31. Fraud and Embezzlement - Protect Your Business
Signs of financial misconduct and how to prevent internal fraud.
Imagine this - A long-term, trusted employee—someone you never suspected—has been stealing from the company. It might have started small—a few unauthorised purchases, minor expense report exaggerations—but now, the numbers don’t add up, and you suspect fraud or embezzlement.
Financial misconduct can take many forms, including -
Embezzlement – An employee diverting company funds for personal use.
Payroll fraud – Falsifying work hours, ghost employees, or inflating salaries.
Expense fraud – Misusing company accounts or inflating business expenses.
Invoice fraud – Overbilling or creating fake vendors.
Fraud and embezzlement are devastating for SMEs, where financial resources are limited, and trust is crucial. If left unchecked, they can lead to -
Significant financial loss.
Legal and reputational damage.
Erosion of team trust and morale.
HR psychology tells us that fraud is rarely committed by “bad people”—often, employees justify it due to financial pressure, opportunity, or resentment toward leadership.
The challenge? How do you detect, prevent, and handle fraud without creating a culture of paranoia?
The Solution – A Three-Step Approach - Prevention, Detection, and Response
While no business is immune to fraud, a proactive approach can reduce risk, strengthen financial integrity, and ensure fair accountability.
1. Prevention – Creating a Culture of Accountability
Fraud thrives in environments where opportunities exist, oversight is weak, and accountability is low. Prevention starts with strong policies, clear checks and balances, and a culture of transparency.
A. Implement Strong Financial Controls
Segregate financial duties. Ensure that no single employee has end-to-end control over financial transactions.
Require dual approvals. All major financial transactions (e.g., payments, refunds) should require two levels of approval.
Regular audits and reconciliations. Conduct random and scheduled financial audits to spot discrepancies early.
B. Strengthen Policies & Awareness
Set clear fraud policies. Employees should know what constitutes fraud, the consequences, and reporting mechanisms.
Communicate zero tolerance. Make it clear that fraud, no matter how small, will be dealt with seriously.
Train employees on ethical financial practices. Ensure they understand expense policies, data security, and financial reporting rules.
C. Reduce Temptation Through Fair Treatment
HR research shows that employees are more likely to commit fraud if they feel undervalued or mistreated. To mitigate risk -
Ensure fair compensation and financial well-being programs. Employees under financial stress are more likely to justify misconduct.
Foster an ethical, open-door culture. Employees who feel respected are less likely to act dishonestly.
Encourage whistleblowing. Anonymous reporting systems empower employees to report suspicious behaviour safely.
HR psychology confirms that a positive work culture reduces fraud risk by increasing loyalty and ethical decision-making.
2. Detection – Identifying Warning Signs of Fraud or Embezzlement
Fraud often goes unnoticed until it has caused significant damage. Recognising early warning signs can help intervene before losses escalate.
A. Financial Red Flags
Unexplained financial discrepancies – Missing funds, unexpected losses, or vendor payments that don’t add up.
Altered financial records – Signs of tampering, missing invoices, or irregular bookkeeping.
Unusual vendor activity – Payments to unknown suppliers or invoices with vague descriptions.
B. Behavioural Red Flags
Reluctance to share financial information. Employees who avoid audits or resist oversight may be hiding something.
Living beyond their means. Sudden lavish spending or lifestyle changes without a visible salary increase.
Excessive control over financial processes. Employees who refuse to delegate financial tasks may be manipulating records.
C. Team Complaints or Rumours
HR research confirms that most fraud cases are uncovered due to tips from colleagues—if employees suspect misconduct, take it seriously.
Encourage anonymous reporting. Employees may fear retaliation, so a safe, confidential reporting channel is essential.
Monitor team morale. Fraud is often linked to dissatisfaction, disengagement, or internal conflict.
By combining financial oversight with behavioural awareness, SME leaders can spot fraud before it becomes catastrophic.
3. Response – Handling Fraud Professionally & Legally
If you suspect fraud or embezzlement, take swift but controlled action to protect your business while maintaining legal and ethical integrity.
A. Gather Concrete Evidence Before Accusations
Conduct an internal audit. Work with your accountant or a forensic auditor to confirm financial discrepancies.
Avoid public accusations. Accusing an employee without solid proof can lead to legal complications.
Document findings securely. If fraud is confirmed, maintain thorough records for potential legal action.
B. Address the Employee Professionally
If an investigation confirms misconduct -
Hold a private meeting with HR and legal counsel.
Present the evidence clearly and factually. Avoid emotional confrontations.
Allow the employee to respond. While fraud is serious, some cases may be misunderstandings or errors.
Determine appropriate consequences. These may include -
Immediate termination for serious fraud.
Legal action for financial recovery.
A structured repayment plan (if misconduct was minor and non-malicious).
C. Communicate With the Team (Without Spreading Fear)
Fraud can shake workplace trust. To preserve morale and business integrity -
Acknowledge the situation (without disclosing sensitive details).
Example - “We recently identified a financial discrepancy, and we are taking corrective actions to ensure transparency.”
Reinforce financial security measures. Explain how new controls will prevent future incidents.
Emphasise workplace ethics and accountability.
HR experts recommend communicating fraud cases carefully—employees should feel protected, not fearful.
Reflective Scenario – What Would You Do?
You suspect an employee has been inflating expense reports, and an audit reveals they have misused $10,000 of company funds. You don’t want to overreact or cause workplace panic, but you must take action.
Using the strategies above, you might -
Gather concrete evidence before making accusations.
Conduct a private meeting with HR and legal guidance.
Determine fair consequences (termination, repayment, legal action).
Communicate with the team transparently while reinforcing financial integrity.
By handling fraud professionally and ethically, you protect your business and maintain employee trust.
Golden Nugget - "Trust is built over years but can be lost in seconds—preventing and handling fraud correctly is key to long-term business success."
By implementing strong financial controls, staying vigilant for warning signs, and taking decisive but fair action, SME leaders can safeguard their business while maintaining an ethical, high-trust workplace.