Behavioral Red Flags for Internal Fraud

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 65% 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 how an employee was acting.

Certain behaviors are characteristic of people who commit fraud. Some people exhibit more than one behavior. The behavioral red flags that may indicate a cause for concern include the following:

• Employees who always come in early and stay late. It’s easy to think this is a sign of diligence or ambition, but it may be that the person uses “alone time” to act criminally. The Association of Certified Fraud Examiners’ (ACFE) “2018 Report to the Nations” found that 55% of frauds involved fraudulent physical documents and 48% involved altered physical documents.
• Employees who never take vacation. The person may be afraid they’ll be discovered if someone else takes over his or her tasks. 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.
• 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 be using a vendor or contractor who is giving him or her a kickback.
• Employees living above their means. An employee who seems to be living above his or her means may need money to keep up with the bills. The ACFE reported that 41% of perpetrators were living beyond their means.
• Overly curious employees. Someone who is very curious about the company’s procedures, particularly around financial matters, may be looking for loopholes to exploit. Curiosity often is a good thing, but it may be a warning sign if the topic always centers on financial issues.
• 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. This potential for fraud is not the greatest concern. The ACFE’s report indicated it made up only 9% of fraudsters.

Fraud prevention is the best cure. Adjusting your hiring practices to include background checks may offer some protection against bad actors. Keep in mind that 85% of fraudsters in the ACFE study were never punished or terminated for fraud-related conduct before the crimes in the study.

Call us today if you need help uncovering potential fraudulent practices at your firm.

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