Every business is subject to the potential for fraud. Any business that does not believe it may be a victim of fraud should review its operations for red flags that may indicate fraud. Scammers are very good at hiding their crimes. They won’t publicize their crime, but many make the mistake of telling a friend or family member of their exploits. When this occurs, it’s time to hire a forensic accountant.
In other cases, there are some telltale signs that fraud might be taking place. A red flag is a set of conditions that are extraordinary in nature or vary from 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 simply provide potential warning signs of fraud.
Employee Red Flags
There are certain changes in employee behavior that could indicate fraud is taking place. The ACFE has identified the following changes:
• Employee lifestyle changes: expensive cars, jewelry, houses, clothing
• Significant credit problems and personal debt
• Behavior changes: These may be an indication of drugs, alcohol, gambling, or simply fear of losing your job.
• High staff turnover, particularly in those areas that are more susceptible to fraud
• Refusal to take vacation or sick leave
• Lack of segregation of functions in the vulnerable area
The information provided here provides data provided by the Association of Certified Fraud Examiners (ACFE) Report to the Nations (2016).
CFE (Certified Fraud Examiners) estimates that the average business makes losses of 5% of annual income due to fraud. The median loss from a single work-related fraud case 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 top three categories of occupational fraud are financial statement fraud and caused the largest median loss per scheme:
• Misappropriation of assets $125,000
• Corruption $200,000
• Financial statement fraud $925,000
When owners or executives committed fraud, the average damage was more than 10 times greater than when the perpetrators were employees.
• Average employee fraud was $65,000
• Average manager fraud was $175,000
• Average owner/executive fraud was $703,000
The more people involved in employment fraud, the greater 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
Victimized companies that did not implement anti-fraud controls reported higher median losses, in fact twice as many. (The amounts below compare those with controls to those without controls.)
• Proactive data monitoring and analysis $92,000 vs. $200,000
• Management review $100,000 vs. $200,000
• Direct Line $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 method to the least common:
• Points
• Internal audit
• Management review
• Accidentally
• Account reconciliations
• Other
• Document review
• External audit
• Reported by the police
• Monitoring monitoring
• IT controls
• confession
If your company has not completed the ACFE Fraud Prevention Checklist, you should do so immediately. Preventing fraud is the best way to avoid fraud.
