How to spot possible fraud
Forensic Focus - May 2015
Throughout the numerous fraud investigations we have carried out, we have identified a list of common themes or ‘red flags’. Any one of these could set off alarm bells that a possible fraud is taking place. Being alert to red flags and responding appropriately can assist you to detect fraud earlier and in some cases prevent fraud occurring altogether.
It is important to emphasise this this list is not exhaustive, rather it represents many of the common red flags present in fraud cases that we have investigated. If 1 or 2 of these red flags alone are present, it may not necessarily mean that fraud is occurring, however it would be prudent for the organisation to look and make enquiries.
1. Unusually close relationship with suppliers
Employees who have unusually close personal relationships with suppliers. For example an employee takes a holiday with a supplier.
2. Recurring transactions with a particular supplier for no apparent reason
A large number of transactions with a particular supplier – often when many are slightly below an employee’s authorisation limit or when the supplier or goods/services supplied are not known to finance or senior staff.
3. Unprofessional “manufactured” manual invoices
Invoices that do not appear to have been generated through a computerised accounting system and/or the description of what is being invoiced for is ‘light’.
Our article Employee Fraud: False invoicing provides more information about how to spot an unprofessional invoice.
4. Insufficient knowledge of suppliers
Payments made to suppliers, where finance or senior staff do not know of the supplier or do not know why the payment is being made.
5. Common contact details and bank account numbers
Two or more suppliers and/or employees that seemingly share contact details and/or bank account numbers.
6. Lack of supporting documentation
Lack of supporting documentation for payments, especially those incurred through corporate credit cards. This risk is magnified if there is no review or oversight of the expenditure (e.g. if no one reviews the CEO’s credit card expenditure).
7. An overly dominant management team
Managers with dominant personalities that people rarely question or are wary of questioning.
8. Annual leave not taken
The accumulation of large amounts of annual leave coupled with reluctance to take holidays or to delegate work when away. Similarly an employee may refuse to take sick leave when they are really sick.
9. Working unnecessarily long hours
Employees who routinely work excessive amounts of overtime, work weekends or work early or stay late - for no apparent reason or business need. This could be coupled with a reluctance to delegate work.
10. Significant observed changes in the attitude and behaviour of an employee
An individual displays feelings of resentment towards their employer or has a perception of being owed something by their employer. For example an employee suddenly becomes more animated and aggressive or alternatively becomes closed or even evasive when they had always been quite open.
11. Employee lifestyle change
Individuals who appear to live beyond their means or have an unexplained lifestyle change. For example an employee suddenly buys a new, expensive car or starts wearing expensive clothes and/or jewellery – when their income or personal situation doesn’t support this lifestyle change.
12. Unavailability of original documentation
Payments to suppliers supported by photocopies instead of originals or not supported at all.
13. Odd transaction patterns
Transaction patterns that are inconsistent with overall business and industry norms. For example a payment to a supplier might be split into two smaller payments so as to avoid triggering the employee’s authorisation limit.
14. Weak internal control environment
Management does not emphasise the importance of strong internal controls or does not take any corrective action when problems arise.
15. Liberal accounting practices enacted by management that compromise internal controls
Controls such as separation of duties, delegation levels or review of expenditure are ignored or modified in practice.
Avoid becoming a victim
The best method for any organisation to protect themselves against a possible fraud is to ensure that they have adequate fraud prevention and detection methods in place.
Fraud prevention methods include:
- ensuring that adequate internal controls are implemented (such as separation of duties and appropriate delegation levels etc) and that these controls are adhered to
- Code of Conduct, ethics/values and Conflict of Interest policies are documented and are regularly communicated to all staff
- senior staff set a positive ‘tone from the top’
- pre-employment screening
- carrying out regular fraud risk assessments and following up on control improvements.
Having adequate prevention methods in place will make it harder for fraud to be committed. However, in the same way that you can only deter (and not completely stop) would-be burglars by having prevention mechanisms in place (such as an alarm system), a person intent on committing fraud may will still find a way in despite having adequate prevention methods in place. Therefore, it is also important that an organisation has implemented adequate fraud detection methods as well. Fraud detection methods could include:
- having a whistleblower hotline
- implementing a regular fraud detection data analytics programme
- providing regular fraud awareness training to employees.
Fraud detection is about making sure systems are good enough to not only identify problems but to act on them (and elevate them) appropriately. The 2014 Association of Certified Fraud Examiners Report to the Nations highlights that tips are still the most common fraud detection method, with over 40% of all cases being detected by a tip. And employees accounted for nearly half of all tips that led to the discovery of a fraud. This report also identified that organisations with whistleblower hotlines were much more likely to catch a fraud by a tip. So in regards to fraud detection, your own people are your greatest asset.