Fraud can be uncovered in many different ways: a tip, management review, internal or external audit, document examination, account reconciliation, or even by accident. In 53 percent of cases, however, someone at the company has noticed something amiss and alerted the company. That means there were clues along the way.
It’s easy to miss these clues—or fail to recognize them for what they are—because it’s hard to believe that someone you trust is engaged in a criminal activity. It’s much easier to identify these clues when you consider your employee's behavior.
Certain behaviors are characteristic of people who commit fraud. Some people exhibit more than one behavior. Here are some behavioral red flags that may indicate a cause for concern:
- Employees living above their means. An employee who seems to be living above his or her means may need extra money to keep up with the bills. Employers should be aware of any unusual changes in the lifestyles of their employees. The Association of Certified Fraud Examiners (ACFE) reported that 41 percent of the fraud cases studied in the 2018 Report to the Nations involved perpetrators who were living beyond their means.
- Employees with financial difficulties. An employee who is going through a difficult time financially may feel pressure to commit fraud in order to make ends meet. They may internally rationalize the act of fraud because of a necessary medical procedure or other unforeseen financial emergency. The ACFE reported that 29 percent of fraud cases involved employees struggling with financial difficulties.
- Unusually close association with a vendor or customer. When an employee has an unusually close relationship with a vendor or customer, this may allow the opportunity for the employee to commit contract fraud, create fictitious orders, or receive kickbacks from the other party. Twenty percent of the fraud cases studied in 2018 involved this scenario.
- Employees who resist sharing control. Employees who won't share control over a financial function or a client relationship may be hiding a fraud. The person may refuse to teach another employee in the company how to perform their functions in case of an emergency or may refuse to take a vacation for fear of their fraud being uncovered while they are away. For example, is the amount in the tip jar at a restaurant consistently higher when a particular manager is not working? Do the copays at a doctor's office go down when the office manager is away? You may not make a connection if the person is out for a day or two, but the discrepancy may become obvious if the amounts change again when the person is back on the job.
- Divorce or family problems. An employee going through a difficult personal struggle may feel external pressure to commit fraud. In the ACFE's 2018 Report to the Nations, 14 percent of fraud cases studied involved perpetrators who were experiencing divorce or other family difficulties.
"Wheeler-dealer" attitude. It is important to observe how managers and employees interact with co-workers in the office. An attitude that relays egotism may be an indicator of someone who may commit fraud. The type of attitude that says "I'm better than you" should be a red flag that this person may think they deserve more than what the company is giving them.
- Disgruntled employees. Employees who think they aren't being paid what they deserve may be looking to make up the difference. Disgruntled employees can be a problem on many levels, but potential for fraud is not the greatest concern; the ACFE's report indicated they made up only 9 percent of fraudsters.
Fraud prevention is the best cure. Implementing internal controls that limit the opportunity to commit fraud and adjusting your hiring practices to include background checks may offer some protection against bad actors. Keep in mind that 85 percent of fraudsters in the ACFE study had never been punished or terminated for fraud-related conduct before committing the crimes in the study.
Call us if you need help uncovering potential fraudulent practices at your firm.
About this Author
A specialist in auditing and full disclosure financial reporting, Phil leads R&A’s assurance department and has extensive experience in resolving technical issues, communicating internal control and operational improvements, and implementing financial reporting and disclosure requirements. Additionally, Phil is a certified fraud examiner with experience in fraud risk assessments, fraud investigations, and litigation support. His industry experience includes investment companies, broker/dealers, real estate, construction, employee benefit plans, government contracting, and not-for-profit entities.