According to the 2014 Report to the Nations on Occupational Fraud and Abuse, completed by the Association of Certified Fraud Examiners, the typical organization loses 5 percent of revenues each year to fraud. This equates to an estimated annual loss due to fraud of almost $3.7 trillion. The median loss caused by fraud totaled $145,000 and approximately 22 percent of the cases in the study involved losses of at least $1 million. It is important to be able to recognize the indicators, or “red flags,” of occupational fraud and abuse, to be able to deter fraud, and to know when it is necessary to bring in an expert if fraud is suspected or discovered in your organization.
Fraud indicators or fraud “red flags” can be categorized into two categories: behavioral red flags and financial red flags. The behavioral red flags pertain to the fraudster who is perpetrating the fraud whereas the financial red flags pertain to the company’s financial data, records and business practices.
Some examples of behavioral traits that can often be indicators of fraud are as follows: living beyond their means; financial difficulties; divorce/family problems; control issues and unwillingness to share duties; addiction problems; complaints about inadequate pay; refusal to take vacations and personal leave; unusually close association with vendor/client; excessive pressure within the organization to perform well; past legal problems; and excessive pressure from family and peers to be successful. Most fraudsters exhibit one or more of the above mentioned behavioral indicators. Managers, auditors and other employees should be aware of these warning signs that could indicate that the potential for fraud is higher with those displaying these indicators.
Financial indicators of fraud often include the following: accounting anomalies; unusually rapid revenue and profit growth; internal control weaknesses; ethical weakness at the executive, owner and manager level; unusually high disparities with industry averages; unusual patterns in cash flow; complex organizational structure; intricate and complex financial transactions; and lack of board oversight of executives and top management.
Fraud occurs in many organizations and most fraud goes undetected. There are many various indicators, or “red flags,” of fraud that owners, managers, employees, auditors, vendors and customers can be aware of to assist in detecting fraud. The earlier fraud is detected, the lesser the loss will be, which can be critical to keeping the business operating. What is even more critical is having internal controls and other safeguards in place to deter fraud as best as possible. If fraud is detected, it is important to bring in a forensic expert as soon as possible to ensure that the scope is accurately defined, that all necessary documents are requested, that all deadlines are met, and that the forensic investigation will be completed as accurately and thoroughly as possible.
Significant contributions were made to this article by Jenna Adle CPA, CFE, MSF. I95
Weyrich, Cronin & Sorra