Employee Fraud And Over-Payments: Serious Problems You Need To Address

The Association of Certified Fraud Examiners estimates that 5% of all revenue is lost to occupational fraud – each and every year. Meanwhile, the body’s latest global report has shown the gruesome details of 2,400 cases of employee fraud it found out about that translated to a staggering $6.3bn worth of deceit, with an average cost to the firms involved of $150,000.

Fraud is endemic, it seems. The heart of the problem is this: paper is a fantastic medium for perpetrating a scam against a firm. It’s even better for doing so over a very long time period. Think about all the illegal activities happening over years and years at places like Enron , after all – and I’ve witnessed at least four cases of such scams, over my professional career.

A lot of this sort of long-term, chronic, fraud is carried out by established employees. Often, these individuals do so in mutually beneficial partnership with outsiders, even regular ostensibly-trustworthy suppliers or partners. Human nature is unchanging, no matter how advanced our technology may be, especially when a good colour photocopier can help you create a pretty convincing invoice in about 10 minutes.

Algorithmic checking of what’s coming in and what’s supposed to be going out

But, why did I say paper was a great medium for all this? The bottom line is this: a) it’s really easy to conceal items when they reside in metal filing cabinets and b) it’s also very easy to conceal any malpractice when it’s next to impossible to search for patterns, namely an audit trail of activity.

The fraudulent activity may not be immediately apparent of course, but technology intervention to remove the paper chase will help considerably. Here’s a real example: a client we were helping to digitise its finance processes stumbled on a pretty substantial bit of fraud when it was finally able to start matching delivery notes against physical goods coming in. (This was a building sector customer, which like it or not does seem to have been acquired a reputation for certain suspect practices over the years.) In the end, £100,000 worth of fraudulent activity came to light, after we scanned all the paperwork and it became clear that things had been claimed for that simply never showed up.

That’s only something it could do properly, and consistently, when systems were automated, becoming at a stroke the payment process became more visible and transparent both internally and externally. In that case, it was the disparity in the order numbering that gave the game away – something that would have been far harder to detect working off the paper chase alone.

The good news is that you can get to that magic three-way match between orders-payments-delivery, tying your core ERP into all of your invoicing processes. It’s finally possible, with a move to paperless – and you really need to have this in place in order to avoid 99% of the above.


It’s important to point out that while fraud can be deliberate and perverse, human error can also be a problem here. If you sit on your cash, which many CFOs and FDs do in straitened times, you will have a good float. But what happens if you sit on an invoice for so long that the supplier, in their genuine innocence, assumes you’ve lost or forgotten them, so they fire off another invoice – and you pay that and the original bill?

Sounds unlikely? Unfortunately, I’ve seen it hundreds of times – and it’s a glitch that can only stop when you put in a process that electronically matches your credits and debits. In fact, double invoicing is such a big issue for some big firms that they have in-house staff, sometimes two or even more FTEs, whose sole job is to examine the paper pile and check for duplicate invoices and manually match POs.

That’s a crazy approach in this day and age. Your staff can be a lot better deployed doing value-add activities, or you could lose the salary and NI overhead to your undoubted benefit too, of course. I class this as auto-fraud, fraud against yourself! And there’s no need for it, with the wide availability of enterprise-class Enterprise Content Management (ECM), from, of course, the members of thedmcollaborators and elsewere. In fact, I’d recommend moving to bigger orders with a smaller set of core suppliers, as that plus paperless invoicing is a real step to true business efficiency.

Take steps today to fix this

So let’s sum up. A first step to take is to refresh your data. Do you even have an up to date supplier list? Create one, and use IT to check your processes and flush out any rogue invoices or suspicious internal behaviours. Get more automated and digital to speed up your auditing procedures – and if you prefer to hold on to the cash, be realistic about what that can mean in terms of money being paid out twice for the same work, over and over again.

Howard Frear is Sales & Marketing Director at EASY, a post he’s held since 2001

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