Inside threat: dealing with employee fraud

This article was current at the time of publication.

Employee fraud is one of the most devastating breaches of trust practitioners can experience. In Australia, employers lost A$350 million in 102 cases of employee fraud during the past decade, according to research released by forensic accounting and corporate investigations firm Warfield & Associates.

In New Zealand, a 2022 survey commissioned by shows that 25 per cent of respondents have had employees steal from them.

Katherine Psomas, CPA Australia’s General Manager Professional Conduct, says reports of employee fraud have increased in recent times.

“We want our members to be aware that often it's the trusted employees who are doing this,” she says. “Unfortunately, some employees will take advantage of that trust.”

Common inside crimes

Dean Newlan FCPA, forensic accounting specialist and senior consultant at McGrathNicol, says, “In terms of workplace fraud in accounting practices, misdirection of the firm’s fees to an employee’s own bank account is the most likely risk. 

“An employee would bill a client for work done without recording time spent in the time recording system and raise an invoice in the firm’s invoice template directing the client to remit the fees to their own account.

“Accepting secret commissions for falsification of an audit or other engagement requiring independent opinion could also occur. A more common but lower impact scenario in professional services is charging personal expenses to a firm issued credit card.”

Psomas has seen an increase in public practice employees fraudulently changing statutory declarations. 

“For example, they might change the details on a client’s BAS [business activity statement] as well as change the bank account number where the refunds should be going,” she says. 

“So, instead of the refund coming back into either the business trust account or the client’s bank account, it’s going into the personal account of the employee.”

As fraud is often committed by trusted employees, Psomas says employers may be unaware that it’s occurring. 

“One recent incident occurred where fraud had been going on from 2021 until 2024, and it was the ATO [Australian Taxation Office] that highlighted something wasn’t right,” she says. 

“They rang the employer and said, ‘We have noticed that there are a lot of refunds coming through to different clients, but they’re all going to these four bank accounts. What’s going on here?’.” 

The amount of money stolen can vary, but Psomas has received reports of up to A$250,000. 

“In this case, there were 87 amended BAS statements and 12 clients who were affected,” she says. “Fraud of this nature can have a significant impact upon the reputation of the employer and their business and its ongoing viability. 

Are you insured against employee fraud?

Ruth Parker, managing principal at insurance broker Marsh and leader of its FINPRO Professions Practice Group, says that while employee fraud may be covered by professional indemnity (PI) insurance, there may be exclusions that apply, so it pays to read the policy thoroughly or to seek advice.

“You will need to review your policy carefully,” she says. “There can be extensions which cover employee dishonesty under a PI policy for claims which arise from the provision of professional services. 

“These extensions will not, however, provide cover to those who commit or condone fraudulent conduct. It is prudent for firms to consider taking out a separate crime policy for fraud exposures.”

Fraud risk factors

David Maritz, partner at MDD Forensic Accountants in Auckland, says employee fraud has the potential to thrive in accounting practices. 

“Where we see a lot of fraud being committed is where the checks and balances are circumvented out of convenience,” he says. 

“Too much trust has been placed on individual employees where there should, for example, be a dual-factor authentication process in place. Even where that exists, we sometimes find that in fact the employee is allowed to make transactions by using both codes simply because it is more convenient, or cost effective for the employer.”

Newlan points to the Fraud Triangle, developed by criminologist Donald R. Cressey in the 1950s, which highlights three conditions that typically must be present for employee fraud to occur: motivation, opportunity, and rationalisation, which involves the workplace thief justifying their conduct to themselves.

“In my career, in terms of workplace fraud, I’ve unfortunately come to the view every organisation needs to assume that any employee is capable of anything if the right mix of motivation, opportunity and rationalisation arises,” says Newlan.

“Someone might be honest in every aspect of their work and private life and, all of a sudden, something goes wrong financially in their personal situation. 

“They start looking around for how they can get themselves out of the hole, and the solution is sitting right in front of them in their workplace. They may say, ‘I'll just borrow this small amount and pay it back quickly’, but the law says this is actually theft, and the next thing you know, the snowball has rolled down the hill and they've stolen hundreds, thousands or, in many cases these days, even millions.”

Fraud reporting requirements

If you uncover fraud in your practice, Psomas says you are required to report it to CPA Australia. 

In Australia, if you uncover fraud in your practice, you are now required to report it to the Tax Practitioners Board within 30 days of when you first had reasonable grounds to believe it had occurred.

“You should also report it to the police, because it is criminal activity that has occurred in your practice,” says Psomas. “It may also affect your professional indemnity insurance if fraud has occurred, but you don’t report it.

“It’s important to put measures in place to reduce the risk of employee fraud,” adds Psomas.

“Your entire reputation as a business could be at stake, because if your clients feel that they can't have their affairs dealt with in a trustworthy manner, then what sort of business are you going to be left with?”

Combating fraud from the inside

Don’t assume that your employees would never commit fraud. Processes that can help minimise the risk include:

Background checks
When hiring new staff members, speak to their referees. There are also specialised businesses that can perform police checks and credit checks.

Documenting workplace procedures
Create a manual of workplace procedures and ensure every employee understands and has access to it. Include a statement about “zero tolerance” for any fraudulent behaviour.

Creating a code of conduct 
This code should also clarify what constitutes employee fraud, such as misuse of company credit cards.

Separating duties 
Ensure that an individual is not responsible for a complete transaction from start to finish. Where this is not practical for small businesses, ensure employees are supervised.

Implementing supervisory processes
This can include approvals, reviews, authorisations and occasional spot checks.

Disclaimer: This article should not be considered as legal, tax or financial advice and may not reflect the views and opinions of CPA Australia.  CPA Australia does not warrant or make representations as to the accuracy, completeness, suitability or fitness for purpose of this publication and disclaims all liability and responsibility for any acts or omissions made in reliance of this publication. Readers should seek their own professional advice that takes into account their own personal circumstances.