Tackling the inside job threatening your bottom line: Risk mitigation and the role of fidelity insurance

Tackling the inside job threatening your bottom line: Risk mitigation and the role of fidelity insurance

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.

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. Some of the most prevalent types of employee fraud in South African businesses include:

1. Theft of cash or physical stock
Considering that many local businesses deal in physical inventory and operate in high-crime areas, opportunities to remove or misuse assets can be plentiful – 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.

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 is often motivated by performance-based incentives or attempts to conceal earlier fraudulent behaviour. 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 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, such as:

• 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.

Fidelity insurance: your financial safety net
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 appropriate cover in place. 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. 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.

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.