Most business owners will agree that their employees are right at the heart of their company. Good employees bring many benefits to a business and, in return, their employers treat them with respect and dignity. However, sometimes employees are responsible for fraudulent activity within the company. This is called fraud in business.

Fraud in business is usually performed by employees who abuse positions of trust. It’s not necessarily just one employee, sometimes there can be a whole group of employees who are involved in a fraudulent scheme.

Some types of fraud in business to look out for

The world of business can be a ruthless place and, unfortunately, there are many types of business fraud that you should be on the lookout for if you own a small company.

The most common types of business fraud include:

Skimming: This type of fraud occurs when employees take money from receipts and don’t record this revenue on the books. This is often referred to as taking cash ‘off the top’ of receipts and reporting a lower total to the business records.

Embezzlement: This type of fraud often gains a lot of press attention as it involves the illegal use of business funds by the person who is in charge of those funds. Examples of embezzlement include using business funds for personal use, or using the company payroll to illegally take money.

False overtime: False overtime occurs when an hourly-paid worker clocks out earlier or later than the time that they are in work. For example, a worker may finish at a certain time, but only clock out a few hours later, thus getting paid for the extra hours.

Friendship fraud: Friendship fraud occurs may occur if a business owner does not follow the set procedure when employing a member of staff, due to this person being a ‘friend’. The friend then proceeds to abuse their new position of trust, i.e. if they are the bookkeeper.

Over-ordering fraud: This type of fraud occurs when a member of staff intentionally over-orders items, i.e. stationary, for the business. The employee will then return the items and pocket the extra cash or gift card.

As a small business owner - How can I avoid becoming a victim of fraud?

As a small business owner, one of the most important ways to avoid becoming a victim of fraud is to stay alert at all times. If something seems out of place, ask questions, and check the business finances on a regular basis.

When hiring an employee that will hold a position of trust, i.e. a bookkeeper, it’s important to hire a candidate with a good amount of experience. Be wary of candidates who seem to have struggled to hold down a job for longer than a few months at a time, and always follow up references.

If an employee seems to be putting in a lot of overtime, but this doesn’t show in their work, ask them to log exactly what tasks they have completed during their overtime, along with how long it has taken to perform each task. Most of the time, simply making the employee aware of the fact that you are watching them is enough to make them cease any fraudulent activity.

Ensure that any orders placed for the business by employees go through the correct procedure, and that any receipts for these are logged on the books.

What to do if you suspect an employee of fraud

If you suspect that an employee is engaging in fraudulent activity for their own gain, it’s important to take the necessary steps to ensure that the matter is dealt with efficiently.

  • Gather evidence. Just having a feeling that the employee is being fraudulent is not enough. You need to collect hard evidence if you want to take disciplinary action, or there’s a high chance that the employee will appeal against your decision.
  • Seek legal advice. Prior to confronting the employee, it’s important to obtain professional legal advice.
  • Don’t discuss the situation with any other employees or people from outside the business.
  • If you wish to terminate the employee, make sure that you follow the correct company procedures.
  • Don’t be tempted to deduct anything from the employee’s final paycheck. Doing so may give the employee a right to take legal action against you.

By Rebecca Beale, legal copywriter at DPP