Many businesses believe fraud is something that happens elsewhere – until it strikes at the heart of their own operations. The financial and reputational fallout from internal dishonesty can be devastating, with South African organisations particularly vulnerable.
Source: Supplied. Ryno de Kock, head of Distribution at PSG Insure.
From payroll scams to procurement kickbacks, the hidden cost of employee fraud is more than lost revenue – it’s lost trust. Proactive risk management, supported by fidelity insurance, ensures businesses aren’t caught off guard by the price of complacency.
Designed to protect a business against financial losses incurred due to dishonest acts of employees, fidelity insurance covers everything from petty theft to full-blown corruption, within specific terms and conditions. According to Ryno de Kock, head of Distribution at PSG Insure, some of the most prevalent types of employee fraud in South African businesses include:
1. Theft of cash or physical stock. Considering many local businesses deal in physical inventory and operate in high-crime areas, the opportunity to remove or misuse assets can be frequent – especially in environments with limited inventory tracking or surveillance.
2. Payroll fraud.This includes creating fictitious employees (ghost workers), inflating hours worked, or continuing to pay a terminated employee. “It often occurs in businesses where payroll is controlled by a single individual or where HR and finance functions are not properly segregated,” says de Kock.
3. Procurement fraud. Employees may collude with vendors to inflate prices, approve duplicate invoices, or channel business to connected suppliers in exchange for kickbacks.
4. Falsification of financial records. This includes manipulating accounts to cover up losses, hide theft, or present a more favourable financial position. It’s often motivated by performance-based incentives or attempts to conceal earlier fraudulent behaviour. According to de Kock, “In businesses where the same staff handle both record-keeping and approvals, there's a higher risk of unchecked falsification.”
5. Expense claim abuse. Inflating, fabricating, or duplicating reimbursement claims for travel, entertainment, or supplies is often rationalised as minor, but de Kock says this type of fraud adds up quickly – particularly in organisations with minimal expense policy enforcement or manual processing systems.
Mitigating risks
While it’s impossible to eliminate risk entirely, there are practical steps that a business can take to minimise exposure to employee fraud:
- Implementing internal controls.
- Performing regular reconciliations and audits.
- Vetting new employees thoroughly.
- Monitoring transactional data for unusual patterns, such as frequent returns, duplicate payments, or repeated small losses.
- Creating an open culture that encourages employees to speak up when something looks suspicious – confidential whistle-blowing channels can be effective.
Your financial safety net
It is estimated that organisations lose around 5% of their revenue to employee fraud each year. Considering that South Africa consistently tops the list of sub-Saharan African countries in terms of its high incidence rate of organisational fraud, fidelity insurance should be a standard line of defence for every business.
Even with the best processes in place, no business is immune to internal risk. The amount of cover you will need depends on your risk profile and other key factors, such as your staffing levels, stock movement, and any potential incentives for internal fraud.
Understanding how to structure your insurance effectively is just as important as having the cover in place, De Kock stresses.
"An experienced adviser can help assess your exposure to internal fraud risks, determine appropriate cover levels, and ensure your business complies with any requirements to validate a future claim," he adds. "For example, fidelity policies often require proof that the fraudulent activity resulted in financial gain for the employee and occurred within a defined time period."
As de Kock concludes, “To ensure your business is protected from the inside out, speak to a PSG Insure adviser. They will also be able to guide you on complementary types of cover, such as cyber insurance or professional indemnity, which may overlap with internal fraud in more complex incidents.”
