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An SMB’s Guide to Detecting (and Avoiding) Occupational Fraud

Fraud auditor using magnifying glass

Quick look: International Fraud Awareness Week is here, but staying protected should always be a priority for small businesses, as organizations with fewer than 100 employees are at the most risk. Here, explore what occupational fraud entails, its prevalence, signs fraud may be occurring in your business, and how to fend off fraud internally and with the help of a PEO.

It’s International Fraud Awareness Week, and there’s no better time for small- and medium-sized businesses (SMBs) to pause and focus on potential types of occupational fraud and what their organizations can do to prevent it.

This year, International Fraud Awareness Week falls from November 12 through 18, and according to its website, the commemorative holiday “was established by the Association of Certified Fraud Examiners (ACFE) in 2000 as a dedicated time to raise awareness about fraud. The week-long campaign encourages business leaders and employees to proactively take steps to minimize the impact of fraud by promoting anti-fraud awareness and education. Organizations and individuals are encouraged to register as Official Supporters prior to International Fraud Awareness Week, and to host training opportunities, distribute anti-fraud information or otherwise promote anti-fraud activities during the week.”

The state of fraud in the workplace

Understanding the cost and prevalence of employee fraud is important.

Occupational fraud is defined as “using one’s occupation for personal enrichment through the deliberate misuse of misapplication of the employing organization’s resources or assets.” The Association of Certified Fraud Examiners (ACFE)’s Occupational Fraud 2022: A Report to the Nations® analyzed 2,110 cases of fraud in 133 countries and discovered that:

  • $4.7 trillion is lost annually to fraud globally
  • Companies lose an estimated 5% of their revenue each year due to fraud
  • The median loss per case is $117,000
  • Businesses with under 100 employees are at higher risk than larger organizations
  • Companies with the fewest employees had the highest median loss ($150,000)
  • Industries with the highest risk include banking, real estate, healthcare, and manufacturing

What does workplace fraud involve?

Employee fraud can take many forms.

A human resources (HR) team may experience someone misrepresenting themselves to gain access to financial resources or sensitive information. For example, a job candidate may lie about their identity or experience (something that 70% of workers admit to!). Consistently performing background checks and having adequate verification processes in place can prevent this type of fraud. If small businesses are too busy to perform these tasks each time, they may benefit from outsourcing their recruiting operations to a professional employer organization (PEO).

Fraud also extends to the payroll department. Payroll fraud can include employees embezzling funds from the business via the organization’s payroll system, falsifying time sheets, disbursing unauthorized bonuses, and paying fake or terminated employees.

Other kinds of employee fraud include:

  • Misusing company assets, like using work computers or company perks for personal gain
  • Stealing property or resources from the business
  • Engaging in kickbacks or bribery (accepting money in exchange for preferred treatment)
  • Benefits fraud, where a worker uses sick days when they’re actually healthy
  • Expense report fraud which involves an employee lying about the price of an item, claiming the same item twice, or claiming personal items as business items

5 signs of employee fraud

Thankfully, fraud doesn’t typically happen out of thin air. According to Occupational Fraud 2022: A Report to the Nations®, 85% of fraudsters displayed behavioral red flags.

SMBs should be aware of the following five signs of employee fraud:

  1. A worker’s lifestyle suddenly doesn’t match their wage. A sign of fraud can be when a staff member is abruptly living far beyond their means.
  2. An employee is keeping secrets. If a worker is very reluctant to share their processes or have a colleague review their work, that can be a sign of fraud.
  3. Frequent tips or complaints are being filed about a certain staff member. These submissions are critical, especially considering 42% of employee fraud cases are detected due to tips!
  4. Numerous inconsistencies exist in accounts receivable. These variations can include excessive or unexplained cash transactions, unreconciled bank account statements, an abnormal increase in expenses, supplies, or reimbursements, or unexpected activity in formerly inactive accounts.
  5. A worker thinks they’re above the rules. A warning sign can be when an employee refuses to comply with an organization’s procedures or regulations.

How SMBs can stay a step ahead of fraud

Prevention is paramount in detecting and minimizing fraud’s impact. Certain actions can play a significant role in avoiding fraud in the workplace, like:

  • Create clear policies and procedures regarding acceptable behavior and the consequences for violation.
  • Train employees on these policies and explain potential disciplinary actions—fraud training reduces median loss per fraud instance by 38%.
  • Regularly conduct background checks on employees, contractors, and vendors.
  • Foster a company culture of accountability and transparency by encouraging staff to report suspected fraud through channels like a hotline or anonymous tip box.

Need a hand keeping an eye out for fraud?

Fraud can occur virtually anywhere within an organization, making its prevention potentially daunting for higher-risk small businesses.

Fortunately, many SMBs partner with PEOs to help shield themselves from employee fraud. The following PEO services can achieve this:

  • Human resources and payroll: PEOs provide many HR solutions, including employee handbook creation and update guidance, as well as payroll administration with a focus on accuracy and compliance.
  • Risk and compliance: A PEO, like ExtensisHR, offers a full suite of solutions to protect businesses, including an Information Protection Plan, optional cyber liability and payroll diversion protection benefits, and more.
  • Recruiting: ExtensisHR’s full range of recruiting services includes job advertisement creation, skills assessments, and more to help organizations hire credible talent.
  • Learning and development: A training platform is very useful in educating employees on signs of fraud and best practices for reporting it. ExtensisHR’s Knowledge Cloud features immersive, on-demand lessons on financial integrity, cybersecurity, and wage/hour compliance fundamentals.  

Business leaders should keep in mind that not every PEO is equal. While there are nearly 500 PEOs in the United States, not all are accredited. Only 1% of PEOs (including ExtensisHR) have been assigned a Certified Professional Employer Organization (CPEO) by the IRS and maintain ESAC accreditation and Certification Institute (CI) for Workers’ Compensation and Risk Management credentials. It’s important that organizations confirm the business partners they choose to help keep them safe are credible themselves.

Fraud is no fun. Contact the experts at ExtensisHR today to discover how we can help you stay protected and compliant.

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