November 2013
Employee fraud represents an important component of white-collar crime, has increased in recent years and is likely to continue to be significant in the current economic climate.
Types of Fraud
Examples of the main types of employee fraud are as follows:
| Examples | Loss to Employer | |
| Misappropriation of assets | Theft of cash, stock or equipment | Reduced assets and profits |
| Theft of intellectual property such as designs or customer lists | Reduced turnover and profits | |
| False expense claims | Increased expenses and reduced profits | |
| Payroll frauds such as payments to non- existent employees | Increased expenses and reduced profits | |
| Frauds involving third parties | “Kickbacks” to employees in purchasing function for award of contracts | Increased expenses and reduced profits |
| Collusion between suppliers and employees to over-invoice or under-deliver | Increased expenses and reduced profits | |
| Collusion between customers and employees through excessive discounts | Reduced turnover and profits | |
| Diversion of sales to entities associated with employees | Reduced turnover and profits | |
| False accounting | Obtaining performance bonuses by inflating turnover or profits | Increased expenses and reduced profits |
| Teeming and lading | Reduced assets and profits | |
| Overstating expenditure to cover up theft | Increased expenses and reduced profits | |
| Overstating assets such as debtors to cover up theft | Reduced assets and profits | |
| Manipulation of computer programs/data | Reduced profits |
Forensic Accountancy Techniques
A key technique in investigating fraud is the examination of weaknesses in financial controls at a business which has suffered a loss: although an employee may be accused of fraud, there may be other explanations if controls are poor. Forensic accountants will focus on the completeness and accuracy of the recording of transactions (e.g. whether it is possible to conceal losses in the records) and the validity of transactions (e.g. whether a transaction is with an associate of a suspected fraudster). It may also be necessary to review the arrangements for the authorisation of payments.
Another “priority” area is the verification of transactions by reference to documentary evidence. It is important to link transactions to documentation generated by third parties since documents which have been internally generated may have been produced or altered by the alleged fraudster.
Analytical review techniques involve the review of trends in variables such as turnover or in financial ratios over time and comparisons of such trends and ratios between divisions of a company or with industry averages. Such techniques can highlight exceptions which warrant further investigation; alternatively, they may show that apparent irregularities in trends or ratios are reasonable in the context of the business’s circumstances at the time of the alleged offence.
Asset tracing techniques follow the trail along which funds have passed and include the analysis of the transactions along the trail, tracking the passage of the funds, possibly through intermediaries, from source (e.g.. the employer or a third party via the employer) to destination (e.g. an account under the control of the alleged fraudster).
Conclusion
An understanding of employee fraud requires a thorough examination of the financial control systems of the defrauded entity and the deployment of a range of skills. Using the right skills is essential given the serious impact of fraud on business entities and of fraud charges on employees.
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