The biggest business frauds in U.S. history, Enron, and Bernie Madoff’s Ponzi scheme, cost their businesses and shareholders 60 billion dollars each. If one group can do this much damage to some of the world’s largest businesses, imagine what kind of negative effect a dedicated employee could have if they were committing fraud within your company.
Employee fraud is one of the most damaging and costly issues businesses face today—especially when it happens under your nose. According to the Association of Certified Fraud Examiners (ACFE), organizations lose 5% of revenue each year to fraud, and small businesses are hit hardest because they often lack internal controls to prevent and detect it. Whether it’s payroll fraud, accounting fraud, or sensitive information theft, employee fraud can lead to massive financial losses and reputational damage.
In this article, we’ll break down how fraud occurs and what red flags of employee fraud to watch for. You’ll learn how to detect and address internal fraud, the types of employee fraud to watch out for, and best practices to prevent becoming a victim.
Here’s what we’ll cover:
- Common Types of Employee Fraud
- Warning Signs and Red Flags
- How to Prevent Fraud in the Workplace
- Why Fraud Investigations Matter
Ready to protect your workplace? Let’s dive in!
Types of Employee Fraud
In order to identify fraud, you need to know what form it comes in. Employee fraud comes in many forms—and every organization is at risk. Let’s break down some of the most common employee frauds so you know what to look for.
Forged Checks
This is an extremely common form of fraud, although it is a little more difficult in today’s age. This is the process of an employee forging the signature of a superior on a check in order to take money from the company.
A classic example of this is Frank Abagnale, who forged hundreds of thousands of dollars in checks. Frank was a unique example, though, because he was an exceptionally gifted conman and thief. He worked his way into becoming a fraudulent airline pilot, lawyer, and impersonated a police officer.
Get the Answers You Need!
Work with the best reviewed private investigation firm in Chicago, IL to uncover truth, drive results, and win your cases.
Payroll Fraud: The Silent Drain on Your Business
Payroll fraud occurs when an employee may falsify timesheets, inflate hours, or create fake (ghost) employees to deceive your company. Other fraudulent schemes include unauthorized bonuses or fake reimbursement claims.
This form of workplace fraud is a huge problem for small businesses that lack proper checks and balances. To detect payroll fraud, monitor payroll transactions, review accounts payable, and cross-check hours and payments regularly.
Theft of Inventory
This form of fraud can be more or less complicated, depending on the level of involvement the employee has. This could be something as simple as pocketing inventory as it is being put on the shelves, or as complicated as diverting large amounts of products to do alternate warehouses to sell them for their own profit.
This can be combatted by keeping a close eye on the books and making sure that the inventory you purchase is received and accounted for.
Additional Reading: You should also check out A Look Back: How Far Back Do Employee Background Checks Go?
Procurement Fraud
This kind of fraud typically involves an employee who is responsible for taking orders and dealing with returns. An employee might purposefully over-order a product to have the opportunity to return it and pocket the refund.
If no one is double checking the work of the person overseeing purchase orders, they would have an extremely easy time doing this, as a return could be scheduled to go directly into an outside account.
Worker’s Comp Fraud
This occurs in instances where an employee is injured outside of the office but claims to have been injured while working. It can be extended to an employee who is in recovery as well.
If someone is ready to come back to work but they claim to still be injured, they are receiving compensation that is not rightly deserved.
Additional Reading: Learn more about How Workers’ Compensation Investigations Work and What They Look For.
Theft of Sensitive Information
Sensitive information—like client lists, intellectual property, and financial data—can be just as valuable to a fraudster as cash. Employee fraud can also include leaking confidential files to competitors or selling data on the black market.
Examples of employee fraud in this category include a disgruntled employee passing along a supplier list or proprietary designs. Prevent data theft by limiting access, implementing internal fraud control measures, and watching for red flags like unauthorized file downloads.
Financial Statement Fraud
Financial statement fraud happens when employees falsify records to cover up losses or steal funds. Accounting fraud occurs when numbers are manipulated—think inflated revenue or hidden expenses. Forensic accounting and fraud investigations are crucial tools to detect these complex schemes.
Tip: Having strong fraud prevention and risk management processes in place can help deter even the most trusted insider from attempting to commit fraud.
Common Red Flags: How to Spot Fraud at the Workplace
No matter how trustworthy someone may seem, employee fraud occurs in businesses of all sizes. So, how can you detect fraud before it’s too late? Start by knowing the warning signs of fraud.
Warning Signs of Workplace Fraud You Shouldn’t Ignore
- Living well beyond their means — If an employee’s lifestyle doesn’t match their salary (e.g., luxury cars, expensive vacations), this could be a red flag of embezzlement, bribery, or other types of fraud.
- Avoiding time off or delegating tasks — Employees who never take vacations or resist sharing responsibilities may be hiding a scheme. Many fraud cases reveal that consistent control over accounts receivable, invoice processing, or company credit cards was key to the fraudster’s success.
- Behavioral changes and secretiveness — If a normally open and cooperative employee suddenly becomes withdrawn, defensive, or overly secretive about work-related tasks, it’s time to pay attention.
- Inconsistencies in financial reports — When financial statements don’t add up or receipts and invoices look altered, it could signal accounting fraud or manipulation of workers’ compensation claims.
Understanding the Red Flag Indicators of Employee Fraud
Spotting these red flags is essential for putting your organization on the right track toward prevention. However, it’s important not to jump to conclusions. Just because an employee may show one red flag doesn’t mean they’ve committed internal fraud. But when multiple signs emerge—like odd behavior combined with financial irregularities—leaders should act.
Start by ensuring internal controls are in place, setting up an anonymous hotline, and creating a culture that encourages employees to report concerns without fear. Early intervention can be a powerful deterrent and help prevent fraud before it grows.
Remember: Every employee, from entry-level to senior analyst, can face opportunities for employees to defraud a company—so vigilance at all levels is key.
Employee Fraud Examples That Actually Happened
It’s easy to think employee fraud won’t happen in your company—until it does. Real-life fraud cases show that fraud may be committed by employees at every level, from entry-level staff to trusted managers.
Take, for example, the case of an accountant at a small firm who misrepresented invoices and redirected payments to personal accounts over several years—costing the company nearly $500,000. With no proper oversight, no one noticed until it was too late.
In another form of employee fraud, an insurance company faced losses when a manager committed internal fraud by creating fake contractual agreements and pocketing the proceeds. This involved collusion with a supplier, showing how fraud may involve more than one person.
During the 2018-19 financial year, and even more during COVID-19, non-corporate commonwealth entities and private companies reported higher incidents of fraud, as employees steal or exploit weak processes during chaotic times.
These experiences of fraud highlight one thing: internal controls in place and regular reviews are critical to protecting your organization.
Additional Reading: Discover How Private Investigators Uncover Executive Phishing Scams.
Lesson learned: Trust is important, but oversight is essential. Fraud occurs when employees see opportunities without consequences—so making prevention part of your culture is a must.
How to Handle Internal Fraud When It Happens
So what should you do if you suspect an employee — at any level, from entry-level to management — might be committing fraud? First, don’t panic, but don’t ignore it either. Handling internal fraud the right way can protect your business and avoid costly mistakes.
Steps to Take if You Suspect Fraud
If you think fraud is happening:
- Investigate discreetly — Avoid tipping off the suspected employee. Quietly gather evidence and review relevant transactions.
- Document everything — Keep a detailed record of suspicious activity, including dates, behaviors, emails, and financial data.
- Consult legal counsel — Before taking action, speak with a lawyer to understand your options and ensure you follow proper procedures.
Additional Reading: You might also want to learn How to Find Hidden Bank Accounts & Assets Nationwide.
Why Professional Fraud Investigations Are Critical
Fraud is a sensitive issue, and mishandling it could expose your company to liability. This is where professional fraud investigations come in. Experts know how to conduct thorough, unbiased reviews without jeopardizing evidence or violating privacy rights.
A professional investigation team, like our private investigators at Lawrence Ryan Investigations, understands how to handle theins and outs of complex fraud cases, working discreetly to protect your organization.
Additional Reading: You might also want to read about Insurance Fraud Investigations and 6 Ways They Can Happen.
Tip: Outside investigators can also spot patterns or methods of fraud you might miss — even those committed by a trusted level employee.
Ready to protect your business? Let’s talk next about how we can help.
Think You’re Being Taken Advantage of? LRI Can Help You!
If you think that one of your workers is committing employee fraud, you’re not out of luck. Even if you have a suspicion about someone outside of the workplace, there are ways to get the truth.
At Lawrence Ryan Investigations (LRI), our team of experienced fraud investigators specializes in uncovering employee fraud through fraud investigations, forensic accounting, and detailed evidence collection.
We offer personalized strategies to help detect and prevent fraud, tailored to your specific workplace needs.
Whether you need a discreet investigation or proactive fraud prevention, we provide confidential, professional services to protect your company’s future. If you suspect fraud or want to strengthen your defenses, contact LRI today—we’re here to help.
