Employee fraud is a risk faced by organisations of every size and sector. Understanding how employee fraud occurs, recognising the warning signs and putting effective preventative measures in place can help organisations reduce financial losses, protect reputation and foster a culture of integrity.
In this guide, we discuss the most common types of employee fraud, why fraud happens, how to identify potential risks and the practical steps you can take to prevent and respond to fraud in the workplace.
What is fraud in the workplace?
Employee fraud (also known as occupational fraud or internal fraud) is a dishonest or deceptive act committed by an employee for their personal or financial benefit, resulting in actual or potential loss to their employer.
Unlike external fraud, employee fraud is committed by someone who already has authorised access to an organisation’s systems, finances, assets or confidential information. This position of trust can make fraud more difficult to detect.
What are the consequences of employee fraud?
Employee fraud can have serious financial, operational and reputational consequences.
In the UK, the Economic Crime Survey 2024 found that 27% of UK businesses with employees experienced fraud during the previous 12 months, equating to around 389,000 businesses.
Employee fraud can result in:
Financial losses
Fraud can lead to the loss of money, stock or other assets, as well as investigation costs, legal expenses and the cost of introducing stronger controls.
According to the Association of Certified Fraud Examiners (ACFE) Report to the Nations 2024, organisations lose an estimated 5% of annual revenue to occupational fraud each year.
The Economic Crime Survey found that 71% of businesses affected by fraud in the UK incurred financial costs, with an average total cost of £2,090 per affected business during the previous 12 months, although losses were substantially higher for some organisations.
Operational disruption
Investigating suspected fraud takes time and resources away from normal business activities. The Economic Crime Survey found that 37% of businesses affected by fraud required additional staff time to deal with incidents, while 31% changed their internal business processes following fraud.
Damage to reputation
Fraud can undermine confidence among customers, suppliers, investors and regulators. It may damage business relationships, result in increased scrutiny and make it more difficult to win new contracts or retain existing customers.
Impact on employees
Fraud can reduce trust between colleagues, increase workloads during investigations and create uncertainty within teams.
The Economic Crime Survey found that some organisations experienced reduced staff morale following fraud incidents.
Plus, where fraud results in significant financial losses, organisations may need to reduce spending, delay recruitment, make redundancies or, in extreme cases, cease trading altogether, putting jobs at risk.
Employee fraud at a glance
| Also known as | Occupational fraud or internal fraud. |
| Definition | A dishonest or deceptive act committed by an employee to obtain an unauthorised personal or financial benefit at their employer’s expense. |
| Who can commit it? | Any employee, manager or director with access to organisational assets, systems, information or finances. |
| Common types | Asset misappropriation, corruption and financial statement fraud. |
| Typical motivations | Financial pressure, personal gain, opportunity and the belief that dishonest behaviour can be justified or go undetected. |
| Estimated impact | The Association of Certified Fraud Examiners (ACFE) estimates organisations lose around 5% of annual revenue to occupational fraud each year. |
| Potential consequences | Financial losses, business disruption, reputational damage, disciplinary action, dismissal and criminal prosecution. |
| How to reduce the risk | Strong internal controls, effective management oversight, fraud awareness training, regular audits and a workplace culture that encourages ethical behaviour and reporting concerns. |
Examples of fraud in the workplace
Most examples of fraud in the workplace fall into one of three broad categories. Understanding the characteristics of each can help organisations recognise warning signs, strengthen controls and reduce risk.
Asset misappropriation
Asset misappropriation is the theft, misuse or unauthorised use of an organisation’s money, property or other assets for personal gain. It is the most common type of employee fraud because it often involves everyday business activities and relatively small amounts that may go unnoticed if controls are weak.
Examples include:
- Submitting false or inflated expense claims.
- Creating fictitious overtime or timesheet entries.
- Payroll fraud, such as creating “ghost employees” or making unauthorised payroll changes.
- Stealing stock, tools, equipment or cash.
- Using company credit cards for personal purchases.
- Diverting customer payments into personal accounts.
Although individual losses may be relatively small, repeated incidents can result in significant financial damage over time.
Corruption
Corruption occurs when an employee abuses their position or authority to obtain a personal benefit. Unlike asset misappropriation, corruption often involves another individual or organisation, such as a supplier, contractor or customer.
Examples include:
- Accepting bribes or kickbacks in exchange for awarding contracts.
- Failing to declare conflicts of interest.
- Awarding work to friends or family members without following procurement procedures.
- Sharing confidential commercial information for personal gain.
- Accepting inappropriate gifts or hospitality that influence business decisions.
Corruption can damage an organisation’s reputation, undermine confidence in decision-making and expose employers to significant legal and regulatory consequences.
Financial statement fraud
Financial statement fraud is deliberately manipulating accounting records or financial reports to present a false picture of an organisation’s financial performance. It is the least common type of occupational fraud but usually results in the greatest financial losses.
Examples include:
- Inflating sales or revenue figures.
- Concealing business losses or liabilities.
- Recording fictitious transactions.
- Altering accounting records to achieve performance targets or bonuses.
- Deliberately overstating assets or understating expenses.
In addition to substantial financial losses, it can result in regulatory action, criminal prosecution and serious reputational damage. Financial statement fraud is often committed to satisfy investors, secure funding, meet performance targets or improve the apparent financial position of an organisation.
Why does employee fraud happen?
According to the Association of Certified Fraud Examiners (ACFE), occupational fraud is often committed by employees with no previous criminal history who exploit opportunities created by weak controls or poor oversight.
One of the most widely recognised models for understanding why fraud occurs is the Fraud Triangle. Developed by criminologist Donald Cressey in the 1950s, the model suggests that three conditions are usually present before occupational fraud takes place: pressure, opportunity and rationalisation.
The Fraud Triangle helps organisations understand the factors that increase fraud risk and where preventative controls should be focused.
| What it means | Examples | |
| Pressure | Financial, personal or professional pressures create motivation to commit fraud. | Debt, gambling, addiction, family pressures, unrealistic performance targets, pressure to meet financial results or secure investment. |
| Opportunity | Weak internal controls or poor oversight create an opportunity to commit fraud without being detected. | Poor segregation of duties, excessive system access, inadequate supervision or ineffective financial controls. |
| Rationalisation | The individual convinces themselves that their dishonest behaviour is acceptable or justified. | “I’ll pay it back”, “I deserve it”, “The company won’t notice” or “Everyone else does it”. |
Signs of employee fraud
No single indicator proves that fraud is taking place. Many signs may have perfectly legitimate explanations. However, where several warning signs occur together, or where behaviour changes unexpectedly, organisations should consider whether further investigation is appropriate.
Behavioural indicators
Changes in an employee’s behaviour can sometimes indicate that something is wrong. While these signs are not evidence of fraud on their own, they may warrant closer attention when combined with other concerns.
- Reluctance to take annual leave – Avoiding time away from work may prevent others from discovering irregularities.
- Refusing to share responsibilities – Employees who insist on maintaining sole control over certain tasks or systems may be attempting to conceal inappropriate activity.
- Living beyond apparent means – Significant or unexplained changes in lifestyle, spending or possessions that appear inconsistent with known income.
- Becoming unusually defensive or secretive – Overreacting to routine questions, resisting oversight or avoiding discussions about their work.
- Working excessive hours without explanation – Frequently staying late or working alone when it is not necessary, particularly where this reduces oversight.
Financial indicators
Fraud often creates anomalies within financial records.
- Duplicate invoices or payments – The same invoice being processed more than once or payments made without a clear justification.
- Missing or incomplete documentation – Missing receipts, purchase orders, contracts or supporting records.
- Unexpected accounting adjustments – Unexplained journal entries, write-offs or manual changes to financial records.
- Unusual expense claims – Claims that appear excessive, inconsistent or unsupported by evidence.
- Changes to supplier or payroll information – Unexpected amendments to bank account details, payment instructions or employee records without appropriate authorisation.
Operational indicators
Operational issues can sometimes indicate that fraudulent activity or other irregularities may be occurring.
- Approval processes being bypassed – Employees regularly circumventing established authorisation procedures or seeking unnecessary exceptions.
- Unexplained stock discrepancies – Inventory shortages, surpluses or records that do not match physical stock levels without a clear reason.
- Unauthorised use or removal of company assets – Equipment, materials or stock being used, transferred or removed without authorisation or a legitimate business reason.
- Repeated customer or supplier concerns – Complaints about missing goods, unexpected deliveries, poor record keeping or other unexplained operational irregularities.
- Unusual operational activity – Unexpected changes to working practices, records or processes that cannot be readily explained and are inconsistent with normal business operations.
How to prevent fraud in the workplace
Practical controls and a strong organisational culture can make it much harder to commit and conceal fraud.
Assess fraud risks
Identify where fraud is most likely to occur within your organisation. Consider areas such as payroll, purchasing, procurement, expenses, cash handling, inventory and financial reporting.
- Review which roles have access to money, financial systems or valuable assets.
- Identify where a single individual has significant control over a process.
- Consider how fraud could occur and whether existing controls would detect it.
- Reassess fraud risks whenever systems, responsibilities or business processes change.
Strengthen internal controls
Introduce practical controls that make fraud more difficult to commit and conceal.
- Require two people to authorise significant payments or changes to supplier bank details.
- Separate key tasks so one person cannot initiate, approve and complete the same transaction.
- Limit access to financial systems according to job role and remove unnecessary permissions promptly.
- Carry out regular reconciliations, spot checks and independent reviews of high-risk transactions.
Develop an ethical culture
Create an environment where honesty, integrity and accountability are expected at every level of the organisation.
- Communicate a clear zero-tolerance approach to fraud.
- Ensure managers follow the same rules and approval processes as everyone else.
- Publish and regularly promote anti-fraud, bribery and whistleblowing policies.
- Recognise and encourage employees who raise genuine concerns or identify control weaknesses.
- Avoid creating incentives or unrealistic performance targets that encourage employees to manipulate financial information or bypass controls.
Train employees
Provide employees with the knowledge they need to recognise and prevent fraud in their day-to-day work.
- Explain common fraud risks relevant to different job roles.
- Show employees how to identify suspicious invoices, payment requests or expense claims.
- Ensure managers know how to respond to concerns and escalate suspected fraud.
- Include fraud awareness training in induction and provide regular refresher training.
Encourage employees to speak up
Make it easy for employees to report concerns and ensure they have confidence that reports will be taken seriously.
- Provide confidential reporting channels, such as a whistleblowing process.
- Explain how concerns should be reported and who they should be reported to.
- Investigate reports promptly, fairly and consistently.
- Protect employees from retaliation when they raise concerns in good faith.
Monitor and review
Regular monitoring helps identify unusual activity before significant losses occur.
- Review financial reports for unusual transactions or unexpected trends.
- Investigate duplicate payments, repeated refunds or transactions just below approval limits.
- Carry out periodic audits and random checks on expenses, purchasing and payroll.
- Rotate responsibilities where possible and ensure employees take annual leave so others perform their duties.
Dealing with fraud in the workplace
Suspected fraud should always be investigated promptly, fairly and confidentially. Acting without sufficient evidence can expose organisations to legal risks, while delaying action may enable further losses.
1. Secure evidence
Preserve all relevant information before it can be altered or deleted.
- Retain invoices, receipts, purchase orders, bank records and financial reports.
- Preserve emails, instant messages and other electronic communications.
- Secure system access logs, audit trails and CCTV footage where available.
- Record who collected the evidence and when it was obtained.
2. Protect assets and systems
Take immediate steps to prevent further losses while the matter is investigated.
- Restrict access to financial systems or sensitive information where appropriate.
- Suspend payment approvals or purchasing authority if necessary.
- Secure company property, cash or stock that may be at risk.
- Monitor accounts and transactions for further suspicious activity.
3. Conduct a fair investigation
Follow the organisation’s investigation and disciplinary procedures.
- Appoint an appropriate person to lead the investigation.
- Gather facts from documents, systems and relevant witnesses.
- Maintain confidentiality and avoid making assumptions before the facts are established.
- Keep accurate records of decisions and evidence throughout the investigation.
4. Take appropriate action
Respond proportionately once the investigation has established the facts.
- Take disciplinary action where organisational policies have been breached.
- Recover financial losses where appropriate and legally possible.
- Report criminal offences to the police where necessary.
- Notify insurers, regulators or other authorities if reporting obligations apply.
5. Review lessons learned
Use the findings to reduce the likelihood of similar incidents occurring again.
- Identify how the fraud occurred and why existing controls failed.
- Strengthen procedures or introduce additional approval controls.
- Update fraud risk assessments and organisational policies.
- Share lessons learned and provide additional training where appropriate.
Fraud awareness training for your workplace
Our Fraud Awareness Training for Employees and Fraud Awareness Training for Managers provides participants with the knowledge to recognise the warning signs of employee fraud, understand why it occurs and know what to do if concerns arise.
Through engaging, real-life scenarios, learners explore common fraud risks, their responsibilities for preventing fraud and how to report concerns through the appropriate channels.
By strengthening awareness and encouraging a culture of integrity, accountability and speaking up, organisations create a workplace where dishonest behaviour is less likely to occur or go undetected.
Find out more about Fraud Awareness Training for Employees and Fraud Awareness Training for Managers on our website, or call our friendly team today on 0203 011 4242 / [email protected]
Tom Paxman
Managing Director (Digital)
