The warning signs of employee fraud
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The warning signs of employee fraud

Mar 17, 2020 · 3 min read

No one wants to think that someone they have hired is dishonest. The unfortunate reality, however, is that employee fraud is far more common than most businesses realize.

This is particularly true for companies with fewer than 100 employees, which lose nearly twice as much per scheme to occupational fraud as larger corporations, for a median loss of $200,000 — a potentially devastating amount for a small business, according to the Association of Certified Fraud Examiners (ACFE). Therefore, it is crucial to be alert to fraudulent activity, and to catch it as early as possible.

Here are some of the top signs that management accountants should be looking out for which signal an employee or a colleague might be engaging in fraud:

Working long hours

An employee who comes in early, stays late, works on weekends, and does not take sick leave or annual paid time off may seem ideal. However, these are also all classic red flags for employee fraud.

“Fraudsters often avoid holidays because other people will start reviewing the work that they’ve done, and might detect the fraud,” said Will Davies, London-based partner and head of forensic investigation services at Grant Thornton. “So when you see someone who’s been at a company long term and hasn’t taken holiday in years, that might be a warning sign.”

Similarly, people who come in early and work late or on weekends may be taking advantage of hours in which they are less likely to get caught to commit and cover up fraudulent activity.

Living beyond their means

If someone on a modest salary suddenly starts driving to work in a new Porsche, sporting a Gucci handbag and a flashy watch, or buying expensive real estate, there may be cause for concern.

While such behavior may seem like the most obvious clue, it is one that companies often miss. It can be quite challenging for organizations to evaluate legitimate windfalls in an employee’s life, such as inheritances, versus fraudulently obtained funds.

Showing signs of stress on the job

There are a lot of reasons why people might be stressed at work. However, displaying anger or anxiety in response to routine questions that arise about an employee’s duties — especially when the questions come from an auditor — could be a warning sign for fraud.

“When someone in the finance department becomes irritable and aggressive, it may be a sign that the stress of committing fraud is getting to them,” Davies said. “By itself, it might not mean anything. But when taken in the larger context of other red flags, it’s an indicator.”

Working in a position to commit fraud

While it may seem counterintuitive, it is often the employees who have been working at a business the longest that are the most likely to commit fraud.

“Employees who have been with a company a long time tend to have more trust, know the company’s weaknesses, and have the ability to override what appear on paper to be adequate controls,” said Ben Johnson, head of forensic investigations and managing director in the global investigations and strategic intelligence team at the Berkeley Research Group in London. “They are also more likely to have access to multiple points of control.”

For example, in a well-controlled system, the tasks of creating an accounts profile for a new employee and approving payments should always be carried out by different people. Employees in a position to do both could be tempted to commit fraud.

Turning up suspicious or inconsistent transactions in accounts receivable

Unusual invoicing patterns, sudden increases in expenses, vague or unaccounted-for cash transactions, or activity in a previously inactive account should raise questions and warrant further investigation.

“If you have a sudden change in the performance of a business unit, or an unexpected change in the level of expenditure in certain areas, it could be a sign that someone is committing fraud,” said Johnson.

Receiving whistleblower tips

According to a 2018 report on occupational fraud and abuse by the ACFE, 40% of occupational fraud cases were initially detected via whistleblower tip. So it is worth following up on any internal tips you might get, even if they are anonymous.

“It’s really important to take all whistleblower tips seriously,” said Darren Matthews, executive managing director and head of Europe, the Middle East, and Africa at K2 Intelligence. “They might not have every detail, but the ones they do have are critical for an organization to absorb and investigate.”

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