Employee fraud can be a drain on the bottom line and have serious implications on an organization. According to a recent report from The Association of CertifiedFraud Examiners, the median loss for an employee fraud case is approximately $140,000. More than a fifth of these cases caused losses of at least $1 million, a significant loss for any size company.

Even considering a well-run organization, over 5% of a company’s revenue losses can be attributed to fraud, which is a staggering drain on the bottom line. When employees get away with this type of fraud, a "me too" mentality can take hold leading to an environment of fraud and waste.

What Can you Do?

So then, if you're a senior manager in an organization with a toxic employee fraud problem, what can you do? Setting a culture of honesty is not simple and doesn't happen immediately, but it must happen none the less. If managers are held accountable for fraud in their departments, then it's safe to assume that they will hold their employees accountable as well. The reality of the situation is that people (employees) are fallible, and there is always going to be a few bad apples in the barrel. When managers become responsible for bad apples in their barrel, a number of bad apples begins to dwindle.

Where Fraud Happens

According to the Association Certified Fraud Examiners, the majority of fraud is the result of asset misappropriation, which occurs in the procurement, payment, and expense areas. If the employer begins to closely monitor these areas, the chances are very good that fraud will be discovered and more importantly, reduced. The five areas in which employee fraud normally occurs is:

o   Purchase to Pay - Purchase to pay fraud takes place when an employee creates a purchase order for goods or services that are diverted for their personal. The employee sets up a fake vendor account where fraudulent invoices are processed and then paid to the employee. To prevent this from happening in your organization, never let an employee create and then approve the same purchase order. Instead delegate the responsibility of approval to a different employee forming a system of checks and balances.

o   Payroll  - Payroll fraud usually exists when a phantom employee is set up on the payroll system and typically receives excessive payments for overtime or when the employee remains on the system after being terminated. Testing should be done to evaluate employees with like addresses, invalid social security numbers, and excessive overtime.

o   Sales and Receivables - Employee collusion with vendors and sales reps can lead to unsuspected fraud. Managers should also be on the lookout for customer accounts with unusually high credit limits, frequent credit memos, unusually large discounts, or suspect returns of goods without matching credit memos. Managers should also check for customer shipment addresses corresponding to employee addresses.

o   Critical Data Hacking - Although employers typically safeguard the sensitive data of customers and vendors, they do not typically understand that most organizations are hacked by employees, both current and former. Terminated employees can become a major threat to an organization's sensitive data for the simple reason of getting even with an employer. Logins and passwords should be changed before a terminated employee has left the building rather than a day or two after.

Regretfully, employee fraud threatens every organization and precautions must be put in place. Employee dishonesty coverage should be a key coverage in the organization's insurance policy, but should not replace key testing that can uncover the problems that may exist. If you have questions about employee fraud contact Skyline Risk Management, Inc. at (718) 267-6600 to discuss your concerns.