Every business is subject to the potential for fraud. Every business that does not believe that they can be the victim of fraud needs to assess their operations for red flags that could point to fraud. Fraudsters are very good at hiding their crimes. They are not going to advertise their crime, but many make the mistake of telling a friend or relative of their exploits. When this occurs it is time to hire a forensic accountant.
In other cases there are some telltale signs that fraud might be occurring. A red flag is a set of conditions that are extraordinary in nature or vary from the normal activity. It is an indicator that something is out of the ordinary and may need to be investigated further. Remember that red flags do not indicate guilt or innocence but merely provide possible warning signs of fraud.
Employee Red Flags
There are certain changes in employee behavior that could point to fraud being committed. The ACFE has identified the following changes:
• Employee lifestyle changes: expensive cars, jewelry, homes, clothes
• Significant personal debt and credit problems
• Behavioral changes: these may be an indication of drugs, alcohol, gambling, or just fear of losing the job
• High employee turnover, particularly in those areas which are more susceptible to fraud
• Refusal to take vacation or sick leave
• Lack of segregation of duties in the vulnerable area
The information provided here gives facts provided by the Association of Certified Fraud Examiners (ACFE) Report to the Nations (2016).
CFEs (Certified Fraud Examiners) estimate the average business realizes losses of 5% of annual revenues to fraud. The median loss from a single case of work-related fraud was $150,000. The study investigated more than 2,400 of these types of fraud cases and the result was that the crimes created a total loss of more than $6.3 billion. More than 23% of work-related fraud cases resulted in a loss of at least $1 million. The three major categories of occupational fraud are financial statement fraud and caused the greatest median loss per scheme:
• Asset misappropriation $125,000
• Corruption $200,000
• Financial Statement Fraud $925,000
When proprietors or executives committed fraud, the median damage was more than 10 times greater than when employees were the perpetrators.
• The average employee fraud was $65,000
• The average manager fraud was $175,000
• The average proprietor/executive fraud was $703,000
The more people involved in occupational fraud, the higher losses tend to be:
• One person $65,000
• Two people $150,000
• Three people $220,000
• Four people $294,000
• Five or more people $633,000
Victim businesses that failed to implement anti-fraud controls realized greater median losses-in fact twice as much. (The amounts below compare those with controls vs. those without controls.)
• Proactive Data Monitoring & Analysis $92,000 vs. $200,000
• Management Review $100,000 vs. $200,000
• Hotline $100,000 vs. $200,000
The most common methods used to detect fraud come from a variety of sources. According to the ACFE these methods are as follows based on the most common to the least common method:
• Internal audit
• Management review
• By accident
• Account reconciliations
• Document examination
• External audit
• Notified by law enforcement
• Surveillance monitoring
• IT Controls
If your business has not performed the ACFEs Fraud Prevention Checklist, then it should be done immediately. Preventing fraud is the best way to avoid fraud.