3. Check tampering– Check tampering is usually a case of an employee stealing company checks and writing them out to him or herself, but it can also be a case of an employee intercepting outgoing checks and cashing them in their own account. The majority of check tampering happens in small businesses and employees who are guilty of check tampering most frequently come from the accounting department. Make sure that you physically keep your checks secure, but also double check your bank statements for all cashed checks to make sure they are valid and that you wrote them yourself.
4. Skimming– Skimming is basically any example of where the full sum of a profit is not reported and some of the money is directly pocketed by an employee. Usually, employees practice this type of fraud by “skimming” relatively small amounts of money off of multiple purchases over time. Skimming can come from any area of your company: it could be employees who sell products that give things away for free to friends (or pocket them for themselves) or, on a larger scale, it could be accountants who record sums a little bit under the actual amount. Catching skimming can be hard. One of the best things to do is choose random transactions and double check them with your bank statement, and let your employees know that you are on the lookout for skimming. Knowing that they have a manager who is watching out for these kinds of tricks can help keep people in line.
5. Expense reimbursement fraud– In expense reimbursement fraud, employees somehow tamper with their business expenses in an attempt to get reimbursed for personal expenses and purchases. This could be anything from a tank of gas to an expensive flight. Expense reimbursement fraud can happen at any level of your business, but it is usually upper-level employees (who often travel or host clients as a part of their position) who commit expense reimbursement fraud. To prevent expense reimbursement fraud, it is important to review all expense reports carefully and insist that your employees provide documentation (and explanations) for each expense.

If you notice any suspicious activity that leads you to believe an employee is committing any of the above forms of fraud, don’t panic. There are steps you can take to handle situations of employee theft correctly and calmly. Check out our blog, How to Suspect if Someone is Lying to You for tips on how to handle a suspicious employee.