Tax Article - Three Common Forms of Employee Fraud

Feeley & Driscoll forensic accounting services

In crime fiction, one of the classic scenarios behind many a diamond heist or cash grab is the “inside job.” Someone within the stricken organization betrays his or her superiors and gives up the goods to a thief or gang of thieves. Sadly, this circumstance is all too real — and all too prevalent — in today’s business world.

How prevalent? In its 2006 Report to the Nation on Occupational Fraud and Abuse (the most recent information available as of this writing), the Association of Certified Fraud Examiners (forensic investigators) estimates that U.S. businesses lose 5% of their revenue each year to employee fraud. The report places the median loss at $159,000 and states that nearly 25% of the cases cost the company $1 million — some cost $1 billion or more.

To protect your company, you need to know how employee fraud typically occurs and, more important, how to prevent it (or at least catch thieves in the act).

Here’s a look at three of the most common employee-perpetrated scams.

1. Monetary theft

As you might expect, many, if not most, employee fraud schemes revolve around the theft of money. On a rudimentary level, a fraudster may steal only cash. This typically occurs when employees have the opportunity to divert money before it’s deposited. For example, dishonest employees may “skim” cash by taking in payments that aren’t recorded and keeping the proceeds for themselves.

Naturally, there are more sophisticated ways to steal money from a company. Fraudulent disbursements, for instance, can take several forms. One common method involves setting up fake vendors to which employees pay invoices, pocketing the payments.

To safeguard your cash, you need strong internal controls. Start by conducting frequent reconciliations. These can sometimes get lost in the shuffle at busy companies — especially smaller ones.

In addition, separate job duties associated with cash handling. Ideally, one person should not be responsible for taking in money, counting it and making deposits. Vary these duties among several employees and consider, every once in a while, stepping in and doing them yourself.

2. Physical theft

When many people think of employee theft, this is what comes to mind — someone scurrying out a rear entrance clutching valuable inventory. Many of the steps you can take to protect your physical assets may seem fairly obvious but, again, they can be overlooked or underused during busy periods.

Whenever possible, restrict access to high-value inventory. Also, reduce unnecessarily high inventory levels, because it’s much harder to notice shrinkage in large inventories. In addition, take regular physical inventories and keep an eye out for unexpected trends, such as inventory levels that go down even though sales are below projections. Benchmarking your company against similar businesses can help in this regard as well.

3. Workers’ compensation fraud

Whether it’s a worker with an allegedly disabling back injury building and selling fireplaces or an employee with a “broken ankle” strolling through antique fairs, workers’ compensation fraud is a common and costly crime.

Signs that an employee might be committing workers’ compensation fraud start with the accident itself. If no one witnessed the incident or it occurred just before an anticipated strike, layoff, job completion or termination, you may have just cause for suspicion.

Additionally, if the employee can’t recall specifics about the injury or accident, or he or she refuses or constantly delays diagnostic procedures, you may have a fraudster on your hands. Also be wary of injuries that aren’t consistent with the nature of the employee’s position or the business.

To guard against fraudulent workers’ comp claims, set up a formal review procedure to look for signs such as those mentioned above. If a claim sets off an inordinate number of red flags, work with your legal and insurance professionals for forensic accounting services to conduct an official forensic investigation.

Be prepared (but be prudent)

When facing the threat of employee fraud, it’s important to keep things in perspective. Go overboard in your efforts to catch would-be internal thieves and you could wind up lowering morale or even driving away good workers. And of course you should consult your attorney or forensic accounting firm whenever you suspect someone of fraud, to seek the correct steps of action without inadvertently violating that employee’s legal rights.

Nonetheless, to protect what’s yours, you’ve got to keep a sharp eye on your operations and be prepared to act swiftly when necessary. (For a specific idea on just how to act, see “We’ve been ripped off! Now what?”)

We’ve been ripped off! Now what?

Payroll costs are shooting through the roof and, despite the fact that sales are way up, you just can’t seem to get money to the bottom line. Did you hire too many employees? Is your strategic planning that far off base? Nope — you’ve been ripped off.

In the unfortunate event something like this happens to your company, it may help to have a formal fraud contingency plan in place with the help of a forensic accountant. Essentially, such a plan sets specific policies and procedures for:

• Undertaking an immediate forensic investigation (including seizing critical documents and computer data),

• Contacting outside parties (such as your attorney, CPA, or forensic accounting firm) for help,

• Suspending or terminating any employees involved in the alleged crime (a suspension is often a more prudent legal choice), and

• Developing a strategy for minimizing bad publicity and reassuring stakeholders.

In some cases, the fraud your forensic accounting firm uncovers may seem too minor to fully mobilize the contingency plan. Having a contingency plan ready to go, however, will help ensure that you address any incidents thoroughly and avoid mistakes that you may later regret.

Contact our forensic accounting services by email or call us at 1 (888) 875-9770 to look at some ways you can tighten your internal controls to prevent fraud.

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