The Warning Signs of Occupational Fraud

The Warnings Signs of Occupational Fraud

By the time most executives recognize it, fraud has caused devastating financial loss, lowering of employee morale and damage to an organization’s reputation. What are the major warning signs you should look for?

There it is right in front of you and you didn’t see it. Why did you miss it? Any organization can become a victim of fraud. Averting fraud starts with an understanding that fraud will occur somewhere regardless of the safeguards in place. Throughout human history there have always been those who have deceived others with the intended result of financial or personal gain.

A key 2016 Association of Certified Fraud Examiners (ACFE) study estimates that the typical organization loses 5% of revenues a year due to occupational fraud, defined as the use of one’s occupation to commit fraud.1 The median fraud loss suffered by small organizations with fewer than 100 employees was the same as that suffered by the largest organizations with greater than 10,000 employees. Is your organization prepared to detect fraudulent activity?

What are the warning signs of fraud?

The ACFE study identifies 17 common behavioral red flags associated with occupational fraud and displayed by fraudsters before the fraud was detected. In 91% of cases studied, a behavioral red flag was displayed, and in 57% of cases, two or more red flags were displayed prior to detection of the fraud.

Red flags are a set of circumstances that vary from normal activity, may be unusual in nature, and may signal that something should be investigated further. Red flags do not indicate guilt or innocence but provide possible warning signs of fraud. Do not ignore a red flag, but realize sometimes an error is just an error and no fraud has occurred. Follow-up investigation of a red flag should be done by a competent and responsible person.

The top seven behavioral red flags identified by the ACFE study and the percent of cases in which it was displayed include:

1.       Living Beyond Means (46%)

2.       Financial Difficulties (30%)

3.       Unusually Close Association with Vendor/Customer (20%)

4.       Wheeler-Dealer Attitude (15%)

5.       Control Issues, Unwillingness to Share Duties (15%)

6.       Divorce/Family Problems (13%)

7.       Irritability, Suspiciousness, or Defensiveness (12%).

In 95% of cases in the ACFE study, the fraudster made some effort to conceal the fraud, most commonly by creating, altering, destroying/deleting physical or electronic documents or altered transactions in the accounting system. It isn’t uncommon for documents to go missing in the workplace; however, if this becomes a frequent occurrence, fraudulent acts could be the reason. Altered documents may be in the form of altered account reconciliations, journal entries, vendor invoices, and prepared schedules or reports.

If your organization would like professional assistance to mitigate risk and deter fraud contact Pro Back Office. Our risk mitigation experts are skilled in providing recommendations in establishing internal controls to reduce the chance of fraud in your organization.

1 Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse2016 Global Fraud Study. The report contains an analysis of 2,410 cases of occupational fraud that were investigated between January 2014 and October 2015. Of these cases 1,038 (49%) were in the U.S.A.