How to Detect Behavioral Red Flags of Fraud

According to the Association of Certified Fraud Examiners, the overwhelming majority of frauds against organizations are committed by insiders.Yet, it would be a mistake to assume that most employees who steal are experienced criminals.

In fact, many, if not most, employees who defraud their employers are fundamentally honest.They just get themselves into difficult predicaments or have personalities that are more prone to breaking the law if given the opportunity.

There are hundreds of kinds of personal problems and personality traits that can cause a normally honest employee to “cross the line.” While the existence of one or two or even just a few such indicators doesn’t necessarily mean that a person is stealing, understanding the common behavioral red flags of internal fraud can be extremely helpful in protecting the organization from a variety of frauds.

IN A JAM
Among the most common personal problems that can present red flags of fraud are substance abuse, gambling habits or other addictions.

Problem: In addition to the obvious expense of supporting a habit, an addiction often causes further financial setbacks through work absences and poor performance. When addiction-related financial strain grows too intense, theft from an employer is often close behind.

If warning signs such as erratic behavior, depression, aggressiveness or frequent “illness” are apparent, management should keep an eye on the employee’s work performance and personal conduct as well as any potential opportunities for him or her to steal.

Additional personal problems that can lead to fraud:

  • Criminal record. This factor can be tricky because statistics show that employees who have run afoul of the law earlier in life aren’t necessarily the most likely to commit fraud against your organization. However, it would be foolish to totally ignore the existence of a criminal past.
  • Chronic or costly legal problems. Recurring legal problems—particularly financially related issues such as repossessions, foreclosures, civil suits related to debts, etc.—create pressures that lead a desperate individual to commit fraud if presented with the opportunity.
  • Infidelity. A cheating husband who spends lavishly on dinners, gifts, travel and other luxuries with money that he doesn’t want his wife to miss needs to make up the shortfall somehow. On-the-job fraud can be one option.

Bottom line: A common cause for concern when assessing whether an employee has a “fraud-prone” personality is instability. Instability in family life…with employment…and with personal finances are all potential motivators for fraud.

WORK ATTITUDES
Using an employee’s on-the-job mindset to draw conclusions about the chances that he or she will commit fraud is a highly subjective exercise. However, there are specific characteristics that managers at defrauded companies have found in common among internal fraudsters.

Examples:

  • Weak code of ethics. If a person is willing to engage in dishonest behavior in other parts of his or her life, it often follows that the same inclination exists in the workplace. Especially worrisome: An employee’s boastfulness about the fruits of his or her dishonest conduct. Key: Pay close attention to workplace “buzz” and look for verbal clues that indicate the employee condones and/or participates—or might participate— in unethical behavior.
  • Propensity to work “outside” the system. This means not following the rules that everyone else abides by… not following established job procedures and workplace policies…and repeatedly trying to “beat the system.” Key: Be alert to employees with an attitude of “The rules don’t apply to me”…or who habitually try to find a way around the rules for personal gain.
  • Poor work performance. When coupled with rationalization or justification of substandard performance, this can be an indicator of disrespect for the organization which in turn can be a driver of internal fraud.
  • Excessive drive to achieve. Employees who desperately try to improve performance or meet certain targets may find it tough to resist the temptation to circumvent fraud controls. While goals and benchmarks are necessary in any workplace, an employee with a seemingly compulsive pursuit of achievement may be willing to “fudge” numbers or otherwise embellish performance in a way that violates corporate or legal rules. Caution: Even employees with consistently outstanding performance records can succumb to this syndrome to maintain the appearance of excellence.
  • Over-protectiveness of data and key documents. Dishonest employees are often reluctant to share information with co-workers or managers.To conceal their illegal activity,they may go to great lengths to ensure that sensitive documents are never out of their sight. They might be conspicuously reluctant to swap tasks with another employee—even temporarily.
  • Persistent demoralization. When you spot an employee who shows constant dissatisfaction with his or her status in the organization, job duties, coworkers or supervisors it’s time to keep a close eye on the person. Reason: Employees who feel unfairly treated or persecuted on the job can more easily justify stealing from the company. They may come to feel that the company, the department or the manager “deserves” to be a victim of fraud. Related indicator: An employee’s belief that it is okay to steal to settle a score or supplement a perceived pay imbalance.
  • Being the first one in or the last one out. An employee who looks for ways to be alone in the workplace could pose a problem. And of course there’s the widely recognized red flag that emerges when an employee never takes a vacation. Companies have uncovered many frauds when employees who, after going for long periods without a missed workday, suddenly had an unexpected illness or family-related absence and were unable to prevent incriminating evidence from being discovered. But what about the employee who does take vacations or medical leaves, but only after detailed planning and visible nervousness as the first day off approaches? Key: If such an employee is committing fraud,you can be sure that he or she won’t take the time off without making sure that no one—but no one— is permitted to do even the slightest part of his job during the absence.

JUDGMENT CALLS
While these and numerous other types of workplace behavior can be telltale signs of employee fraud, be careful not to jump the gun when you think you spot a red flag…or two. Remember that employees—both honest and dishonest—inevitably become familiar with key details of the company’s operations. Regardless of how effective the organization’s internal controls may be, it is impossible to completely “lock down” all operations against fraud.

The key to effective fraud prevention is knowing what to look for, never becoming complacent about monitoring for red flags and taking swift action when sufficient evidence does exist.

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