Employee fraud isn’t something that business owners want to face head-on. You want to trust your employees, and why shouldn’t you? You hired them, you work alongside them. In many cases, you know them personally, perhaps you’ve spent time with their families, and vice versa.
But small businesses are also major targets of fraud. Yes, outside actors are often to blame, especially with the rise of AI deep fakes and hacking capabilities. However, forensic accountants know that if you’re ignoring three hard truths about your employees and their potential role in fraud, you’re making a huge mistake. We’ve seen it play out in devastating financial ways.
Accidental Employee Fraud
Well-meaning employees can inadvertently cause major small business breaches. If you’ve accidentally clicked on a bad link or been strung along on a scammer’s call yourself, you know all too well how easily it can happen. As the FTC points out, scammers pretend to be someone who is trusted (like you, the business owner). They create a sense of urgency, intimidation, and fear. How can you protect your business when your employees are being baited and tricked at every turn?
“Your best defense is an informed staff. Train employees not to send passwords or sensitive information by email, even if the email seems to come from a manager. Explain to your staff how scams happen and encourage them to talk with their coworkers if they suspect a scam,” the FTC recommends.
It comes down to the importance of teaching employees to verify who they are talking to, what they are seeing, and what they are being asked to do is legitimate. They need to be taught and empowered to question everything. The FTC offers guides and examples here, and the Texas Office of the Attorney General offers this tip sheet to help get you started.
Employee Fraud with Intent from the Beginning
Background checks are an immensely important part of the hiring process and can help prevent employee fraud to an extent. But it’s certainly not perfect, as our own federal government recently found out. In January 2026, a former U.S. Small Business Administration (SBA) and IRS employee was charged with a multi-year scheme to steal over $3.5 million from four separate COVID-19 emergency relief programs while employed in the two areas. It took the agencies working alongside the FBI, U.S. Treasury Inspector General for Tax Administration, and a county district attorney’s office to get to the bottom of the deceit.
The crime involved submitting fraudulent applications to obtain loans for businesses that were not operational. It mimics a more common small business fraud tactic of document and invoice fraud. We also brought you news of tech giant HP suffering from an employee fraud case in this genre in 2022. In the past, U.S. companies of all sizes have lost an average of $300,000 per business per year to invoice fraud. “Even more shocking is the fact that one in four (25%) finance professionals are unaware or unable to even estimate the cost of invoice fraud to their business,” a study from AP automation company Medius found.
The Association of Certified Fraud Examiners (ACFE) acknowledges that the wider issues of document fraud (including fraudulent pay stubs, bank statements, invoices, and tax records) are a growing concern—there was a 311% increase from 2024 to 2025—because advances in generative AI have made these documents virtually undetectable.
It’s likely the federal government and major high-tech companies have even more background checks in place than you do, so take these cases as cautionary tales. The ACFE also found that, among the perpetrators of employee fraud, 87% had never been charged or convicted of a crime before and 85% had never even been disciplined in any way or fired by a former employer.
Sometimes checks and balances to prevent overreaching (like limiting financial power for one person and regularly conducting internal audits) and to detect employee fraud as quickly as possible can help when other controls fail. One recent Austin-based studyfound that small business owners use multi-factor authentication (44%), along with transaction notifications (39%) and fraud alert services from credit bureaus (39%) to stay ahead of emerging threats.
Employee Fraud That Develops Over Time
Sometimes, as horror movie fans like to remind us, “the call is coming from inside the house.” That can be the toughest reality to face when it comes to employee fraud—and the hardest to detect. While your long-tenured employees may not be the most likely to commit fraud, the ACFE has found that the longer a fraudster has worked for an organization, the costlier their fraud. Level of authority matters, too. While most fraudsters are employees and managers, fraud perpetrated by owners and executives costs an average of $500,000 in median losses, 2-10x higher than in other cases.
Over time, trusted, long-term employees can begin to feel a sense of ownership that blurs ethical boundaries. Perhaps they believe they’re “borrowing” funds they intend to repay, deserve more compensation for their loyalty, or can cut corners the owner would never notice (and, therefore, can convince themselves it’s a victimless act).
Forensic accountants often find that this type of employee fraud, in particular, hides behind small, repeated transactions. Red flags include vendor payments directed to personal accounts, payroll manipulation, or falsified reimbursements that fly under normal review thresholds. Because the perpetrator knows the systems—and the people—so well, the fraud can continue undetected for years.
Again, checks and balances are essential for prevention (taking the temptation away) and detection. This can include bringing in an outside bookkeeper or payroll specialist and periodic internal audits. When something is still “off,” a forensic audit may be able to follow the breadcrumbs that other methods have missed.
Feel free to contact us with questions.
Shutterstock: January 27, 2026