Types of Employee Frauds

• Embezzlement – This occurs when an employee misappropriates funds or property that has been entrusted to their care. It often involves falsifying records or creating fake transactions to cover up theft.

• Larceny – The outright theft of cash or assets not entrusted to an employee (e.g., stealing inventory).

• Defalcation – Another term for fraud, including embezzlement or larceny.

• Payroll Fraud – Employees manipulate payroll records to receive unauthorized payments, such as ghost employees or falsified overtime.

• Expense Reimbursement Fraud – Employees submit inflated or fake expense reports for personal gain.

• Check Tampering – Employees alter or forge checks to redirect company funds.

• Billing Schemes – Employees create fake vendor accounts and submit fraudulent invoices for payment.

• Inventory Theft – Employees steal physical inventory and sometimes alter records to hide discrepancies.

Examples and Real-World Cases

• Rita Crundwell Case – A former city comptroller who stole $53 million by creating false invoices and funneling taxpayer money into a private account​.

• Craig Haber (Grant Thornton Partner) – Stole $4 million by diverting client payments into a fraudulent account​.

• James Hammes Case – A Pepsi-Cola controller who embezzled $8.7 million and lived on the Appalachian Trail for years to evade capture​.

These fraud cases illustrate how trusted employees can exploit weaknesses in internal controls to commit fraud.

Red Flags and Warning Signs

Employee fraud is often associated with certain behavioral changes, such as:

• Unexplained wealth or lifestyle changes.

• Reluctance to take vacations (fear of being discovered).

• Unusual defensiveness when questioned about financial matters.

• Excessive control over financial records without oversight.

Conclusion

Employee fraud is a significant risk for organizations, and auditors must be vigilant in identifying red flags, assessing internal controls, and conducting fraud risk assessments. Auditors should focus on areas with a high risk of fraud, such as cash transactions, payroll, and vendor payments.