Employee Frauds: What Is It And What Are The Different Types?

What is employee fraud?

Employee fraud, or internal fraud, refers to the lies told by an employee for their financial or personal benefit. Fraudulent activities can range from theft to deception.

Contrary to common beliefs, employee fraud occurs more often than business owners realize. To put things into perspective, here are some statistics related to employee fraud.

• 51% of organizations say they have experienced fraud in the past two years (PWC)
• 46% of organizations said they experienced fraud in the past 24 months. (PWC)
• 75% of employees in the United States say they have stolen from their workplace at least once. (California Restaurant Association)
• Employee fraud costs U.S. businesses $50 billion annually. (Statistic Brain)
• More than 30% of bankruptcies are caused by employee fraud. (Service Management Group)

What are the types of employee fraud?

There are five main categories of employee fraud, namely Asset Misappropriation, Vendor Fraud, Accounting Fraud, Payroll Fraud and Data Theft. Under each category are nearly a dozen or more fraudulent behavior. We’ll explore all of them.

Asset Misappropriation

Asset misappropriation is a broad term that describes the theft of company assets by an employee. This type of employee theft can also be called insider fraud.

Some of the most common forms of asset misappropriation schemes include:

Check Forgery

Check forgery occurs when an employee makes a company check to him/herself/someone else and applies the signature of an authorized maker.

Check Kiting

An employee writes checks on accounts without sufficient funds with the expectation that the money will be in the said account before the check is cleared.

This type of employee fraud occurred more often when check-clearing times were slower and when electronic banking was not as widespread.

Check Tampering

An employee alters the information on an existing signed check, such as the payee, amount, and other details. Check tampering also occurs when an employee creates an unauthorized check.

Inventory Theft

An employee steals products from the company through either of two means: physically taking a product or diverting it somewhere.

Inventory theft is more common in industries with high-paying goods, such as luxury clothing, jewelry, pharmaceuticals, and electronics. Often, employees who steal products have the aim of reselling the item.

Cash Theft

As the name suggests, cash theft happens when an employee steals cash from the company. This type of employee fraud is more common in small businesses, especially those in retail environments where cash exchanges are common.

Apart from stealing cash, this type of occupational fraud also involves skimming cash (which means registering a sale and pocketing the cash), return fraud (where an employee colludes with a purported buyer to return an item fraudulently for a refund), and any other fraudulent activity that involves the removal of hard currency.

Service Theft

An employee misuses company services or company-funded services for personal gain.

For example, a secretary at a salon may get workers to do their hair for free. In another case, a manager at a car repair shop might get the mechanics to do their oil changes or tire realignments for free.

The personal use of a company vehicle could also be classified under service theft. In these cases, employees often use the company credit card or submit reimbursement claims for gas.

Expense Reimbursement Fraud

Also called expense fraud, this type of employee fraud occurs when a worker knowingly completes inaccurate expense claims by forging receipts, double claiming for expenses, submitting false reimbursement claims, and inflating expense claims.

Expense Account Fraud

An employee uses the company accounts to pay for personal purchases or expenses and then submits them as business-related. Expense account fraud also covers expense reimbursement fraud.

Procurement Fraud

Procurement fraud covers schemes like over-ordering products, then returning some and pocketing the refund, purchasing goods for the company from a fictitious vendor account that the employee has created, or purchasing goods for personal use or reselling.

Payment Fraud

Payment fraud is a wide umbrella that covers a number of fraudulent schemes, including:

• Vendor fraud
• Creating false customer accounts with the intent of generating false payments
• Altering payee details on checks
• Self-authorizing payments
• Colluding with other entities to process false claims

Workers’ Compensation Fraud

An employee lies about their injuries or disabilities to collect workers’ compensation payment. Employees who commit fraud to collect workers’ compensation payments may exaggerate the severity of their injury, invent injuries, or attribute injuries that occurred outside of the workplace to their work environment.

Health Insurance Fraud

An employee colludes with healthcare providers or medical workers to defraud an insurance company by submitting false receipts or claiming reimbursement for health services that were not provided.

Commission Fraud

An employee may either inflate their sales numbers by logging false sales or collude with customers to record and collect commission payments on falsified sales.

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Vendor Fraud

Vendor fraud is a crime that can be committed by an employee acting alone, a vendor acting alone, or a worker in collusion with vendors.

Vendor fraud schemes involving employees include:

Billing Schemes

A billing scheme is where an employee generates false payments to themselves using the company’s vendor payment system, either by creating a shell company or by manipulating the account of one of the company’s vendors.

Bribery

An employee asks for or accepts cash payments, discounts, products, or contracts from a vendor in exchange for an advantage.

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Accounting Fraud

Accounting fraud schemes occur when an employee manipulates their company’s account in an effort to cover up theft. Accounting fraud also happens when an employee manipulates the company’s accounts payable and receivable for their personal gain.

Schemes under accounting fraud include:

Embezzlement

Embezzlement occurs when an employee takes the personal property entrusted to them. For instance, an embezzler may create bills and receipts for activities or sales that never occurred and use the money paid for personal expenses. Other embezzlers also destroy employee records or pocket company funds.

Accounts Payable Fraud

Accounts Payable Fraud is one of the easiest and most common frauds because the money being stolen from the company legitimately goes through the accounts payable function.

In this type of fraud, an employee manipulates a payment from their employer for their personal gain. Schemes included in accounts payable frauds are billing schemes, check tampering, and bribery.

Falsified Supplier

An employee falsifies a supplier file in order to bill the company for products or services that were never provided. This type of fraudulent activity is most common in the retail and hospitality industries.

Double-Check Fraud

An employee writes two checks, one to pay an invoice and another addressed to themselves. The employee then records both checks in the accounting system as a payment to a vendor or supplier.

Accounts Receivable Fraud

Accounts receivable fraud occurs when an employee manipulates the company’s financial records to steal money meant for the company or to inflate the business value.

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Payroll Fraud

Payroll fraud occurs when an employee steals from a business through the company’s payroll system. This type of fraud occurs more often in small businesses with fewer controls to prevent employee fraud.

Payroll fraud schemes include:

Ghost Employee Schemes

In this type of payroll fraud, an employee diverts payments made to a fake employee or a former worker to their own bank account.

Advance Fraud

An employee requests an advance from the payroll department but does not pay it back.

Timesheet Fraud

An employee manipulates employee timesheets to either inflate their worked hours or that of another employee who is absent from work.

Employees working in a business’ payroll department can also conduct timesheet fraud by inflating the hours on another worker’s timesheet.

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Data Theft

Data theft or the theft of company trade secrets can drastically compromise the business’ marketing and sales efforts as well as put the company in a precarious position with authorities.

Schemes included under data theft includes:

Trade Secret Theft

An employee steals propriety information with the intention of selling it to a competitor. This may include everything from formulas to prototypes.

Theft of Customers

A departing employee steals the company’s contact list with the intention of selling it to competitors or using it for personal gain.

For instance, a consultant who is leaving your company may copy or download the contact list to try and poach customers when they open their own firm.

Theft of Personally Identifiable Information

An employee steals or shares credit card numbers, bank account numbers, and other personally identifiable information of colleagues, customers, vendors, or clients with the intention of selling it to other parties.