Employee Fraud: It Goes with the Job
According to recent surveys, 60% of all white collar crime is committed by employees against their own companies. For every possible type of employee fraud that you can think of, you can bet that there are a dozen more. However, an understanding of the types of fraud that are being perpetrated by employees will help you appreciate where you might be at risk and so take preventative measures.
Types of employee fraud can be broadly broken down into three main categories; asset misappropriation (that’s stealing to you and me); bribery and corruption; and fraudulent misstatements of financial and other information.
Asset misappropriation accounts for more than 80% of all reported employee frauds. Almost all physical assets are at risk: cash, stock, machinery even stationery! But there are also non-tangible assets which potentially even more valuable. Intellectual property, designs, financial and marketing information and customer lists are all inviting targets to the would-be light fingered employee. This type of information is especially vulnerable when an employee is about to leave, after all, what better way of impressing his new employer than providing them with confidential information on a competitor?
There are myriad ways that assets can be stolen from a business. However, they can largely be categorized as off-book or on-book. Off-book frauds, which are those that do not involve the manipulation of information, tend to be relatively unsophisticated compared with their on-book cousins. Off-book frauds range from simply thieving stock to failing to ring up sales on a till and pocketing the cash. These can be combated by physical security measures, such as restricting access, cameras, alarms, security guards and locks. Also taking stock regularly, reconciliations, keeping asset registers, and monitoring such indicators as gross margin may also help in either minimizing or detecting off-book fraud.
On-book frauds tend to be more complex and potentially involve significantly higher amounts. These frauds are perpetrated by employees who have access to books and records and can manipulate them in order to give them the opportunity to steal and to hide the theft. Such frauds include raising false invoices, creating false employees, teeming and lading, writing off assets and then stealing them and putting personal expenditure through the business. They can range from highly sophisticated frauds, involving teams of employees and millions of pounds to an employee fiddling his expenses. Strong internal controls and an appropriate division of duties are key to providing some form of protection against this type of fraud.
Bribery and corruption are, perhaps, the most insidious of all crimes against business. In certain parts of the world corruption is widespread and almost cultural. We like to think that in this country we have better work ethics, and with only 10% of detected employee fraud being corruption based, on the face of it, we don't appear to have a major problem. However, corruption is very difficult to detect and those employees that are caught may represent only a tiny proportion of those that are committing these crimes.
So, what actually is corruption? It is usually an act of a person in a position of trust, who uses that position to gain a benefit for himself, or somebody else, in breach of his duty and to the detriment of his employer. Corruption takes many forms; employees receiving kickbacks for the placement of contracts, having conflicts of interest with suppliers or customers, or economic extortion, for instance where an employee threatens to remove business from a supplier unless he is paid.
The problem with corruption is that it is very difficult to draw a line from where innocent entertaining of your employees by suppliers becomes something more sinister. Is receiving a bottle of spirits at Christmas corruption? Or being taken to dinner? Or being given weekend break or a holiday? It is up to each business to draw their own lines, but I would suggest that the line has been crossed when a gift or gratuity will hold your employees in someway beholden to the giver.
Corruption is difficult to defend against. However, a strict ethical policy, avoidance of individuals having unfettered power and strong procedures when placing contracts can help minimize the risks.
Misstatements of financial or other information represent about one in twenty of all detected employee fraud crime. A typical example of this would be the management of a subsidiary or division misstating its results to obtain bonuses, reach targets or simply to avoid closure. It can be the doctoring of internal information so that an employee can come across in a better light. Remember, 25% of employees lie in their CVs. Ask yourself, what can an employee gain by misrepresenting the information he has placed in front of you?
The risk of fraud by employees can never be eliminated. But knowing where you may be at risk and taking reasonable, sensible precautions will help reduce your exposure.
Our sister site, AccountingWEB-UK, and Grant Thornton offer these other commentaries on fraud