The Top-6 Most Common Employee Frauds—How to Minimize Internal Fraud

On average, companies lose 5% of their revenue to employee fraud every year. By “employee fraud”, we don’t mean stealing paper clips. We’re talking about serious financial crimes, such as payroll fraud, which can have serious negative consequences for companies. If undetected, employee fraud can also have an extremely negative impact on company culture. 

To help companies prevent employee fraud, we at Sumsub prepared this guide explaining the best ways to spot it, along with some effective solutions. 

What is employee fraud?

Employee fraud, also known as internal fraud, is when employees engage in criminal activity targeting the companies they work for. 

Top six types of employee fraud

There are many ways an employee can steal from a company. It all depends on the position they hold. The most common types of employee fraud include:

• Credit card fraud—occurs when a company provides their employees with a credit card, which then gets abused to pay for personal expenses (e.g., clothes, hotels, flights)
• Report fraud—occurs when an employee in charge of providing expense reports lies about actual spending (e.g., charges twice for the same item)
• Simple theft—occurs when an employee steals company property (e.g., money, resources, goods)
• Bribery—occurs when an employee engages in bribery
• Payroll fraud—occurs when an employee manipulates the payroll system to get higher compensation (e.g., declares more hours than actually worked)
• Data theft—occurs when an employee steals sensitive company information with the intention of benefitting from it (e.g., selling to a third party)

What business sectors are at risk for employee fraud?

According to ACFE’s Occupational Fraud 2024 Report, the privately held companies were the victims in 42% of the cases with a median loss of $150,000. Publicly-traded companies accounted for 26% of cases, while government agencies represented 17%. Nonprofit organizations accounted for 10%.

The same report provides employee fraud data by industry, stating that banking and financial services, and manufacturing were the most commonly targeted industries. 

The report also shows that small organizations typically don’t have enough sources to implement an efficient employee anti-fraud solution, making fewer than 100 employees more vulnerable to fraud. 

How does employee fraud affect businesses?

The ACFE report analyzed 1,921 cases of fraud from 138 countries. The final result showed a total loss of more than $3.1 billion. However, there are still many cases of fraud that fall out of the report’s scope.

Employee fraud affects both small and large businesses. However, bigger companies have the resources to withstand losses incurred by employee fraud and implement robust security protocols. Smaller companies, meanwhile, are far more affected by employee fraud, which can even lead to bankruptcy in some cases. 

How to spot employee fraud

Companies should constantly be on the lookout for employee fraud. Some of the red flags include:

• Employees living beyond their means—when an employee’s salary doesn’t match their lifestyle (especially when this starts after being employed)
• Close relationship with a third-party representative (e.g. customer)—this might signal that an employee somehow benefits from a company’s existing business relationship
• Secretive behavior by employees
• Inconsistencies with reports—this includes payrolls, receivables, other documents
• Reports from other employees—when a staff member tips you off about employee fraud

Solutions

The most efficient way to minimize the spread of employee fraud is toy implement automated solutions that can detect red flags. 

In addition, companies can establish a chain of approvals for certain financial operations. For example, if an employee makes a transaction that exceeds a certain threshold, then the operation will require approval from two more staff members. 

Here are some other tips: 

• Conducting a thorough background check when hiring an employee
• Rotating the duties and responsibilities among employees
• Introducing an auditing system
• Creating hotlines for staff members to report cases of employee fraud
• Building a safe working environment to share information

FAQ

• What are the six types of employee fraud?

  • Credit card fraud
  • Report fraud
  • Simple theft
  • Bribery
  • Payroll fraud
  • Data theft

• How to identify employee fraud

  Here are some ways to detect employee fraud::

  • Background check
  • Rotation of duties
  • Regular audits
  • Anonymous hotlines

• What are the red flags of employee fraud

  • Living beyond means
  • Close relationship with a third party representative
  • Secretive employee behavior
  • Inconsistencies with reports
  • Reports of fraud from other employees