Red Flags of Occupational Fraud


When attempting to prevent corporate fraud, management must be aware of the warning signs and be willing to identify operational risk factors and implement effective solutions to the problems.

Operational red flags are among the most important red flags of fraud to be aware of. These are ways that the company’s operations may make it easier for someone to commit fraud and get away with it. Operational red flags of fraud can include some of the following:

  • Operating in “crisis mode” or “fire drill mode”: When companies don’t establish “normal” operations because there is always a crisis, it becomes next to impossible for employees to determine when something out of the ordinary is going on. A constant state of chaos means that it’s hard to pay attention to details, and things that might otherwise be considered unusual won’t be flagged.
  • No clear lines of authority: Employees must understand the pecking order within a company. If they do not, they will be unclear about who receives complaints, and they may be less likely to report suspicious behavior. Even in companies that utilize the “team” concept throughout, there is still a chain of authority that should be clear in case of trouble.

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Stopping Employees From Stealing


It might be hard to believe, but each and every day companies are losing money because they not only give employees opportunities to steal, they encourage it.

How? By not providing adequate oversight. A clerk, for example, sees that an error in an account wasn’t caught by anyone. A purchasing manager notices that no one is watching over his vendor relationships, and won’t know it if he establishes a fake account. Employees are not stupid. They know when they are being monitored and when their work is being checked. They know when they are working in an environment ripe for fraud.

But you have honest employees, you say? You’re probably right. If we thought job applicants were criminals, we wouldn’t hire them. But situations occur where the temptation to steal simply becomes too much. Imagine owing money to a hospital or having an expensive (and necessary) car repair that you can’t afford. What if your child needs clothing or food? There may come a day in your life when your morals are challenged because you have a financial need and an opportunity at the workplace that seems too good to pass up. Continue reading

Commit Fraud and Get Away With It


A little tongue-in-cheek take on committing fraud at work. No, I don’t really want you to commit fraud against your employer. I’m just trying to illustrate some of the red flags of fraud.

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

Top Ways to Detect Fraud in Companies


Tracy Coenen talks to a group of CPAs about the top ways fraud is detected within companies. The Association of Certified Fraud Examiners (ACFE) conducts a survey of its members every two years. It consistently finds that the most common way fraud is found within companies is through tips from employees, customers, and vendors.

Next, management review of financial statements and account balances and reconciliations is a very effective technique. The internal audit function can also be very effective at helping to uncover fraud at companies. Sadly, many internal frauds are also uncovered by accident.

Eliminating Opportunities For Fraud


Perpetrators of fraud have plenty of schemes to choose from when cooking up their crimes. The fraud schemes range from petty theft by lower-level employees, all the way up to management cooking up stellar financial statements to dupe investors and lenders.

Fraud prevention policies and procedures sometimes have a tendency to focus on the smaller thefts. While those types of defalcations occur most often, they are not the most expensive. The financial statement frauds are the most devastating monetarily, and therefore must be fought aggressively. Continue reading

4 Legal Elements of Fraud


Tracy talks about the definition of fraud, and the four legal elements that are generally required. Laws vary from state to state, so you can see some variation here, but this is the “textbook” definition. The elements of fraud include: intentional misrepresentation, knowledge of the falsehood, reliance on the fact, and damage as a result.

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Allowing Management to Override Internal Controls


It’s clear that there is a time and place for management to occasionally override a control. Everything in business is not routine, and there are times when special situations require special treatment. It would be silly to prohibit management from ever overriding the policies and procedures that are in place. There has to be guidance in place to direct employees when they may consider overriding controls.

However, it’s important to recognize that the override of controls should be the exception rather than the rule. Employees should be able to circumvent the system only on an infrequent basis, and these instances must be actively monitored to determine if the override process is being abused.

For example, there may be a policy specifying levels of approval before a payment can be issued. What if the person who normally approves the payment is on emergency sick leave and a payment needs to be made? There must be a process for getting an alternate employee to approve the payment. This transaction should then be flagged for later follow-up to determine that the payment was still proper. In this case, there is a need for overriding the normal control, but this is something that should happen infrequently.

Who’s Watching?
There is an obvious dilemma surrounding the problem of override of internal controls. Management must monitor the controls and look for overrides. When management themselves are the ones doing the overrides, who is watching them?

The responsibility usually falls on the owner of a company and the board of directors. The board of directors should be proactively involved in monitoring internal controls and acting when overrides are discovered.

How can the board do this when they’re not involved in the daily operations of a company? One of the most important steps is creating and maintaining a culture of integrity. This means that an ethical corporate culture is continuously supported and exhibited. When unethical behavior is discovered, it must be met with swift action.

Another effective step is creating a whistleblower program that works. Studies have shown that giving employees an anonymous way to report suspicions of fraud is an effective way to detect and prevent fraud. Employees must be educated on what types of things should be reported, including instances of management overriding stated policies and procedures.

In larger companies, internal auditors can often be in a position to see which policies and procedures are being followed, and which are being circumvented. It’s important for companies to allow the internal auditors enough access to give them the opportunity to evaluate compliance with internal controls. They could be one of the best watchdogs companies have.

Some companies severely reduce the access internal auditors have in a deliberate attempt to undermine their function and prevent them from seeing what is really going on. The board of directors should demand access for internal audit employees, and should ensure that internal auditors feel comfortable approaching the board directly with any concerns or problems.

Companies also may rely on their outside auditors and consultants to identify and report instances of overriding internal controls. This shouldn’t be a primary method of detecting override, however, because outside auditors and independent consultants often aren’t around enough to make it likely that they’ll see a lot of misbehavior.

Internal Controls Are Useless If Management Can Easily Override Them


Some companies think they are protected against employee fraud because they have strong internal controls. Often, that’s the case. Good controls mean the rules are followed and the money is properly accounted for.

Sometimes, however, good controls are meaningless. What about the controls over the controls? All the rules and designated procedures in the world are meaningless if management has the ability to override them at will. When these overrides go unchecked, the company is often no better off than if they didn’t have any controls in place.

Indeed, the risk that management will override controls established to prevent fraud and ensure accurate financial statements is great. It is a constant risk as executives are in a position to manipulate numbers and direct employees to aid the manipulation. They can easily fabricate transactions or modify numbers to craft the financial statements to report whatever their hearts desire. Continue reading

How Can a Company Recover From a Fraud Loss?


Fraud committed by employees can have devastating effects on a business. The company’s finances suffer, employee morale may drop, and the company’s reputation could be affected by negative publicity.

Following the investigation of an internal fraud, owners and managers of companies need to rethink how they do business. It is the perfect time to carefully analyze the operations and create procedures and an environment in which ethical behavior thrives.

A fraud by a trusted employee is often devastating to management, both financially and emotionally. A company can be thrust into turmoil because of a significant theft, and it’s important to approach the situation methodically in order to mend the damage and prevent future occurrences. The company can recover from an internal fraud by focusing on three key areas, in addition to completing a thorough investigation of the fraud. Continue reading

Expense Report Fraud


The dreaded expense reports. Employees hate preparing them. Companies hate reviewing them. They seem to be painful for everyone involved, yet companies can’t get away from them all together.

You’re asking yourself why this might be an important topic. Expense report losses are really a minor expense for most companies, aren’t they? Yes, they are.

However, the problem with them is what they stand for in other areas of the company.

Cheating on expense reports is one of the most common thefts perpetrated by employees. While the amounts lost to expense report abuse may be small, condoning this unethical behavior can lead to bigger problems.

The Schemes
Probably the most common way of cheating on expense reports is by claiming items for which an employee is not entitled to reimbursement. Companies typically specify certain items that are not reimbursable, so an employee who wants to be reimbursed may mischaracterize the item in order to avoid scrutiny.

Companies may also set limits on the dollar amount that will be reimbursed for some items. If an employee exceeds the allowable amount, sometimes she or he will split the item into two parts so that the smaller items fall under the predetermined threshold.

Another common way to cheat on expense reports is inflating a bona fide expense. This might include adding on tips that were never paid or expenses that were never really incurred. Some companies specify maximum meal reimbursements, and if a receipt is not required, employees may claim the maximum amount even if a meal did not cost that much. Continue reading