Let's separate out the two things here.
One is the deliberate insertion of errors. He should stop doing that. That's not cool. (I wouldn't label it as "fraud" though.) If the employer found out about that, they'd be well within their rights (legally, ethically, whatever) to fire him over that point alone. However, it doesn't sound like the intentional errors are any more than what would naturally occur if he hadn't automated the system, so the end result is unchanged, so while I won't give him a pass on it, I also can't demonize him for it.
The other is having built an automation tool without telling his employer, drastically reducing the amount of time it takes to do his work, and then not having other work to take on to fill his time.
To me, at the heart of it is whether he's being paid for his time, or if he's being paid to get a specific job done. It sounds like it's the latter (and I would say that's the case in any salaried position), so while the company might be annoyed/pissed that their estimate of the time needed was way off, that's really their problem, not the OP's.
We wouldn't be having the same discussion if he didn't automate, but just got more efficient at the job because he'd done it for a while. So say initially he had to work 40 hours a week to get it done, but after 6 months on the job he was able to drop that down to 35 hours a week due to familiarity with the work. Why is it ok to work 5 hours less but not 38 hours less, while still getting the same job done?
Fraud, though? No. The only way it would be actual fraud is if he were getting paid hourly, and he was marking up a time sheet with 40 hours when he really only works 1-2. But it doesn't sound like that's the case here.