Fraud Red Flags
Pay Attention to the Warning Signs
Occupational fraud generally involves the unauthorized use of physical and monetary company assets and include the misrepresentation of financial statements to make organizations appear more economically successful than reality. According to the ACFE’s 2024 Report to the Nations, organizations with less than 100 employees suffered larger median losses ($141,000) than those of larger companies of up to 9,999 employees.
Fraud can happen to any company, no matter the size, and it is important to recognize and monitor for the red flag indicators, or early warning signs, of fraud. Prevention of fraud through announced audits and publicized controls help a company keep honest employees honest.
Below are some, but not all, of the red flag indicators for which management and fraud audit teams should be alert.
1. Transaction Irregularities
Budget busting can be a warning sign of more serious problems, and about which executives should be asking questions.
Are there unusual cash transactions?
Does the vendor or payee name match the name in the accounting records?
Have there been identical payments to any vendors in the same date range?
Do the suppliers or vendors have unprofessional looking invoices?
Are the vendors known as questionable companies?
Anything too good to be true is often just that. Above the norm or unexpected sales or revenues could indicate accounting or fraud problems. If a business has more than one bank account, then cash movement between accounts could be happening without detection.
How to Prevent:
Conduct regular fraud audits of the accounts and teams.
2. Email Irregularities
If you receive an unusual or irregular email from an unknown entity, or even a known entity, it could be a phishing attempt to penetrate the company servers and the beginning of a scam to defraud the company. According to the According to the ACFE’s 2024 Report to the Nations, 53% of the cases had at least one pandemic-related factor contribute to the occurrence of the fraud.
How to Prevent:
Increase cybersecurity training for employees, specifically focusing on how to recognize phishing attempts and how to comply with the organization’s work-from-home cyber policies. Special attention should be paid to the structure of the sender’s email address for conformity to that company’s known or likely proper structure.
3. Employee Resistance to Control or Change
If employees voice resistance to new internal controls, it could be a sign of deception or a desire to hide their activity from disclosure. Normal resistance is to be expected to process changes, but attention should be paid to the parties involved.
How to Prevent:
Schedule individual meetings with any employee that has more than logical or irrational push back against new controls and address the issue from that vantage point.
4. Overly Close Relationships at Work
High-risk employees are those who have trusted roles in finance, purchasing, or whose responsibilities cross over departments. These employees, often viewed as the most valuable, have more opportunity to commit fraud. Very close relationships between employees in a particular group, or with one high-risk employee and a single unit, can be a red flag for fraud. Vendor fraud can occur between employees and vendors that overcharge the company, and the insider and vendor split the profits.
How to Prevent:
Monitor relations between employees. While friendship between employees is acceptable, sometimes reminders are necessary about the importance of being professional and treating everyone equally.
5. Travel Cost and Reimbursement Irregularities
The abuse of travel vouchers and expenses is simple and pervasive across all industries. A lack of oversight can permit employees to easily falsify their expense records. For example, an employee could easily add on several false company lunches each month to their vouchers or expense reports.
How to Prevent:
Ensure your organization has internal controls in place to monitor all expenses and verify they are legitimate.
6. Unusual Employee Work Requests
Sometimes an employee will need to work late, or they will need to change up their schedule to accommodate an unexpected life event. That need was prevalent throughout the pandemic and continues to this day. Unusual pattern should be noted and monitored, especially these behaviors:
An employee frequently asks to work extra hours.
An employee frequently asks to work outside of regular business hours.
An employee refuses to share certain tasks.
An employee will only work with a certain supplier.
How to Prevent:
Request for and review the employee justifications for the unusual work changes. If an employee wants to work late to finish a report, be sure that the report was actually finished. Similarly, security cameras could be used to ensure compliance with the request.
7. Expensive Employee Personal Purchases
Ensure that new and expensive employee purchases, such as homes or autos or holiday trips, align with their salary levels. There could be legitimate reasons for the new purchases, such as an inheritance or savings for special items. These events should be flags for caution to ensure that their salary can justify such purchases.
How to Prevent:
Assess and monitor for red flag indicators of fraud or other warning signs, such as the ones included above. If there are, this may be enough to dig deeper. The warning signs mean the company may need to conduct an audit or investigation to ensure the possible effects by the organization.