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Employee Fraud – is your business at risk?

Published: 17/03/12

All businesses worry about the potential for employee fraud; according to the Association of Certified Fraud Examiners, businesses lose on average 7% of their revenue from it. 

In a recent survey of over 2000 UK employees - 20% of them admitted to fraud – 70% of respondents said that they would commit fraud if they knew that they could get away with it.  Whilst much of this will be modest inflation of expense claims, there are examples of more serious cases. Indeed since the UK was hit by recession, as companies battle the downturn, employee fraud has continued to increase.

The KPMG Fraud Report Jan-June 2011 reported that internal fraud committed by employees (of all levels of seniority)  did £225m worth of damage in this year (up from £181m Jan – Jun 2010), with management fraud, averaging at £7.3m a case, and employee fraud around £708k.

Within the report, Hitesh Patel, UK forensic partner, KPMG, commented:

“Although it is just as prevalent in larger organisations, the small and medium sized companies are more likely to suffer dire consequences as a result. For SMEs fraud can often lead to significant cash flow problems resulting in redundancies - and at worst a fight for survival.

“This is illustrated by a Wirral business brought to its knees by the in-house accountant who stole nearly £170,000 and then bragged about his lavish lifestyle on the internet. This instance led to multiple job losses while he took luxury holidays.

“The impact of fraud can be long lasting, affecting the organisation’s growth and competitiveness. It may dampen customer and staff confidence, cause reputational damage and detract from simply running the business.”

Looking out for workplace fraud
Mark Jenner & Co, Forensic Accounting Services, provide the following advice as potential indicators of workplace fraud:

  1. A very high work load and potentially high levels of stress can be a time when frauds might occur. Staff can feel put upon, or because the added activity means that normal fraud controls are being overlooked and somebody sees an opportunity.

  2. Staff who work late regularly or do not take any holidays may be guarding a little empire within the business that is acting fraudulently.

  3. An employee who suddenly shows the trappings of wealth for no apparent reason could have obtained a source of money fraudulently.

  4. Similarly any change in lifestyle may indicate that a member of staff has acquired wealth or is earning his living by different means.

  5. Unusual customer complaints may indicate the presence of fraud, e.g. if customers are suddenly complaining that their payments have not been recognised on their statements it is possible that somebody is diverting receipts fraudulently.

  6. When staff arrive and then leave a few months later for no obvious reason; they could have been targeting your company for fraud opportunities.

  7. Relationships between members of staff and suppliers or with customers should be professional – no one customer should be dealt with solely by one member of staff. The chance of bribery and fraud increases in these cases.

  8. Unusual cost rises or missing money (black holes) may be indicators of fraud and not just bad accounting or a depressed market place.

  9. Employees with external business interests need to be managed; this could indicate fraudulent intent.

The first steps to employee fraud prevention

The best advice is for any business, large or small, is to have a written policy. A fraud prevention policy is simply the formalisation of the intent that the organisation will not tolerate fraud. It is a statement that the business considers fraud to be a threat and that it will make every effort to prevent it happening. It will state that it expects its employees to have the same intent. The risk of fraud increases in organisations that are complacent about the problem.
A fraud policy can be a full blown glossy publication circulated to all staff – or it can be a printed sheet posted on the staff notice board. The important thing is to communicate the required message to all staff, for example:

  1. The business considers fraud to be a criminal offence

  2. The business will not tolerate fraud

  3. The business expects its staff to be of the same mind

  4. The business will deal with any fraud discovered

  5. If a fraud is suspected staff are  to contact [a convenient and appropriate number is given - with assurances that whistle blowing is supported by the business]

The precise details contained within the policy document will vary from organisation to organisation. The culture of the organisation is ultimately governed by the example set by the management.
Employee Fraud Protection – do you need cover?

Obviously some companies are more at risk than others, depending on the type of business – but from an insurance point of view it’s important to know is that standard cover under a commercial insurance policy would essentially require you to suffer some sort of forced or violent entry to substantiate a theft.

Theft by an employee is generally a standard exclusion.  An Employee Fraud product is therefore designed to fill this gap. Any claim would need to be proven, but there are numerous ways of doing this depending on the type of claim and as your insurance broker we would be there to give you advice.

Flint has a number of Employee Fraud products – these are specially designed to provide you with comprehensive cover against loss of ‘insured property’ following theft or fraud by employees — protecting money, balances, stock, work in progress, equipment and machinery.

This cover is available as a stand-alone product or part of a combined policy (also known as a fidelity guarantee, crime insurance and staff honesty and fraud by employee cover).

If you feel that your business is under threat – speak to Dawn Charlesworth on 0845 3711 452 or email dawncharlesworth@flintinsurance.co.uk and we can discuss the best options for cover.

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