Leslie Wilks, CPA, CFE
Prevention and deterrence are ideally the best ways for employers to combat fraud. However, the truth of the matter is if employees want to steal, they will find a way to do so. In effort to limit losses due to fraud , it is important that employers are aware of the various behavioral red flags that employees display when they are engaged in fraudulent activity.
Overwhelmingly, the most prevelent indicators are living beyond one’s means and financial difficulty. These two indicators seem to be present regardless of the perpetrator’s position or type of scheme. In many cases, the fraud is discovered when the employee is out of the office for an extended period of time, which supports the theory that required vacations can be an effective control to include in an entity’s anti-fraud policy. Typically, when employees are engaged in fraudulent activity, they will not want to take time off, or delegate their responsibilities for fear that their schemes may be detected. That is why it is important if an employer decides to require mandatory vacations that another employee steps in to perform those duties during their absence.
Sudden changes in behavior may also indicate that an employee may be involved in fraudulent activity. Additional behavioral red flags include:
- Employees who become anxious or irritated at reasonable questioning or provide answers that seem odd or make no sense
- Refusal or delay in providing financial records
- Refusal of a promotion for fear of detection
- Borrowing money from co-workers
- Excessive lifestyle changes, such as expensive purchases of cars, jewelry or homes and bragging about such purchases to coworkers. This type of change usually comes with an excuse of how the employee received a sudden large amount of money (inherentence, investments doing well, etc.)
- Lifestyle problems (addiction, debt, divorce, illness, spouse losing job)
There are many more behaviors that can be indicators of fraud and these behaviors vary by entity type and employee position. The few mentioned above seem to be quite prevelent and exist thoughout all industries and all positions. All too often I read articles about a large fraud scheme being exposed, and then see how many of these red flags were present. In almost every case one or more (usually more) of these behaviors have been displayed by the employees who were involved and more often than not, coworkers noticed and did not say anything. Although prevention and deterrence are both key elements in combating fraud, early detection can mean the difference between the loss of a few hundred or a few million dollars.
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