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Red flags of employee fraud

Certain behaviors are displayed by fraudsters. While these don’t prove fraud is happening, they are red flags that warrant a closer look. ACFE says that in 85 percent of cases, fraud perpetrators displayed at least one of these; in half of cases, they exhibited multiple red flags:

• Living beyond their means
• Financial difficulties
• Unusually close association with a customer or vendor
• Control issues: unwilling to share duties or files
• Divorce or family problems
• “Wheeler-dealer” attitude
• Irritability, suspiciousness or defensiveness
• Complains about inadequate pay
• Instability in life circumstances
• Excessive pressure from within the organization

 

Why fraud is worse in smaller companies

Small businesses lose almost twice as much per scheme to occupational fraud. Why? Smaller companies typically don’t have adequate anti-fraud controls in place, leaving them more vulnerable. The median loss for a company with fewer than 100 employees is $200,000; for a company with more than 100 employees, the median loss is $104,000.

In a company with less than 100 employees, 29 percent of the time the fraud is perpetrated by an owner or company executive; another 29 percent of the time, wrong-doing is detected by a tip. In companies with more than 100 employees, 16 percent of fraud cases involve an owner or executive, while 44 percent of them are detected by a tip.

Related: Should you have an employee mobile phone policy?

 

Best practices to prevent employee fraud

Follow these steps to lessen your vulnerability to fraud:

• Establish and communicate a code of ethics that applies equally to management and employees.
• Identify areas that are vulnerable to fraud. What measures can you take to shore them up?
• Evaluate your internal controls: how effective are they? What else should you consider?
• Know your employees. Observing and listening to employees can help you identify potential risks. An employee who’s feeling underappreciated may retaliate by theft or fraud. Look for negative attitudes.
• When hiring a new worker, conduct a background check, run a credit report and do a social media audit (what’s their online reputation? Have they ranted against former employers?)
• Train employees and managers on basic ways to prevent employee fraud.
• Implement a fraud hotline, because most cases are detected by a tip. Having an anonymous reporting system is vital for faster reporting.
• Keep communication front and center, increasing the perception that you’re on the lookout for fraudulent behaviors, along with the consequences of fraud (termination and prosecution). Show that you’re always watching.
• Implement internal controls. If one person mans the cash register, have a different employee tally receipts and prepare the bank deposit; a third person takes the deposit to the bank. Add documentation steps so that management can more easily view daily receipts and deposits.
• Monitor vacation balances and take a closer look at one who refuses to take time off.

Related: How to minimize employer risk for drugs in the workplace

 

Additional anti-fraud controls you should consider

You may wish to take additional steps to prevent employee fraud. If so, here are a few to think about:

• Job rotation and mandatory vacation
• Surprise audits
• Independent audit committee
• External audits of financial statements
• External audit of internal controls over financial reporting
• Management certification of financial statements
• Rewards for whistleblowers

ACFE’s Fraud Awareness website includes shareable fraud videos, infographics, guides, webinars, courses and more to help business owners become more aware of how they can prevent employee fraud. View these resources here.

Additional resources:

How Companies of All Sizes Can Prevent Fraud
Six Strategies for Fraud Prevention in Your Business