Against the backdrop of increased financial pressures on individuals brought about by inflation and the rising cost of living, our fraud awareness team is seeing an increase in cases of insider fraud committed by employees within small businesses.  

And while there is an increase in all types of fraud against businesses, insider fraud can have particularly damaging consequences for a business and its employees because the threat comes from within the organisation.

John Allcock, fraud awareness specialist, says data gathered from customers is showing a definite upwards trend in the number of insider fraud cases since the beginning of the cost-of-living crisis.

“We’ve started to see a rise in insider fraud in the last six months,” he says. “We believe this increase could be connected to the cost-of-living crisis, where employees who are in financial difficulty may commit this type of crime.

“With so many households impacted by inflation and the rise in the cost of living, individuals may become more desperate, and can turn to crimes like fraud as a misguided solution.”

Typically, insider fraud involves diverting payments or creating false invoices against known suppliers. This enables the criminal to avoid many of the usual fraud-detection measures that might be in place. It can be committed by new employees, long-serving members of staff or even trusted family members, says John.

To commit insider fraud, an employee usually requires three elements, sometimes referred to as the ‘fraud triangle.’

        1. Pressure or motive

A person can be driven by financial difficulties, or an addiction to alcohol, drugs or gambling. They could also be trying to maintain an unrealistic living standard, or they may have become involved in organised crime.

        2. Rationale

Employees can convince themselves that the crime they’re committing is justified. For example, thinking they’ve been treated unfairly at work, aren’t paid enough, or that the company can afford to lose the money they are stealing.

        3. Opportunity

When an employee sees and takes the chance to commit fraud, the opportunity often occurs due to lack of internal controls or when access to financial systems is allowed when it isn’t needed. It can also be the result of an abuse of a position of authority.

“The key is to control the opportunity element,” says John. “If you take away the ability of employees to set up and authorise payments without any checks, you’ll have gone a long way towards reducing the risk.”

Ways to prevent insider fraud:

• Employ two or three-step authorisation for payments
• Screen employees before and after hiring them
• Set up regular internal audits, including fraud-risk assessments
• Check bank accounts, transactions and balances regularly
• Show staff that you have policies in place to prevent fraud

Another factor to consider is staff morale. If a workforce is unhappy, staff might be more inclined to engage in insider fraud. Situations like imminent layoffs, frozen salaries or changing working conditions can all mean a business is at higher risk.

As the cost-of-living crisis continues, and financial pressures on individuals increase, the number of fraud cases against organisations is likely to continue to rise. It might be a good time to put fraud prevention measures in place, and for your senior staff or internal audit team to review the fraud triangle within your business.

“The threat of insider fraud is growing and in periods of heightened volatility, it’s vital for internal audit teams to continually re-evaluate the fraud triangle to help anticipate threats to a business,” says John. “They need to be proactive in the fight.”