Every business is subject to the potential for fraud. Any business that does not believe it may be a victim of fraud should evaluate 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 about their exploits. When this occurs, it’s time to hire a forensic accountant.
In other cases, there are some telltale signs that fraud could be occurring. 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
the flags do not indicate guilt or innocence, but simply provide possible 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:
• Changes in the lifestyle of employees: expensive cars, jewelry, houses, clothes
• Significant credit problems and personal debts
• 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 most 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 loses 5% of annual revenue 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 highest median loss per scheme:
• Misappropriation of assets $125,000
• Corruption $200,000
• Financial statement fraud $925,000
When fraud was committed by owners or executives, 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 the 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
Victim companies that did not implement anti-fraud controls had higher median losses, double in fact. (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
• Hotline $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 the following based on the most common method to the least common:
• Tips
• Internal audit
• Management review
• Accidentally
• Account reconciliations
• Other
• Document review
• External audit
• Notified by the police
• monitoring monitoring
• IT controls
• confession
If your business has not completed the ACFE Fraud Prevention Checklist, you should do so immediately. Preventing fraud is the best way to avoid fraud.
