How to detect and investigate the early warning signs of employee fraud

The early warning signs of employee fraud usually appear in both behaviour and financial records. Behavioural clues include unexplained spending, financial pressure, reluctance to share responsibilities and unusually close supplier relationships. Financial clues include missing documents, duplicate payments, unexplained discrepancies and unexpected changes to bank details. The Association of Certified Fraud Examiners (ACFE) estimates that organisations lose around 5% of revenue to occupational fraud annually, while its 2026 study found a median detection time of 12 months. These are international benchmarks, not predictions for individual UK businesses. If concerns arise, preserve evidence, restrict unnecessary access and seek advice before taking action.

What are the signs of employee fraud?

The main indicators fall into two categories. Behavioural warning signs include apparent financial difficulties, resistance to taking leave or sharing duties, unusual defensiveness and close links with customers or suppliers. Financial indicators include missing invoices, altered supporting documents, payments close to approval limits, inconsistent reconciliations and unusual adjustments to payroll or supplier accounts. None establishes dishonesty without supporting evidence.

The ACFE’s 2026 Report to the Nations examined 2,402 investigated cases across 143 countries and territories. It found that 84% of identified perpetrators displayed at least one behavioural warning sign. Living beyond their means appeared in 39% of cases, financial difficulties in 29%, and unusually close vendor or customer relationships in 17%.

These figures describe investigated fraud cases worldwide, not the likelihood that an employee displaying a particular behaviour has committed fraud. Always assess transactions fairly and objectively.

Why smaller businesses are exposed

Smaller companies may rely heavily on trusted employees, sometimes giving one person responsibility for raising invoices, authorising payments and reconciling accounts. That arrangement can leave mistakes or deliberate manipulation undetected. The ACFE’s 2026 research found the highest median losses among the smallest organisations, with absent internal controls the leading reported weakness, contributing to approximately a third of cases.

A business can appear to be operating normally until a bank reconciliation, supplier complaint or cash shortage reveals a discrepancy. Regular independent review helps avoid that delay. Independent checks should continue even where staff have long service or close working relationships.

Early warning signs to watch for

One unusual entry may have an innocent explanation. Look for corroborating evidence, control weaknesses and consistent patterns before reaching conclusions.

Where detection really happens

In the 2026 ACFE study, 43% of fraud cases were initially detected through tips, more than half from employees. Internal audit identified 15% and management review 13%. An accessible, confidential reporting process, with protection against retaliation, can therefore be an important early-warning mechanism for businesses of any size.

Management review and proactive data monitoring were associated with lower median losses and faster detection, although these findings do not establish causation. For smaller firms, this may mean having someone independent review monthly management accounts and the key financial KPIs. Appropriate cloud accounting systems can also provide useful transaction histories and access logs when correctly configured. Restrict access to those who need it, and retain logs under an established document retention policy.

How to investigate suspected employee fraud

The first steps matter. A rushed accusation can compromise evidence, damage working relationships and expose the business to employment or data protection claims. Where evidence contains personal data, access and disclosure must also comply with data protection obligations. Document each decision carefully.

1. Keep information confidential. Share concerns only with those who genuinely need to investigate. Avoid making allegations before checking the facts.
2. Preserve evidence. Secure relevant bank records, invoices, messages, system logs and accounting exports without altering original files or metadata.
3. Protect systems proportionately. Review payment permissions and account access where necessary, using lawful measures that do not undermine the investigation.
4. Seek specialist advice. Consult your accountant and employment solicitor, particularly before interviewing staff, suspending anyone or accessing private communications.
5. Establish what happened. Trace questionable transactions, document the period and quantify any loss. A forensic accountant can help reconstruct evidence for possible proceedings.
6. Follow fair procedures. Investigate impartially, allow the employee to respond and comply with the Acas Code when disciplinary action is considered.
7. Consider reporting duties. Seek advice about notifying the police, regulators or insurers, including any relevant policy deadlines.

Suspension and the disciplinary process

Suspension should never be automatic or treated as a disciplinary penalty. Acas advises employers to consider alternatives, explain the reason and keep any suspension as brief as possible, normally with full contractual pay. Its guidance on the process for suspending someone also emphasises employee wellbeing and regular contact. If disciplinary action follows, provide a fair hearing, the applicable right to accompaniment and written records of decisions.

Reporting to the police

In England, Wales and Northern Ireland, suspected fraud can be reported through Report Fraud or by calling 0300 123 2040. The service replaced Action Fraud on 4 December 2025, with a wider launch in January 2026. In Scotland, report fraud to Police Scotland, normally on 101. Keep your reference number and notify insurers within applicable deadlines. For immediate danger or a crime in progress, contact emergency services.

Putting controls in place afterwards

No system eliminates dishonesty entirely, but consistent controls can reduce opportunities and expose suspicious activity sooner.

• Separate responsibility for creating, approving and paying supplier invoices.
• Require independent approval for payments above an agreed threshold.
• Verify supplier and employee bank-detail changes through trusted contacts.
• Rotate sensitive duties and ensure staff take appropriate annual leave.
• Reconcile bank, stock, payroll and customer balances regularly.
• Provide confidential, accessible channels for raising concerns.
• Train employees and managers to recognise financial irregularities. In the ACFE’s study, organisations training both groups reported median losses of $84,000, compared with $150,000 without either type of training, an association equivalent to 44% lower losses.

Strong controls can also reassure lenders, customers and other stakeholders. Where independent assurance is needed, an external audit may support financial reporting, although it cannot guarantee that fraud will be detected.

Cash pressure and fraud

Financial pressure can create incentives for misconduct, but difficulties at work or home do not establish fraudulent intent. Poor cash flow, late customer payments and demanding targets can also mask missing receipts. Our articles on late payments and SME cash flow and the 13 week cash flow forecast explain how to monitor pressure before problems escalate.

Payroll liabilities and tax payments deserve similar attention. Our guide to HMRC VAT and PAYE direct debits and cash flow discusses payment controls. If records suggest unpaid liabilities, review our advice on HMRC tax debt and obtain appropriate support promptly.

If the loss threatens the business

A substantial fraud loss can destabilise an otherwise viable company. Monitor the financial distress warning signs and seek advice where insolvency becomes likely. Directors must consider creditors’ interests when the relevant legal threshold is reached, as explained in director duties during insolvency.

Recovery accountants can help improve cash flow while the business assesses its options. Where appropriate, a company voluntary arrangement can allow a company to continue trading while repaying creditors under agreed terms. A licensed insolvency practitioner can assess viability and alternatives. Our article on company failures and personal insolvencies provides further context about financial pressures.

If you operate in both the UK and Ireland

Fraud in a cross-border group can be harder to detect when transactions appear in different currencies, systems and entities. Reconcile intercompany balances, clarify approval responsibilities and retain records for each business. Our guide to sterling and euro books covers practical accounting arrangements, while setting up a company in both the UK and Ireland explains structural considerations. For concerns spanning jurisdictions, specialist cross-border accounting and tax advice can help coordinate investigations and reporting requirements.

Frequently asked questions

What are the most common signs of employee fraud?

Potential indicators include financial difficulties, unusual supplier relationships, reluctance to share duties, missing documents and unexplained adjustments to payments. None proves fraud on its own.

Should I confront an employee I suspect?

Avoid premature accusations. Preserve relevant evidence, obtain advice and arrange a fair investigation. The employee should have an appropriate opportunity to respond to allegations.

Can I suspend an employee during an investigation?

Yes, if suspension is reasonable and alternatives are insufficient. It should be reviewed regularly, remain as brief as possible and normally continue on full pay.

How do I report employee fraud?

In England, Wales or Northern Ireland, contact Report Fraud online or on 0300 123 2040. In Scotland, contact Police Scotland. Notify relevant insurers promptly.

Talk to SCC about fraud concerns

If you suspect employee fraud or want to strengthen your financial controls, speak to our team confidentially. We can review transactions, help assess potential losses and advise when a formal investigation is appropriate. Contact your nearest office at SCC Chartered Accountants to discuss the available support.