EMPLOYEE FRAUD

Prepared by CA
Membership No. 188222
Introduction
 Employee fraud is more common than most businesses think. It can have differing
impacts on the success of a business. In the most serious of cases, employee fraud
can lead to business failure and destroyed careers. Misplaced trust, inadequate hiring
and supervision policies, and a failure to implement strong internal controls create an
environment that is ripe for an employee to commit fraud. Employee fraud is
therefore about opportunity. Subsequently, businesses should take steps to reduce
this opportunity.

 The following guide includes:

- an overview of fraud, including common examples of fraud
- examples of strategies to reduce the risk of fraud
- information on what to do when a fraud is detected.
What is Fraud ?
 Fraud is behavior that is deceptive, dishonest, corrupt or unethical. For fraud to exist
there needs to be an offender, a victim and an absence of control or safeguards.”
Fraud is generally described in three categories:
1. Asset misappropriation
2. Fraudulent accounting and financial reporting
3. Corruption.

 Conversely, fraudulent activity is usually motivated by one or more of three main

factors:
1. Pressures
2. Opportunity
3. Rationalization.
Impact of fraudulent activity
 Staff morale can be affected as they feel a sense of betrayal that a colleague could do
such a thing and/or management allowed the fraud to occur.
 Good employees do not want to work for a business where fraud is widespread, not
investigated or not acted upon.
 The reputation of the business in the eyes of suppliers, customers, competitors,
possible employees and other business partners (for example banks) can be
damaged.
 Businesses may become overly internally focused in response to a fraud.
 For individuals that supervised the fraudster, the fraud can impact their reputation
and therefore their career, particularly if the manager is in a financial role, as others
will expect that given their expertise, they should have prevented the fraud.
Types of Employee Fraud,
Prevention & Detection Control
 Asset Misappropriation
 Vendor Master
 Accounting Fraud
 Payroll Fraud
 Data Theft
 Bribery and Corruption
Asset Misappropriation
Asset misappropriation is a broad term that describes a vast number of
employee fraud schemes. Simply, it’s the theft of company assets by an
employee, also known as insider fraud. Asset misappropriation schemes
include:
 Check Forgery
 Check Kiting
 Check Tempering
 Inventory Theft
 Theft of Cash
 Payment Fraud
 Commission Fraud
 Procurement Fraud
 Expense Reimbursement Fraud
Prevent and detect asset
misappropriation:
 Conduct thorough background checks on new employees.
 Implement checks and balances.
 Separate the functions of check preparer and check signer.
 Rotate duties of employees in accounts.
 Conduct random audits of company accounts.
 Don’t pay commission until goods are services have been delivered.
 Keep checks in a locked cabinet and destroy voided checks.
 Implement an anonymous ethics hotline to encourage employees to report
wrongdoing
Vendor Fraud
 Vendor fraud can be committed by employees acting alone or in collusion
with vendors. This type of fraud can also be committed by vendors on their
own. Vendor Fraud schemes include:
 Billing Schemes
 Bribery and Kickbacks
 Check Tampering
 Overbilling
 Price Fixing
Prevent and detect vendor fraud:
 Conduct thorough background checks on new employees.
 Implement checks and balances on payments to vendors.
 Separate the functions of check preparer and check signer.
 Rotate duties of employees in procurement.
 Conduct random audits of vendor files.
 Conduct due diligence when setting up vendors by verifying:
 Use data mining to uncover anomalies and patterns.
 Implement a dual review process for master vendor file management.
 Review the vendor master file to check that volume of billing is reasonable
and consistent.
Accounting Fraud
An employee who manipulates a company’s accounts to cover up theft or uses
the company’s accounts payable and receivable to steal commits accounting
fraud. Employees involved in these types of fraud are generally those in
positions that have access to a company’s accounts with little or no oversight.
Accounting fraud includes:
 Accounts Payable Fraud
 Embezzlement
 Fake Supplier
 Personal Purchases
 Double-Check Fraud
 Accounts Receivable Fraud
Prevent and detect accounting
fraud:
 Implement tight internal controls on accounting functions.
 Separate the functions of account setup and approval.
 Conduct random audits of account payable and accounts receivable records.
 Assign a trusted outside contractor to review and reconcile accounts at
regular intervals.
 Rotate duties of employees in accounts payable and accounts receivable.
 Make it mandatory for employees to take vacation time.
 Set up an automated positive pay system to detect fraud.
Payroll Fraud
Payroll fraud is theft via a company’s payroll system. It’s one of the most
common types of employee fraud – according to the ACFE it occurs in 27 per
cent of businesses and lasts for an average of 36 months. So it’s a significant
risk, especially for small businesses where there are usually fewer controls.
Payroll fraud schemes include:
 Ghost Employee Schemes
 Advance Fraud
 Timesheet Fraud
 Paycheck Theft
Prevent and detect payroll fraud
 Reconcile balance sheets and payroll accounts each quarter.
 Require managers or supervisors to approve timesheets and overtime
claims.
 Institute mandatory vacations for payroll employees.
 Restrict payroll department employees’ ability to modify pay rates and
hours.
 Perform data analytics on payroll records to look for matching addresses,
names, bank accounts, etc.
 Check payroll records to ensure terminated employees have been removed
from the payroll.
 Separate tasks of preparing payroll checks and reconciling payroll account
Data Theft
Data or theft or theft of trade secrets in one type of employee fraud that can be
devastating to a company that relies on its intellectual property for its product
or service. This type of theft can also compromise marketing and sales efforts
and/or put the company in a precarious position with authorities when
personally identifiable information is stolen. Data theft can include:
 Trade Secret Theft
 Theft of Customer or Contact Lists
 Theft of Personally Identifiable Information (PID)
Prevent and detect data theft:
 Restrict access to company proprietary information to only those who need
it in the course of their jobs.
 Set up IT controls to alert management of large data downloads or transfers
or downloads and transfers that occur at odd times.
 Purchase software that alerts management of suspicious activity on a
company network, such as an employee trying to access sensitive
information.
 Dispose of confidential information properly, by shredding documents and
completely removing data from electronic devices before redeploying or
disposing of them.
 Use strong passwords for all computers and devices that can access
sensitive information.
 Implement a clean-desk policy that prohibits employees from keeping
sensitive information on their desks while they are not present.
Bribery and Corruption
High profile employee frauds, such as bribery and kickbacks, can damage
much more than a company’s finances. The reputational hit from a corruption
accusation can deter business, affect employee morale and affect an
organization’s stock price. These frauds can include:
 Kickbacks
 Shell Company Fraud Schemes
 Product Substitution
Prevent and detect bribery and
corruption:
 Have a strong code of ethics and ensure everyone in the company, from the
top down, knows what it says and puts it into practice.
 Ensure those at the top levels of the company set an example that makes it
clear that bribery and corruption are not tolerated.
 Discipline employees who breach the company’s code of ethics.
 Conduct due diligence on all third parties your company does business
with.
 Conduct a risk assessment to look for areas to watch more closely
 Train all employees on bribery and corruption prevention
 Reward employees for ethical behavior
Employee Fraud Detection Tips
(Red Flags)
Watch for the following red flags:
 Employees with a lavish lifestyle that doesn’t match their salary
 Employees who don’t take vacation
 Employees who routinely stay late and work on weekends
 Frequent tips or complaints about an employee
 Inventory shortages
 An employee who reluctant to share his or her job function
 Large number of write-offs in account receivable
 Employees who seem to feel the rules don’t apply to them
 The best way to detect employee fraud is through tips, which is why
implementing a whistleblower hotline can be the best deterrent.
Conclusion
In Order to Prevent and Control employee fraud there are some suggestion :
1. Know your Employee
2. Make Employee aware
3. Implement Internal Control
4. Monitor Vacation Balances
5. Hire Experts
6. Live Corporate Culture
THANK YOU