The problem presented by employee fraud is very real—and very costly, according to "Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse," from the Association of Certified Fraud Examiners. In fact, in the 2018 study, employee fraud accounted for more than $7 billion in total losses, at a median loss of $130,000 per case, with 22 percent of cases causing losses of more than $1 million each. And that, says the report, is just "the 2,690 cases included in our study." Indeed, the median estimate by Certified Fraud Examiners of losses a typical organization faces in a given year due to fraud is 5 percent of annual revenue. The report adds, "To place their estimate in context, if the 5 percent loss estimate were applied to the 2017 estimated Gross World Product of USD 79.6 trillion, it would result in a projected total global fraud loss of nearly USD 4 trillion." |

Facts about employee fraud that might be surprising

The cases of employee fraud the study examined "represent only a tiny fraction of the frauds committed against organizations worldwide," the report said. A look at the findings reveals some interesting peculiarities: |

1. Losses caused by men are 75 percent larger than those caused by women.
2. The most common way employee frauds are discovered is via tips.
3. Internal control weaknesses are responsible for nearly half of frauds.
4. Employees committing fraud who had been with their companies longer stole twice as much.
5. Small businesses lost almost twice as much to fraud per scheme as larger ones.

Additionally, over the past 10 years referrals for prosecution actually fell 16 percent -- the chief reason cited as fear of bad publicity. Data monitoring analysis and surprise audits resulted in the biggest reductions in fraud loss and duration, but only 37 percent of businesses actually used such techniques. And only 4 percent of perpetrators had a prior conviction for fraud. Perhaps most disturbing of all—a majority of victim firms recovered nothing of their losses. While the most cases in the study occurred in banking and financial services, it points out that the reason is likely because the industry is more apt to employ Certified Fraud Examiners, not that it's most susceptible to fraud. |

What are effective ways to deal with employee fraud?

According to a report in the CPA Journal, it's not enough to follow prescribed accounting principles such as setting up governance and internal controls. They're necessary, but "they primarily address incentives and opportunities, and in most cases, these are the easier two components to spot." The harder thing to spot? Perpetrator thinking -- that is, the ways employees who cheat tell themselves it's okay. "Rationalization is hidden and much more insidious," the report says. The report suggests "thinking like a crook" to spot how people rationalize what they are doing and thus identify "lapses in ethical judgment." Such lapses include choosing to follow instructions from a higher-up to take fraudulent action, or seeing fraud done by multiple other employees and thinking that makes it okay—or even harboring a mistaken notion that the action taken is for the good of the company, fellow employees, stockholders or some other "altruistic" reason. Then there's the notion held by some that it is harder to do the right thing than the wrong thing. Phys.org offers a look at research published in the Journal of Applied Psychology that found some people turn to bad behavior because they believe it's easier than behaving honestly. The more a person thought that it took extra work to be an honest employee, the more likely they were to engage in dishonest behavior. In the presence of a strong excuse to cheat, the theory that it's harder to be honest provided justification to engage in fraud. Some red flags to watch out for that can indicate potential employee fraud include the following: |

• An employee living beyond their means
• An unwillingness to share duties
• Being under pressure on the job
• Family problems or divorce
• Defensiveness
• Past legal problems
• Refusal to take vacations

Legal Line and iSight highlight some common types of employee fraud that can result in some pretty hefty losses. And the CFE report cited above contains a huge amount of information about employee fraud, fraud prevention, and additional resources. And if you haven't already, check out the slides above for eight common types of employee fraud and ways to prevent it. READ MORE: 7 ways to protect your business from employee fraud How to spot the signs of workers' compensation fraud 3 ways to reduce fraud and abuse in 401(k) plans EBSA continues focus on criminal investigations in employee benefits cases