4 kinds of employee fraud that can destroy your business

Key takeaways

• Fraud can be especially damaging when it’s perpetrated by an employee.

• There are four types of employee fraud: double check fraud, payroll fraud, expense reimbursement and over-ordering fraud

• Set up a system of checks and balances within your operation to help prevent employee fraud.

Fraud can take a heavy toll on a business, costing thousands of dollars, derailing your brand and causing irreparable damage that could result in your business’s closure. Fraud can be especially damaging when it’s perpetrated by an employee – an inside job.

One way to prevent employee theft is to educate yourself about the types of fraud that commonly occur inside a business. This will increase the chances of spotting something wrong and will give you the opportunity to stop it before things become too damaging.

Here’s a look at some of the more common types of employee fraud:

Double check fraud

If you have an accounting person on staff who pays your bills, this type of fraud could affect you. In this scenario, the employee will write two checks at the same time she pays a bill – one to the vendor and one to herself. For example, she may make out a check of $500 to ABC Productions and simultaneously write herself a check for $100 that is coded in the accounting system as “ABC Productions.”

Because of this it’s important to have more than just one person signing checks and reconciling the bank account. Also remember to have an outsider come and look at the books at least once per year, and at random times.

Payroll fraud

Payroll fraud is the theft of cash from using the payroll processing system. There are several ways in which employees can commit this type of fraud:

• The most passive type of fraud is when an employee requests an advance on his payroll and then never pays it back.
• An employee arranges with a colleague to have them punch his hours into the company time clock while he takes the day off.
• Employees could take the paycheck of another employee who is absent, and then cash the check for themselves.
• Employees conspire with the payroll clerk to increase the amount of their hourly pay in the payroll system.
• One of the most common type of payroll fraud is the padding of time sheets by employees, usually in small enough increments to escape the notice of supervisors.

Your best defense again payroll fraud is to reconcile your books and keep them up to date regularly so no fraudulent charges can sneak through.

Expense reimbursement

Employees may submit additional expenses that either never occurred or are not related to a specific business event. As a result, as a business owner you should always require receipts for reimbursable expenses and question those that seem unusual. Having an immediate supervisor review expense reports before they are submitted for payment can also help identify questionable expenditures.

Over-ordering fraud

Over-ordering fraud occurs when an employee orders more items than necessary – such as office supplies – and then returns the surplus and pockets the refund for themselves. Having a supervisor review purchase orders before they are submitted can prevent the need to return excess items.

As a business owner, fraud can be a scary thing to think about. After all, it seems like risks are everywhere. Although you cannot prevent fraud from occurring, there are some things you can do to decrease the risks. Since low job satisfaction is frequently the cause of employee fraud, make an effort to set up regular communication with employees to address potential issues before they take a troubling turn. Also, make sure you are setting up a system of checks and balances within your operations. Have clear accountability for every person in the organization and conduct thorough investigations on any discrepancies you discover.

If you have questions, we’ve got the answers. Just stop by one of our MidWestOne locations.

MidWestOne Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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