The Cost of Fraud in HR and How to Stop It

Posted by Trakstar • April 20, 2023 (Last modified June 23, 2023) • 8 min read

As companies continue to invest in their HR departments, the threat of fraud remains a significant concern. With the rise of digital technology and increased access to sensitive information, HR fraud has become more prevalent. Business owners should be concerned about fraudsters, scammers, and data theft, mainly from the HR department, payroll department, and employee information systems.

The cost of such fraudulent activity can be astronomical for businesses and employees – big and small businesses alike.

In this blog post, we’ll explore the various forms of HR fraud that exist and provide some actionable steps you can take to help prevent it from happening within your organization. So buckle up and learn how to protect yourself from one of the most costly crimes in business today!

If you are searching for a talent management system that helps protect your employee data, schedule a demo of Trakstar today.

What is Fraud in HR?

Fraud in HR can take many forms, but it typically involves someone misrepresenting themselves to gain access to sensitive information or financial resources. For example, an employee might create a false identity to apply for a job, or an outside contractor might submit forged documents to bill the company for services they never provided.

No matter what form it takes, fraud is always costly for businesses and can jeopardize the safety and security of their employees. That’s why it’s so important to have strong anti-fraud measures in place, such as background checks and verification processes. By taking these precautions, you can help protect your business from the costly consequences.

Your HR professionals and anyone working with Human Resources data must be informed of all employee fraud trends, fraud prevention tactics, and best practices. Others should also know about potential fraud, including customer service, sales, marketing, and everyone at a management level. Workplace fraud can be challenging to spot, but when you have all your employees remaining vigilant and looking for signs of fraud, you’re more likely to spot it.

Identifying and Preventing Fraud in HR

This type of fraud can take many forms, from embezzlement and theft of company funds to bribery and kickbacks. Some of the most common types are payroll fraud, occupational food, workers’ compensation fraud, and unemployment claim fraud. It can also involve the misuse of company resources, such as using company computers for personal gain or taking advantage of company perks for personal gain. Whatever its form, HR fraud is a serious problem that can cost companies millions of dollars each year.

Steps to Preventing Fraud

There are several steps that companies can take:

First, they should develop clear policies and procedures regarding acceptable behavior and the consequences for violating those policies. Ensure that all of your employees are trained in these policies – ensure the equitable application of standards by including this training in your onboarding materials. Be sure to explain what disciplinary action could be if people violate your fraud policies.

Second, they should conduct regular background checks on all employees, contractors, and vendors with access to company resources. Business owners, Human Resources professionals, and even managers should do their due diligence before hiring someone, granting them access to things like payroll data or employee data. An investigation into your new hires takes little time, but it can save business owners a lot of headaches. Scammers are savvy, smart, and stop at nothing to get what they want.

Third, they should create a culture of transparency and accountability by encouraging employees to report suspected wrongdoing and establishing clear channels. At Trakstar, part of our SOC-2 Type 2 certification states that all our employees know how, when, where, and why they need to report potential scammers, data leaks, or anything that feels wrong. Think of your employees as your front line against fraudsters – they can be in many places you cannot be.

By taking these steps, companies can significantly reduce the risk of fraud in HR and protect their bottom line.

Signs of Fraud in the Workplace

Fraud in the workplace can take many forms, but some common signs may indicate that something is not quite right. Even if you aren’t sure, running an investigation might be a good idea if you think something’s going on – the risk is too significant to ignore. HR leaders should be one of the first places employees can go when they spot fraudulent activity, but they don’t have to be the only place.

Common Signs

If you or one of your employees notice any of the following signs, it’s important to take action to prevent further loss:

  1. Unexplained or unexpected changes in financial records or employee expense reports. Sometimes, employers will notice something over budget, which is a mistake. Sometimes, it’s theft.
  2. Employees receiving unusually high commissions or bonuses or other compensation that doesn’t seem to match their job description. Payroll fraud cases usually start this way.
  3. Sudden changes in vendor contracts or suppliers without a clear explanation. This may be something related to direct deposit, expense reports, a privacy statement, and more.
  4. Employees using company credit cards for personal expenses, or making personal purchases on behalf of the company without reimbursement. Often, they won’t make an expense report or they will misuse employee benefits to benefit themselves in fraudulent ways.
  5. Unusual activity in the payroll or accounting department, such as large wire transfers or checks being issued to fictitious vendors. This could be a mistake, or it could be fraudulent employee behavior.
  6. Employees refusing to take vacation days or using up all of their sick days within a short period of time (this may be a sign that they’re afraid of taking time off work because they don’t want anyone to discover what they’re doing). This can also be called a “ghost employee.”
  7. Changes in employee behavior, such as suddenly becoming very secretive or excessively generous with gifts and favors. This could be a sign they are leaving, or it could be occupational fraud.

How to Educate Employees on the Costs

Fraud in human resources is a serious and costly problem. According to the Society for Human Resource Management, fraud costs organizations an estimated $20 billion annually. It’s not enough to prevent payroll fraud. HR professionals have to make fraud prevention part of the ongoing education and training of all employees. It may even benefit to have a certified fraud examiner help build training materials. Record a webinar or a speech they give and work it into a lesson!

One of the best ways to prevent fraud is to educate employees on the cost and how it can impact the organization. Employees should be made aware of the types of fraud that can occur, such as payroll fraud, time clock tampering, and false expense reports. They should also be taught to spot signs and report suspicious behavior. Even if they are the ones who notice something that they shouldn’t be able to do, like access payroll records, for example, they should know it is safe to report without disciplinary action. However, make it clear that if they do access payroll records, and it is later found out, they may face the consequences.

Organizations can use a variety of methods to educate employees on the cost of fraud, such as training sessions, e-learning courses, or printed materials. It is important to make sure that employees understand the material and know how to apply it to their work. Regular reminders about preventing fraud can also help keep employees focused on this issue. Have them from HR managers or the leadership team so that people know to take things seriously.

Steps for Improving and Maintaining an Anti-Fraud Culture

  1. Define what an anti-fraud culture means to your organization and develop policies and procedures that reflect this definition.
  2. Communicate the importance of an anti-fraud culture to all employees and ensure that they understand their roles in creating and maintaining such a culture.
  3. Promote ethical values throughout the organization and provide employees with avenues to report suspected fraud without fear of reprisal.
  4. Conduct regular training on fraud awareness and prevention for all employees, with a focus on identifying red flags and reporting procedures.
  5. Implement systems and controls to detect and prevent fraud, such as background checks for new hires, regular auditing of expense reports, and review of vendor contracts.
  6. Encourage employees to speak up if they suspect something is amiss and create an environment where questions are welcome without fear of retribution.
  7. Stay up-to-date on trends in fraud schemes and share this information with employees so that they can be on the lookout for potential threats.
  8. Take prompt and decisive action, including thorough investigations, appropriate disciplinary measures, and recovery of stolen funds.

Ready For Better Talent Management?

The cost of fraud in HR departments can be devastating, and the effects are long-lasting. By implementing strict processes and procedures within your organization and staying vigilant for signs of fraudulent activity, you can help protect your business from becoming a victim of this costly crime.

If you’re interested in scheduling a demo of Trakstar, click here.

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