Business Law & Compliance

Employee fraud – could it happen to you?

6 min read

05 May 2016

It is a sobering statistic that one in five SMEs has been the victim of an employee fraud, according to the National Fraud & Cyber Crime Reporting Centre.

Employee fraud can take many forms, ranging from the submission and payment of false invoices through to accepting backhanders from suppliers to secure lucrative contracts. Often, employees commit a fraud due to personal financial pressures but sometimes greed and a lack of robust internal controls make such opportunities hard for a dishonest employee to resist.

The impact of such a fraud on an SME should not be underestimated. The misappropriated money may be critical for the business’ financial viability. Dealing with the aftermath of an employee fraud is a huge drain on management time. Damage to employee morale can affect productivity, particularly in small family business built on trust. Knowing how to spot the red flags of a potential fraud and having a robust strategy to prevent, deter and deal with any fraud is therefore essential.

A few changes to your policies and procedures can make your business much less susceptible to employee fraud. 

Read more about preventing fraud:

(1) Take an objective and critical look at your reporting and authorisation structures

Are there any gaps that an unscrupulous or desperate employee could exploit for their own gain? Ensure that all payments have to be authorised by at least two individuals as a safeguard against invoice fraud. Carry out spot checks on invoices to check that the goods ordered have been supplied. Take steps to verify new suppliers. 

(2) Know the warning signs that might indicate that something is amiss

Be aware of employees who rarely take annual leave or other time away from the office. Is there an employee who is always the first to arrive, the last to leave and who rarely delegates? Does anyone’s lifestyle seem out of kilter with their salary?

(3) Check your HR policies

Does your data protection and monitoring policy give you the right to monitor employees’ emails and review their computer if criminal activity is suspected? Do your employees know this? Can you suspend employees with or without pay?

(4) Consider employee fidelity insurance

This can cover the costs of investigating an employee fraud and recovering misappropriated assets as well as the loss sustained. 

If you do find yourself the victim of an employee fraud, the key is to act swiftly and decisively.

Read more about how to preserve and recover the proceeds of the fraud.

The aim of any fraud investigation should be to preserve and recover as much of the proceeds of the fraud as possible.

(1) Appoint people unconnected and independent of the suspected fraudster to investigate in order to avoid tipping off them off. Instruct lawyers early to benefit from legal privilege.

(2) Ascertain who is involved and where the monies have gone. This in turn will enable you to establish who you have a claim against as a result of their involvement in the commission of the fraud or their receipt of all or part of its proceeds and to identify any assets acquired with misappropriated monies.

(3) Decide whether and when to notify the police – there is no obligation to do so unless either your insurance policy obliges you to do so or you suspect money laundering has taken place. If you are under no such obligation, it is generally preferable to conduct your own investigation and take steps to preserve assets before notifying the police.

(4) Preserve evidence, especially electronic data. Involve specialist IT contractors to retrieve deleted data and to take an image of the hard drive of the suspect’s computer. Review the copy rather than the original. Suspend document destruction policies

(5) Is any information missing that could identify who else is involved or where the monies have gone? The court can make orders requiring third parties such as banks who have inadvertently become involved in someone else’s wrong doing to provide documents and information. These orders commonly contain a “gagging order” preventing the respondent bank from disclosing the existence of the order to its customer.

(6) Apply to court for a freezing order to preserve the assets of the proposed defendants up to the value of your claim. This ensures you have a source of funds to enforce any judgment against. Freezing orders also routinely contain a provision which requires the respondent to provide you with an affidavit of their assets and liabilities. This can be an invaluable pressure point to bring the fraudster to the negotiating table and reach an early settlement.

Having robust and well publicised policies in place to deal with any fraud and tightening up any areas that might be vulnerable to exploitation by a dishonest employee should dramatically reduce the risk of an employee committing fraud in your organisation. As with many things in life, prevention is better than cure.

Every business should also understand the importance of employee engagement, so why are companies still only managing to meet the most basic needs of people?

Clare Mackay is an associate at SA Law.