Employee fraud costs Canadian businesses significantly each year. According to a 2017 CBC article, employee theft cost businesses across Canada approximately $1.4 billion annually. When an employee commits civil fraud at their place of employment, it not only impacts their employer financially and/or in terms of their reputation, but it can also create legal liability for the employer if the business is sued for negligence or damages resulting from the employee’s actions.
Below, we will review some of the most common types of employee fraud as well as provide an overview of red flags which could indicate employee fraud, and review some of the most effective means of combating fraud in the workplace.
What is Employee Fraud?
According to a global 2022 study on occupational fraud conducted by the Association of Certified Fraud Examiners (ACFE), organizations worldwide lose approximately 5% of their annual revenue to employee fraud each year.
Employee fraud is a specific type of civil fraud that occurs when an employee commits fraud against their employer or uses their position as an employee to commit fraud against others. There are several ways an employee can commit fraud, including:
- Misappropriating funds by overusing perks, charging personal items to a company credit card, or overbilling,
- Submitting fraudulent invoices
- Abusing access to payroll
- Corruption such as taking kickbacks for favours or assisting with fraudulent activity
- Procurement fraud
- Benefits fraud
Each of these activities can cost employers significantly from a financial standpoint and can sometimes make them liable for damages and/or vulnerable to criminal investigation.
Examples of Employee Fraud in Canada
There is unfortunately no shortage of news headlines about employee fraud in Canada. One of the most extreme cases involves several employees of Service Ontario who were found to have participated in a multimillion-dollar interprovincial car theft ring. The employees used their positions and access to the internal computer systems to create illegitimate registrations for stolen vehicles, presumably in exchange for money. The entire scheme involved nearly 30 people, several of whom were employees of the provincial government department.
A more common issue, the misappropriation of company funds, is illustrated by a news story out of Newfoundland from earlier this year. Coincidentally, it also involves provincial employees across several different departments. Rather than using their position to help others commit fraud, these employees were discovered to have collectively charged hundreds of thousands of dollars in personal expenses and cash advances to their employer’s credit cards. One employee had charges amounting to over $130,000.
In many cases, the employees were allowed to keep their jobs as long as they paid the funds back, but in some of the more egregious cases, the employees were terminated. None of the cases were reported to the police. One expert interviewed for the article, a forensic accountant and fraud investigator, said this is a common mistake many businesses make, as it sends the wrong message to other employees. Not forcing an employee who commits fraud to face consequences for their actions leaves the employer vulnerable to repeat incidents by others.
How to Identify Employee Fraud: What are the Signs?
The ACFE, the world’s largest anti-fraud organization, says that 85% of people who commit occupational fraud display at least one of several red flags the organization has identified. The eight most common red flags, in order of frequency, are as follows:
- They are living beyond their means
- They are experiencing financial difficulties
- They have an unusually close association with a specific vendor or customer
- They demonstrate an unwillingness to share duties with coworkers (this can also be evident in a reluctance to take extended time off)
- They regularly act irritable, defensive, or suspicious at work
- They exhibit bullying behaviour towards others
- They are dealing with family issues such as divorce or separation
- They display a “wheeler-dealer attitude”, perhaps using complicated or objectionable tactics in business dealings
The study also found that certain factors related to employment insecurity can contribute to an increased risk of employee fraud, a correlation that only increased during the pandemic. The most common factors were:
- A fear of job loss
- A denial of a raise or promotion request
- A cut in benefits
- A cut in pay
- An involuntary reduction of hours
Prevention Methods for Employee Fraud
On average, the ACFE found that the average fraud incident takes approximately one year to discover and results in a loss of over $8,000 per month. However, certain anti-fraud safeguards can be particularly effective at catching fraud early on.
The most effective method of detecting fraud was through tips received from fellow employees. Of the employee fraud cases studied, over 40% were detected due to tips, almost three times as many as the next most effective method, which was internal audits. Overall, the study found that organizations that have hotlines in place for employees to report suspected fraudulent activity were more likely to discover fraud and experienced about half the amount of loss as companies without hotlines in place. The effectiveness of hotlines is increased further when the organization provides fraud awareness training to employees.
Of course, hotlines are not likely to be as effective in small businesses with few employees. People are less able to be anonymous in these environments and may have stronger personal relationships with their coworkers, making them less willing to report suspicious behaviour. For businesses without hotlines, the study found that some of the most effective detection methods were:
- Job rotation and/or mandatory vacation policies
- Surprise audits
- Proactive data monitoring
- Fraud training for employees
- Implementing a Code of Conduct
- Formal fraud risk assessments
The study noted that job rotation/mandatory vacation policies and surprise audits alone were connected to an approximate 50% reduction in loss yet were some of the least implemented strategies. Overall, the key takeaway seems to be that businesses need to be proactive in monitoring internal operations and implementing policies that allow for better transparency.
Contact Bader Law in Mississauga for trusted business advice and guidance to safeguard against employee fraud
Employees are one of a business’s greatest assets and, often, can also be the source of the most significant liability. At Bader Law in Mississauga, our knowledgeable lawyers have been advising business owners on employment law matters for over a decade. We regularly advise business owners and entrepreneurs in complying with their legal and financial obligations towards employees, and we assist in developing workplace policies that safeguard against possible risk and liability. We can advise on stand-alone issues as they arise or be on-call to regularly guide and advise you throughout the lifetime of your venture. Contact us online or at 289-652-9092 to learn what we can do for you and your business.