There are many signs of fraud occurring within companies or with individuals. What are some of the signs we may see that indicate fraud is occurring? During a fraud investigation I am looking for signs that things are wrong. What clues may exist that things are not as they seem? Are there deceptions or misdirections that seem unusual that an honest person wouldn’t engage in? Are things set up in a way such that the environment is ripe for fraud to occur?
Apparent Control Weaknesses
When readily apparent major deficiencies in a company’s control procedures are identified, they should be considered warning signs that fraud could be occurring. All companies have some things that are not as secure as they should be. However, when the controls over a company’s assets and data are severely deficient, that is cause for alarm.
Some of the most common characteristics that might be considered severe deficiencies include:Continue reading
A few of the videos I will post here are what I like to call “Accounting 101.” They have some basic accounting information for those who need a bit of a primer on how the accounting process works.
This video focuses on the parts of an income statement. I talk about the main sections of the income statement, also often referred to as the profit and loss statement (P&L). Things you’ll see on the P&L include cost of goods sold, gross profit, operating expenses, operating income ,non-operating income and expenses, and net income. At the end of the video you’ll see a sample income statement, so hit pause and go to full screen mode to get a good look at it.
Performing analytical review on the financial statements of a company is an important part in the fraud detection process. It can help detect manipulation of the numbers, as we are looking at account balances and their relationships to one another. How have account balances changed from period to period? How have the relationships between accounts changed from period to period?
Some of the things that may be evaluated include:
Current period figures versus prior period numbers
Financial statement line items compared to one another
Actual financial results compared to budgeted or projected figures prepared before that accounting period
Company data compared to operational facts
Company data compared to industry data
Numeric data compared to the notes to the financial statements
In later video posts, we’ll cover some of the common ratios that can be used to analyze the balance sheet and income statement to evaluate them for the potential that fraud may be occurring.
How do you begin searching for fraud in a company?
Sometimes I get called in when a company finds an employee stealing. They have found one instance of theft and they want to have the rest of the company looked at, but they don’t know where to begin. What should we look at? If a specific instance of fraud has been identified, that will dictate which financial statement accounts are examined by the fraud investigation team in detail.
But what if no conclusive evidence of fraud exists, and the investigator is instead looking for clues that might point to a fraud? The company has become suspicious, yet has little hard proof that anything unusual has occurred.
In that case, the investigator must dig through at-risk accounts and functions to look for suspicious activity. Analytical review of the financial statements will provide clues about the potential for fraud. (Come back tomorrow to see a video about this very thing!) Ratios may look unusual. Account balances may be out of line with recent history. Key documentation may be missing. These types of red flags will point the investigator toward areas that deserve additional investigation.Continue reading
There are a number of common signs that we may see when someone is engaged in financial fraud within a company. Tracy talks about the behavioral red flags for fraud in this video, which are also summarized below:
Employees may commit fraud against their employers by getting the employer to improperly disburse funds. One way this could happen is through an improper check or electronic disbursement. Another way is through a shell company scheme, whereby the employee sets up a fake vendor which issues invoices to the company for products or services that are not actually provided to the company.
These types of billing schemes could be detected with some of the following techniques:
Analyze disbursements, looking for many large round amounts, or amounts falling just below a threshold that requires additional approval for payment.
Look for unusually large expenses, unexplained variances in expenses between years, or expenses that exceed budgeted amounts. Billing schemes may inflate expenses enough to cause one or all of these comparisons to yield questionable results.
Examine the financial statements for variances in expenses that should track predictably with revenue. Cost of goods sold is a popular account in which to conceal theft via billing schemes because of the high level of activity in this account. If the account varies significantly from expected values when compared to revenue, however, this might indicate a billing scheme.
Cross-check addresses of employees and vendors, looking for exact matches or close matches.
Compare vendor addresses to mail drop address databases to check for businesses that may not have a legitimate location.
Cost-saving measures are always attractive to businesses. If a company with annual revenue of $10 million could eliminate a $500,000 expense, would management be interested? Internal fraud prevention could be the key to saving money in precisely this way.
Experts estimate that companies lose about 5% of their revenue each year to fraud committed by employees. Of course, this is just an estimate, as we have no idea how much fraud goes undetected. But assuming the experts are right, 5% could be substantial. Some companies have such thin profit margins that 5% could be their profit for an entire year. (And the 5% loss figure doesn’t even include all of the secondary costs that go along with internal frauds, such as personnel costs, investigative costs, and legal fees!)
The key to preventing internal fraud is proactive fraud prevention techniques. Fraud prevention is not about putting out fires as they spring up. True prevention is about fire-proofing a company to eliminate the risk of fire. So measures must be taken in advance to prevent problems down the road.Continue reading
Fire drill training in grade school always included the mantra, “Stop, drop and roll.” This was the prescribed course of action if a child was on fire. Professionals sometimes refer to tragedies in companies as fire drills. When a major internal theft occurs, it is akin to a fire, and needs to be met with swift action.
Where there is smoke, there might be fire. Numerous red flags can point to internal theft: missing or altered documentation, unexplained accounting entries, excessive customer complaints about account balances, and disregard for policies and procedures.
While one red flag alone does not necessarily mean a fraud has occurred, numerous questions increase the suspicion of internal fraud. It is important to quickly identify the red flags, determine who might be responsible, and take quick action to extinguish the problem.Continue reading
If a fraud is worth committing, it’s worth committing right. A little extra effort in the commission of a fraud can go a long way toward profiting from it as long as possible. Follow these recommended steps to increase your chances of successfully pulling off a fraud at work.
Don’t Act Suspicious
Don’t be a complainer. Don’t blatantly fight the rules. Appear to go along with policies and procedures, and don’t cause trouble for your co-workers or supervisors. You don’t want to appear to be disgruntled or seem like a problem employee. Those types of employees cause suspicion.
Do not discuss or display any dishonest behavior. Don’t talk about how you screwed your neighbor out of some money. Do not brag that you got one over on the auto repair shop. Don’t tell people that you filed a false insurance claim. Never daydream out loud about stealing money from someone. Dishonest behavior in your personal life can make managers suspicious about your propensity to commit fraud at work. You don’t want to give them any clues.
Never make your money problems public. Don’t say that you’re underpaid, or complain about your raise, or brag that you do much more work than you’re paid for. You don’t want to make it seem like you’re unhappy or might steal money to get back at a company that treats you unfairly.Continue reading
Internal fraud is a huge risk to companies. Experts estimate that on average it costs companies 3% to 5% of revenue each year. When profit margins are thin, internal fraud can literally put some companies out of business. Executives are prone to underestimating the amount of fraud that exists within their companies. They want to believe that their internal controls are better, their employees are more honest, and their ability to stop fraud is more effective than that of executives at other companies.
The truth is, they are often unaware of all the frauds committed within their company’s walls. Indeed, fraud is often hard to find and may be hidden among the seemingly more trustworthy employees, those who are necessary for keeping the business running. They are the ones putting companies at risk; they have access to assets and information and the opportunity to steal and cover up fraud.Continue reading