Far too often I hear employers say “not on my watch”, “it can’t happen here” or “we are like family” and far too often those same employers saw red flags or warning signs from employees and ignored them because of those misconceptions. The 2014 edition of the Association of Certified Fraud Examiners (ACFE) Report to the Nations on Occupational Fraud and Abuse (the Report) examined 1,483 cases of occupational fraud and the report provides useful information on red flags and warning signs fraudsters offer up while committing the fraud, how to prevent and detect fraud and how employers can reduce the risk of fraud being committed at their organization.
Behavioral red flags are indicators that employees provide that could identify some wrong doing. From the Report, 92% of the fraud cases had at least one red flag identified and, in 64% of the fraud cases, the fraudster exhibited two or more behavioral red flags. The top red flag was “living beyond means” and the second was “financial difficulties”. There are many more indicators but employers should be aware of what their employees are doing and how they are living outside the workplace. Keeping your eyes and ears open to some of the small talk in the office could help in understanding difficulties or issues employees are having and could assist you in determining if that could turn into fraud issue later on.
Other red flags relates to non-fraud related misconduct and human resources. Bullying or intimidation and excessive absenteeism are significant misconducts that could lead to fraud. Poor performance evaluations and fear of job loss due to downsizing/restructuring are significant human resource red flags. Your human resource department should understand these red flags and if they feel uneasy about something, especially with employees in departments where theft can occur, they should communicate those concerns to upper management.
There are three matters an employer must understand that contribute to fraud the most. The first and by percentage is more than twice the reason of the others is a lack of internal controls. The second is a lack of management review or oversight. The third is someone overriding internal controls that are already put in place. This tells us that upper level managers and supervisors are not putting enough emphasis on the policies and procedures that should be in place or are put in place but are overridden at times. Upper level officers and managers must be held accountable and the tone at the top must be one that encourages internal controls. Furthermore, managers must adhere to them at every level and at every instance.
The most cost effective way to limit fraud losses is to prevent fraud from occurring. You should ask yourself the following:
- Is anti-fraud training provided to all employees of the organization?
- Is an effective fraud reporting mechanism in place?
- Is the management climate/tone at the top one of honesty and integrity?
- Are specific anti-fraud controls (based on a risk assessment) in place and operating effectively?
- Should we use employee tip hotlines?
The last point “should we use employee tip hotlines” should be seriously considered in most organizations. The Report found that 42% of fraud cases are detected based on a tip and 49% of those tips come from employees. If you do not have a confidential fraud tip hotline currently you should consider it.
An organization and top level officers have a fiduciary duty to safeguard the organizations assets and try to prevent fraud from occurring where feasible. Implementing some of the techniques and understanding and addressing the red flags discussed here should be a priority of every organization.