How to Catch Employee Fraud: Detecting and Preventing Employee Theft

Every year, employee fraud causes businesses to lose millions of dollars, and a significant portion of this loss can be attributed to employee fraud not being detected in time. 

According to the National Retail Federation’s 2023 Security Survey, the average shrink rate, (lost product inventory, primarily driven by external theft), increased to 1.6% in FY 2022, up from 1.4% in FY 2021. This Shrink represents $112.1 billion in losses as a percentage of total retail sales in 2023. 

Employee fraud can manifest in various forms, ranging from seemingly minor oversights, like “forgetting” to record a $1.00 transaction, to more egregious acts such as diverting substantial sums of money into personal accounts.

In simple terms, employee fraud, or internal fraud, encompasses deceptive activities by employees aimed at personal or financial gain, ranging from theft to outright deception.

Understanding Employee Fraud

Understanding the diverse forms of employee fraud is crucial for businesses to effectively prevent and address such issues. Employee fraud manifests in various forms, including asset misappropriation, vendor fraud, accounting fraud, payroll fraud, and data theft, each encompassing a range of fraudulent behaviors​​.

Asset misappropriation, for example, includes thefts like check forgery and tampering, inventory theft, and cash theft. 

Fraudulent activities also extend to service theft, expense reimbursement fraud, procurement fraud, payment fraud, and more, affecting various aspects of business operations​. And let’s not forget data theft including stealing customer data or their personal information for fraudulent schemes. 

Alarmingly, a significant percentage of organizations have faced fraud in recent years, with substantial financial implications for businesses. 

Given this backdrop, it’s imperative for businesses to arm themselves with effective strategies and tools to detect and prevent employee fraud. 

How to Catch Employee Fraud: Detection of Employee Theft

To catch employee fraud, businesses should establish channels for employees to report suspicious behavior anonymously, conduct surprise audits, and stay alert to behavioral or financial red flags.

1. Conduct Regular Financial Audits

Surprise audits are a powerful deterrent and detection tool for employee fraud. By conducting unscheduled financial and inventory checks, you can catch fraudulent activities off-guard. 

Here’s how to implement them effectively: 

• Plan audits at irregular intervals to prevent predictability, which might allow fraudulent activities to go undetected.
• Ensure that the audits cover a wide range of areas, from financial records to physical inventory, to get a holistic view of potential fraud.
• Employ experienced auditors who know what signs of fraud to look for and can conduct thorough examinations.
• Any discrepancies or irregularities found during an audit should lead to a deeper investigation to uncover potential fraud.

2. Implement Surveillance Measures

Surveillance measures, both physical and digital, play a pivotal role in monitoring the workplace. Strategically placed cameras in sensitive areas can deter potential fraudulent activities and capture evidence of misconduct. 

Here are some ways to leverage technology in your fight against fraud:

• Implement Surveillance Systems. Use video surveillance in key areas to monitor and record potentially fraudulent behavior.
• Employ software that can track and analyze transactions, access to sensitive information, and other digital footprints that may indicate fraud.
• Conduct regular IT Audits. Conduct regular IT audits to ensure that digital safeguards are effective and to look for signs of tampering or unauthorized access.

3. Data Analysis Tools

In the era of big data, sophisticated data analysis tools offer a proactive approach to detecting fraud. These systems can sift through vast amounts of financial data to identify anomalies, unusual patterns, or transactions that deviate from the norm. This capability not only aids in early detection but also in the swift resolution of potential fraud cases.

• Implement tools that use machine learning and statistical analysis to detect irregularities in financial data that could indicate fraud.
• Real-Time Monitoring. Use systems that provide real-time analysis of transactions to quickly identify and address potential fraud.
• Set up custom alerts. Set up customized alerts for transactions or activities that fall outside normal patterns, requiring further investigation.
• Regularly update and refine the parameters used by data analysis tools to adapt to new fraud tactics.

4. Anonymous Reporting Channels

Fostering a culture that encourages the reporting of suspicious activities is crucial. Anonymous reporting channels empower employees to come forward with information without fear of retribution. Such systems can often uncover fraud that would otherwise remain hidden, as coworkers may notice irregularities not apparent to management.

• Set up multiple reporting options. Provide various ways for employees to report suspicious activities, including hotlines, email addresses, web forms, and physical drop boxes.
• Assure anonymity of the reports. Clearly communicate that reports can be made anonymously and that the company is committed to protecting the identities of reporters.
• Promote awareness by regularly reminding employees of the reporting channels available and encourage their use through internal communications.
• Set up channels for external reporting. Allow stakeholders outside the organization, such as vendors or customers, to report fraudulent activities through designated channels.

Related:  Signs Your Employees Are Stealing From You 

How to Prevent Employee Fraud: Preventative Measures

1. Strengthen Internal Controls

Robust internal controls are the backbone of fraud prevention. By implementing strict segregation of duties, access controls, and authorization protocols, businesses can significantly reduce the opportunities for fraudulent activities.

Ensuring that no single individual has control over all aspects of any financial transaction is key to mitigating risks.

2. Foster a Culture of Transparency and Ethics

Creating an environment where transparency and ethics prevail can significantly deter potential fraudsters. When leadership exemplifies ethical behavior and enforces a zero-tolerance policy towards fraud, it sets a precedent for all employees to follow.

3. Regular Employee Training

Educating your workforce on the signs of fraud, the importance of adherence to company policies, and the mechanisms in place for reporting suspicious activities is essential. Regular training sessions reinforce the company’s commitment to integrity and inform employees about the latest fraud prevention techniques.

4. Hire Private Investigative  Services

While internal measures are indispensable, the complexity of some fraud cases necessitates the involvement of professional PI services. Privin Network offers a comprehensive suite of investigative services, leveraging extensive experience and cutting-edge technology to unearth the truth behind suspicious activities.

We can help you catch employee fraud by conducting: 

• thorough background checks to reveal critical insights into potential or current employees’ histories, helping to mitigate the risk of internal fraud.
• advanced surveillance utilizing cutting-edge surveillance technology, capturing crucial evidence without detection.
• digital forensics to help you uncover electronic evidence of fraud, even if it has been concealed or erased.
• financial investigations for analyzing complex transactions and financial records to expose any discrepancies or illicit activities

Privin‘s experts ensure a thorough examination of potential fraud, providing peace of mind and security to business owners. Privin offers tailored investigative strategies, ensuring that their approach directly addresses your specific concerns and vulnerabilities.

Detecting and preventing employee fraud is a multifaceted challenge that requires a combination of internal vigilance and professional expertise. By implementing effective detection strategies, fostering a culture of transparency, and engaging the services of seasoned investigators like Privin, businesses can protect themselves from the detrimental impacts of fraud. 

Want to discuss how we can help? Contact us for free consultation.