Nearly two out of three businesses have been victims of employee fraud, according to the U.S. Chamber of Commerce. It doesn’t matter what size of business you have. All companies—whether it’s a small business or a multinational corporation—are vulnerable to internal theft.
In this post, we’ll diagnose what consists as fraudulent behavior and examine why companies should consider the services of a personal private investigator.
Employee Fraud: How bad could it be?
In a survey conducted by the Association of Certified Fraud Examiners, it’s reported that corporations the world over lose an estimated 5% annually to fraud. Although that figure may seem insignificant, when applied to the estimated Gross World Product of that year (2011), it translates to a potential total loss of more than $3.5 trillion.
Fraud conducted by its own employees cost companies, on average, $60,000 for every incident. But when managers and upper-level supervisors are involved, the figure jumps to an average of $180,000 per instance.
And we haven’t even gotten to the worst part yet. Most corrupt employees continue siphoning money off their companies for a minimum of 18 months before they’re finally discovered.
Those figures are ridiculous, to say the least. Thankfully, there are ways in which a company may protect itself from astronomical losses due to internal burglary.
The first step? Know what stands as fraudulent activity.
Types of Employee Fraud
Fraud can manifest itself in many forms, but commonly fall into these categories:
More often than not, misappropriations are carried out by false or misleading records or documents. In layman’s terms, asset misappropriation can be described as the theft of company assets by an employee, especially one who has detailed knowledge about how the business operates. These actions are typically accomplished by circumventing internal controls.
There are 2 types of asset misappropriation that businesses are susceptible to:
Misuse of company assets.
You would be shocked to learn that there are a wide variety of conducts that fall under this type. In some cases, it’s as simple as a staff member violating the office permissive use policy to download or stream movies online. Other instances involve swiping office supplies like scissors or pens. Taking the company vehicle (as well as the company-issued fuel credit card) for personal recreational use, renting out company-bought tools and equipment to a third party, selling the company’s scrap or damaged goods, or carrying out a rival business within company property using company material and inside information… these are all examples of unauthorized use of company assets.
This could spell disaster for business owners as it could potentially result in significant liability. Employees who misuse assets open up the company into becoming party to illegal activities or accidents (for example, if the company vehicle trespasses on private property or is involved in a crash) or gets lost or stolen.
Skimming of cash and cash larceny.
This type of asset misappropriation involves pinching cash prior to its entry into the company’s accounting system. Since technically the company has no record of money coming in, this is extremely difficult to discover. This is a popular option since it requires no sophistication and skill on the part of the thieving employee. Some examples of this type of misappropriation include inventory schemes, payroll schemes, fake or duplicate expense reimbursement schemes, accounts receivable skimming, fake billing schemes, and tampering of checks.
Bribery and Corruption
Corruption is the second most common type of employee fraud in the world. Of the 2,690 real cases of occupational fraud studied in a span of two decades, 38% of them involved some form of corruption. These resulted in a median loss of US$250,000.
Most of these schemes were discovered to be perpetuated by a person in authority. And for the most part, this is what causes a huge drop in employee morale as well as significant decrease in a company’s stock price.
These frauds can include bribes, kickbacks, shell company fraud schemes, and product substitution.
One of the most common types of employee fraud, payroll fraud uses the company’s payroll system and happens in 27% of businesses. The illegal activity often goes for an average of 30 months without being detected, according to a 2018 study conducted by the Association of Certified Fraud Examiners.
There’s a higher risk of this type of fraud occurring in small businesses, where there are usually fewer controls. Payroll schemes were discovered to be notably more common in the religious, charitable, or social services, and the health care sectors.
Payroll fraud activities may include: ghost employee schemes, advance fraud, timesheet fraud, and paycheck theft.
Thanks to advances in technology, businesses have adjusted the way they do documentation: from keeping paper records in steel drawers, to saving digital copies of all company files in one hard drive. But despite the many advantages of information being digital instead of physical, there is one problem that continues to pop up—data theft.
This type of employee fraud is particularly damning to a company that relies on intellectual property for its product or service. Committing data theft has grave repercussions on the part of the defrauder, as it may even involve the FBI and a minimum of 10 years imprisonment, as is the case with an ex-Apple engineer who stole information on self-driving car hardware and prototypes. He was later arrested at the San Jose airport attempting to get a last-minute flight to China to escape being charged.
This occurs either when an employee intentionally manipulates company accounts so that assets appear overstated or liabilities appear understated. The corrupt individual makes it seem as if the business is financially stronger than it really is, and in doing so, covers up his theft.
Typically, employees involved in these cases hold key positions in the company, or have access to the accounts. Embezzlement, accounts payable fraud, fake supplier, personal purchases, double-check fraud, and accounts receivable fraud are primary examples.
Dishonest vendors embezzle millions in company funds from businesses annually, and most of the time without the defrauded party ever being aware of the corrupt transactions. Some common forms of vendor fraud include: billing schemes, bribery and kickbacks, check tampering, overbilling, and price fixing, among others.
The loss of revenue notwithstanding, vendor fraud is considered one of the worst violations of trust for the reason that it involves the complicity of parties under the victim’s payroll—a vendor and at least one employee.
The Association of Certified Fraud Examiners estimates that the median loss a company suffers after a single person commits a fraud is $80,000. When a fraudulent activity involves two perpetrators, the median loss climbs to $200,000. But guess how much the median loss is when four or more perpetrators are implicated? More than $500,000.
How can a personal private investigator help prevent employee fraud?
Unfortunately, there is no neon sign to help spot employees with ulterior motives. It usually takes months, sometimes years, before fraud cases come to light.
There is only so much that a business owner can do to protect his company from dishonest people under his employ. Cases that involve fraudulent activities require the expertise of a personal private investigator.
FORLETTA clients have long relied on our personal PI’s to mitigate the risks of occupational fraud in their companies and help prevent them from happening in the future. With the help of our expert personal PI’s, we have saved many a company from the brink of irreversible disaster.
If you’d rather be safe than sorry, give us a call at our toll-free hotline (1-877-874-9394) for your complimentary consultation.