What if the biggest threat to your business isn’t a competitor, but your own employee? Employee fraud is a big threat to businesses of all sizes, costing organizations billions of dollars a year through various scams and unauthorized activities. From embezzlement and expense account manipulation to inventory theft and payroll fraud, dishonest employees can exploit weaknesses in internal controls to steal money, assets or sensitive information.
In this post, we’ll look at common types of employee fraud, how they happen and how to detect and prevent them. By recognizing the warning signs and having the right protection in place, companies can reduce their exposure to internal theft and have a safe and trustworthy workplace.
The Hidden Costs of Employee Fraud
Employee fraud is a threat to workplace trust and culture. When employee fraud occurs, it doesn’t just impact the company financially, it damages the emotional foundation of the workplace. Trust gets eroded, and morale suffers, especially if leadership doesn’t take clear and transparent action. According to the Association of Certified Fraud Examiners, businesses lose an estimated 5% of their annual revenue to occupational fraud, with the average fraud case lasting 12 months before detection.
A single case of internal fraud can disrupt entire workflows, delay projects, or expose sensitive information. For example, a disgruntled employee with access to the payroll system might manipulate salary records to benefit themselves or others, resulting in financial losses and reputational damage.
When fraud happens, employees may feel anxious or begin to distrust one another. This suspicion can weaken collaboration and create a tense, divided work culture, especially if there’s no clear accountability. Internal fraud schemes have become more difficult to spot. Without in-person oversight, subtle signs of potential fraud may go unnoticed until real damage has been done.
Examples and Types of Employee Fraud That Fly Under the Radar
Internal fraud often hides in everyday tasks, and in ways you least expect. Fraud occurs when employees misuse trust or access, sometimes in ways that look harmless at first. It might be as simple as padding hours on a timesheet or fudging a small expense, but these behaviours often grow into larger, costlier actions.
Big or small, no company is completely safe. Employee fraud affects both small startups with limited oversight and large corporations with complex systems. Smaller businesses may lack resources to catch it early, while larger ones may miss it due to scale.
1. Asset Misappropriation: The Most Common Type of Employee Theft
This type of fraud happens when an employee uses their position to take company assets, whether it’s cash, products or digital information for personal gain.
Examples include theft of inventory, forging checks or an employee using a company credit card to pay personal expenses. It’s often hidden as a simple clerical error in the accounting system, that’s why it can go undetected for a long time.
Signs:
- Inventory levels don’t match sales records
- Suspicious vendor names or duplicate payments
- Sudden lifestyle upgrades not reflected in salary
- Gaps or inconsistencies in financial reports
It may start small, but if left unchecked, this can cost companies more than just money.
2. Payroll Fraud and Ghost Employee Schemes
This type of financial fraud is a silent budget killer that doesn’t raise any immediate red flags. Payroll fraud occurs when an employee manipulates the payroll system to get paid wages, bonuses or benefits they didn’t earn.
One of the sneakiest ways is ghost employees, fake profiles added to the system, so an employee receives payment for workers who don’t exist. Because the payroll system runs on autopilot and internal trust, these schemes can go undetected for a long time if you don’t have checks and balances in place.
Red flags:
- An employee gets paid under multiple names or IDs
- Payroll shows unexplained spikes in total compensation
- Inconsistencies between HR files and payroll data
- Frequent manual overrides or adjustments to time logs
- Employees on payroll who don’t show up on team rosters
It may seem like just a few extra hours here and there, but over time, payroll fraud drains budgets and erodes team trust.
3. Expense Account Fraud
This form of employee fraud is often referred to as expense reimbursement fraud and may seem small, but can add up to big losses over time. It involves an employee submitting duplicate receipts or inflating legitimate business expenses to get more than they actually spent.
In many cases the fraud involves manipulating business expense categories like travel, meals or office supplies to cover personal use on the company’s dime. Without strict enforcement of company policies and regular audits this can go on for years.
Red flags:
- Vague or missing descriptions on expense claims
- Receipts submitted with no business purpose
- Unusual frequency of travel or meal reimbursements
- Slight variations in recurring expense amounts
- Reimbursement requests that don’t match job roles
4. Financial Statement Fraud
Once exposed, financial statement fraud can shatter trust and bring down entire organizations, even those once seen as industry leaders. This type of fraud is most damaging when it happens at the top level, it distorts the company’s financial health. Financial statement fraud involves manipulating key financial metrics to make the business look more profitable, stable or attractive than it is.
Common tactics are to inflate revenue, delay expenses or fabricate performance metrics that boost stock price or attract investors. This misleads stakeholders, shareholders and regulatory bodies and exposes the company to serious legal action and long term damage to reputation.
Signs:
- Revenue growth that doesn’t match sales activity
- A sudden drop in expenses with no explanation
- Inconsistent financial reports or frequent restatements
- Aggressive earnings projections that beat industry averages
- Internal pressure to “hit the numbers” at any cost
Once exposed, financial statement fraud can break trust and bring down entire companies, even those that were once industry leaders.
5. Commission Fraud
This type of fraud is most common in performance driven sales environments where compensation is tied to results. It happens when an employee manipulates sales data, submits fake leads, fabricates deals or backdates contracts to inflate their commission earnings.
While it may look like overperformance on paper, the reality is distorted numbers that hurt team morale, mislead leadership and create distrust between departments. If left unchecked, commission fraud skews forecasting, wastes company resources and undermines real sales efforts.
Look out for:
- Deals that close super fast or right before end of month deadlines
- Leads that can’t be verified or contacted
- Repeated returns, cancellations or clawbacks tied to specific employees
- Inconsistent CRM entries or missing documentation
- Sudden spikes in commission payouts with no matching revenue growth
Detecting this fraud requires regular audits of sales activity, tighter validation of deals and clear boundaries in incentive structures.
How Fraud Damages Employee Trust and Culture
Fraud shakes the foundation of trust that teams rely on to work together effectively.
- Fraud often breaks internal trust: When an employee steals sensitive information or assets, it sends a ripple effect through the workplace. Colleagues may start feeling unsafe, suspicious, or even disillusioned with the company.
- Rebuilding culture post-fraud: Restoring morale after a breach takes more than damage control. Clear communication, visible accountability, and strong leadership are key to regaining employee confidence.
- Ethics must be proactive: Don’t wait for red flags to take ethics seriously. Fraud prevention should be built into everyday operations, not just rolled out after something goes wrong.
- Prevention and recovery go hand-in-hand: Eliminating the fraud is only half the battle, rebuilding the culture is the other. Re-establishing trust after a breach is essential to move forward stronger and more united.
How to Prevent Employee Fraud Before It Starts
Prevention begins with culture, not just control. A proactive approach creates an environment where fraud is less likely to take root.
Prioritize transparency
One of the most effective fraud prevention strategies is building a culture where transparency and integrity are standard practice. When employees clearly understand expectations and know their actions are visible in a fair way, it becomes easier to prevent fraud organically.
Avoid over-surveillance
While it’s tempting to monitor everything, excessive oversight can backfire. To effectively prevent insider fraud, focus on tools and systems that promote accountability without breeding fear. Management software should be designed to enhance openness, not to make employees feel distrusted.
Empower whistleblowers
Fraud often goes undetected when employees don’t feel safe reporting suspicious activity. Set up confidential channels and protect those who speak up. Empowering whistleblowers plays a critical role in early detection and helps prevent fraud before it escalates.
Hire with integrity in mind
The foundation of fraud prevention starts with the people you bring into your organization. Prioritizing character, not just qualifications, helps reduce the risk of insider threats. A thoughtful hiring process that includes value alignment and background checks can make all the difference.
Case studies in proactive fraud design
Industry leaders like Cisco demonstrate how combining behavioural monitoring with ethics-focused education can dramatically reduce insider fraud. Their success shows that blending technology with culture-focused fraud prevention efforts works far better than relying on tech alone.
Detecting Employee Fraud Through Smarter Systems
With the right systems in place, you don’t have to wait for fraud to hurt your business, you can stop it before it starts costing you thousands.
- Use modern fraud detection tools: Think beyond spreadsheets. Behavioural analytics and anomaly detection tools can pick up on patterns that humans might miss, especially when it comes to subtle forms of occupational fraud.
- Integrate tools with workflows: Fraud detection isn’t something you bolt on, it works best when it’s part of your day-to-day operations. When connected to payroll, HR, expense systems, and management software, these tools can flag inconsistencies in real time.
- Train managers: Your managers are in the best position to notice when something feels off. Teach them how to spot early signs of fraud, like sudden changes in behaviour or performance that don’t quite add up.
- Combine management software with AI: Let smart systems do the heavy lifting. Pairing AI with your existing management tools means the software learns what “normal” looks like and quickly flags anything that doesn’t.
When Fraud Occurs: What Happens Next?
Fraud happens when someone makes a conscious choice to deceive or manipulate, but what you do after matters just as much.
- Investigate with care: Not every suspicious act is a scheme. Take the time to separate honest mistakes from intentional wrongdoing, especially in gray areas like timesheet fraud.
- Be consistent in response: Whether it’s petty theft or large-scale corporate fraud, your policies should apply fairly across all roles and departments. Playing favourites only breeds more distrust.
- Protect the company and the culture: After any fraud discovery, review what broke down, and fix it. A fraud-ready business doesn’t just punish wrongdoers; it evolves with stronger systems and smarter safeguards.
Final Thoughts
Employee fraud is often a result of weak systems, vague expectations, or overlooked warning signs. Each case presents a chance to learn and improve. Fraud can be a wake-up call that exposes gaps in oversight, ethics, or trust. By understanding the common types of employee fraud, investing in smarter detection tools, and fostering a transparent, integrity-driven culture, businesses can reduce their risk and respond more effectively when fraud does occur. Prevention begins with awareness, and the right systems make resilience possible. Just as important is hiring trustworthy talent, surround your business with people you can trust. Acquiring talent with intention is one of the most powerful fraud prevention tools you can have.
Frequently Asked Questions
What are some of the different types of employee fraud businesses should be aware of?
Employee fraud can take many forms, and recognizing these types is key to early detection and prevention.
Asset Misappropriation: This is one of the most common forms of fraud and occurs when a worker misuses their position to steal company assets by an employee, including inventory, cash, or digital property for personal gain.
Payroll Manipulation: Fraud schemes involving payroll often include ghost employee fraud, where fictitious workers are added to the payroll, allowing dishonest employees to collect unauthorized wages.
Expense Reimbursement Abuse: In these employee fraud schemes, workers submit fake or inflated expense reports to receive extra funds, often slipping through due to lax oversight.
Commission Inflation: In sales environments, fraud occurs when an employee makes up deals or alters numbers to earn higher commissions dishonestly, harming data integrity.
Financial Statement Deception: A more severe form of accounting fraud occurs when employees manipulate revenue or expense records to present a false image of the company’s financial status.
How can employee fraud impact company culture and employee morale?
When fraud happens inside a company, it doesn’t just hurt finances, it damages trust, morale, and the culture itself.
Trust Erosion: Fraud typically damages internal trust, making teams feel unsafe and less cooperative, especially when transparency is lacking.
Drop in Morale: When fraud is discovered and mishandled, it can drastically lower employee morale, causing disengagement and dissatisfaction.
Strained Employee Relations: Unaddressed internal fraud leads to suspicion and damaged employee relations, which can disrupt collaboration across departments.
Turnover Increase: Discovering fraud may result in an employee leaving the company, either due to guilt, fear, or frustration over how the situation was managed.
Cultural Decline: Over time, unaddressed fraud sends a message that dishonesty is tolerated, and fraud can lead to a toxic work environment if not corrected.
How does fraud usually occur in the workplace without being noticed?
Fraud often hides in routine tasks and small details, making it hard to detect until serious damage is done.
Exploitation of Access: Fraud occurs when employees exploit trusted positions to quietly manipulate systems, especially where checks are weak or inconsistent.
Subtle Manipulation: Internal fraud may start with something small, like rounding up work hours, and grow undetected into more serious financial abuse.
Disguised Activity: Some employees commit fraud by blending illegitimate actions into routine tasks, like slipping fake expenses into otherwise valid reports.
Remote Work Challenges: As more businesses go hybrid, fraud can occur under the radar due to reduced oversight and isolated systems.
Lack of Real-Time Detection: Fraud often thrives in environments without systems that flag unusual activity quickly meaning employee fraud you could prevent ends up going unnoticed.
What are some real-world examples of employee fraud that businesses should learn from?
Real incidents of internal fraud reveal just how varied and damaging these schemes can be when left unchecked.
Accounts Tampering: A common accounts receivable fraud case involves employees rerouting incoming payments into personal accounts, delaying or falsifying records to hide the theft.
Ghost Payrolls: In one notorious case, ghost employees were added over months to extract extra payroll funds, just one of many examples of employee fraud that appear minor but add up.
Expense Abuse: An employee alters meal or travel receipts to get larger reimbursements, often uncovered only during annual audits.
Inventory Theft: Internal staff stole warehouse items and listed them as defective, a case showing how fraud include both physical and digital assets.
Sales Data Fabrication: A team member created fake leads to earn extra bonuses, highlighting how different types of employee misconduct can co-exist in high-pressure departments.
What steps should companies take to prevent and detect internal fraud effectively?
Preventing fraud requires more than rules, it demands ethical culture, smart systems, and proactive oversight.
Build Ethical Awareness: Preventing different types of employee fraud starts with strong company values, frequent ethics training, and open-door policies.
Monitor Financial Records: Fraud detection begins by regularly reviewing financial reports, where accounting fraud occurs most commonly in falsified numbers or delays.
Use Smart Tools: Detecting internal fraud requires real-time monitoring systems because effective prevention acknowledges that fraud requires both tech and culture.
Encourage Whistleblowing: Create secure ways for employees to report suspicious behaviour without fear, since fraud can lead to major damage if left unchecked.
Set Clear Exit Protocols: When an employee leaving the company is offboarded without a proper audit of their access or past records, lingering risks remain.
