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How To Use Employment Screening to Minimise Employee Fraud

Date Published: March 05, 2021 | Last Updated: January 25, 2024 | By Khai Ngo

Employee fraud is more common than most businesses think. 

While high profile employee fraud cases have become an increasingly popular feature in our news, smaller businesses aren’t immune to this type of employee misconduct. 

For example, in 2018, a woman from Western Australia was recently sentenced to six years in jail for stealing money from two small businesses.

In the most serious of cases, employee fraud can even lead to business failure and destroyed careers.

According to the Association of Certified Fraud Examiners (ACFE), the average organisation loses 5% of its revenue to fraud, costing Australian businesses approximately $18 billion each year

Misplaced trust, inadequate hiring and supervision policies, and a failure to implement healthy internal controls create an opportune environment for any employee to commit fraud.

With employee fraud on the rise, we hope to share insights into what employee fraud is, how to detect it and how prevention is better than cure.

What Is Employee Fraud?

Employee fraud involves committing a dishonest or deceptive act that results in a business making a loss. 

Besides the evident financial impact of employee fraud, such acts can result in the tarnishing of your company brand, a decrease in employee morale and loss in customers.

What Types of Employee Fraud Are There?

According to CPA Australia, employee fraud is commonly reported in three different categories:

a. Asset Misappropriation such as:

  • stealing cash or inventory; 
  • company credit card abuse (i.e. using it for personal purchases); 
  • using a company vehicle for personal use; or 
  • providing a discount or free goods or services to family or friends without the company knowing

For example,  Laura, an employee at a local winery in Queensland, created fake purchase orders in the name of one of the winery’s bottle suppliers. She substituted their bank account details with her bank account details, so money was paid into her account every month.

b. Fraudulent Accounting and Financial Reporting, such as:

  • recording fictitious revenues; 
  • recording an incorrect level of inventory; 
  • recording reduced liabilities; and 
  • moving current expenses or income to an earlier or later period. 

For example, Michael, a pharmaceutical sales rep recording higher sales than actually performed by recording an incorrect level of inventory so that he could receive a performance-based bonus.  

c. Corruption such as:

For example, Noah had organised to have his friend’s company to provide services to the business at inflated prices.

Detecting and Managing Fraud

The most important aspect of detecting and managing employee fraud is ensuring that your business has adequate internal controls in place. 

Internal controls that can possibly prevent, detect and deter fraudulent behaviour includes:

  • deposit and reconcile cash receipts daily;
  • take the time to get to know your suppliers and the relationships your staff have with them; 
  • measure your progress toward financial goals; 
  • investigate any variances that have delayed expectations; 
  • conduct unannounced internal audits of the accounting department, and amongst other things;
  • include the requirement to have all payments signed off by at least two senior non-accounting employees

Could Pre-Employment Screening Address Employee Fraud?

Pre-employment screening involves undertaking various checks before employment is offered. It’s a vital component of a company’s risk management practices.

Fraudulent behaviour could occur only when the opportunity presents itself. But it’s also possible to have fraudulent individuals specifically seek out businesses with a lack of oversight that allows them to commit the fraud. 

So, minimising employee fraud can start with the hiring process – it’s risk management in practice. 

Here’s how pre-employment can potentially prevent employee fraud:

  • Pre-employment screening forms a critical first line of defence: an organisation that conducts employment screening will likely have other business practices, checks and balances, to avoid creating an environment for fraud; 
  • Experienced screeners can more accurately assess a candidate’s qualities and behaviours: this can determine if they are a good fit for a business; 
  • Prevention is better than cure: the cost of onboarding new employees is high. The more you know about your candidate, what drives and motivates them, their ethics and integrity, the better.

There are a few pre-employment checks that every business should consider as part of their hiring process: 

Beyond our recommended essential pre-employment screening checks, specific industries such as banks or accounting firms will benefit from more advanced types of checks to better assess the suitability of candidates, such as:

  • A thorough investigation into the candidate’s work experience;
  • legal history checks
  • financial history checks such as bankruptcy, directorship and business interests checks, relevant AFSA or ASIC checks
  • known associations and family connections to assess potential conflict of interest; and
  • Psychometric assessments

For more on these checks, make sure to have a look at our article about the six probity checks that every business should have.

Key Takeaways

All businesses are vulnerable to employee misconduct, such as employee fraud. 

While it’s important to realise that employee fraud can’t necessarily be eliminated, it’s vital to be aware that the risks of it occurring can be substantially reduced.

By implementing pre-employment screening, your business can minimise the risk of becoming a victim of employee fraud. 

At Accurate Australia, we believe that these checks aren’t just for an improved recruitment process but should also be a part of an overall risk management strategy.

With every industry having a different level of risk, it’s good value to consult with an expert. We can help identify what types of assessments, verification and checks should be done to ensure that you’re minimising the chances of employee fraud in your business. 

If you’re looking for help with improving your pre-employment screening process, get in touch with us.