Thomas Horne, BridgeTower Media Newswires
Every organization, large or small, is at risk of incurring losses due to fraud. Unfortunately, in most situations, the majority of the stolen funds have already been spent when the fraud is uncovered. As a result, many small organizations are not able to survive a fraud loss, especially if the fraud remains undetected for an extended period of time. The following are ten of the most common indications that a fraud may be taking place:
1. Too much authority held by one person.
One of the most common conditions that lead to fraud is excessive individual authority over the accounting process. Excessive control creates the opportunity to steal because checks and balances that deter or detect theft are nonexistent. This condition does not mean that fraud is occurring, but it does facilitate theft.
2. Overly territorial and never vacations.
Certain types of fraud require significant manipulation of accounting records, often resulting in the perpetrator’s trying to exert complete control over a specific process, sometimes even exceeding his or her normal duties. These schemes often unravel quickly when other people become involved and notice discrepancies. Consequently, the perpetrator may fiercely attempt to prevent involvement of others, even by forgoing vacations.
3. Home life issues.
Statistically, most fraud perpetrators have no prior criminal history or poor work history. The switch occurs when an external event creates high stress, and fraud becomes a possible means of mitigating that stress. External stress doesn’t always cause theft but is typically present when fraud occurs. Common examples include money troubles, addiction, extramarital affairs, custody disputes, health problems and so on. In fact, committing fraud often increases stress.
4. Behavioral changes.
Often a perpetrator will exhibit behavioral changes, reflecting either the presence of an external stress or the perpetrator’s effort to appear normal to avoid detection. For example, outgoing perpetrators may become withdrawn in an attempt to avoid scrutiny.
5. Flashy spending.
Perpetrators nearly always end up spending some stolen funds on themselves, such as on luxury cars, homes, expensive clothes, vacations, jewelry, etc. Sometimes the perpetrator has spent extravagantly before committing fraud to continue that lifestyle; in other cases the spending stems from perceived entitlement. When pressed about lifestyle affordability, the perpetrator will frequently use inheritances, gambling winnings and investment gains as excuses.
6. Bank statement doesn’t reconcile.
One common byproduct of fraud is that the bank statement and accounting records will show different cash balances. For example, if the perpetrator steals a $1,000 customer payment but records it as received, the bank statement cash balance will be $1,000 less than shown in the accounting records. This imbalance should be detected when the two balances are compared, unless the perpetrator takes additional steps to conceal the fraud, but this imbalance often goes unnoticed if there is ineffective oversight.
7. Improper accounting entries.
Continuing the example of the stolen customer payment, those added steps are usually altering records to hide the fraud. For example, this might include recording the customer payment as an expense rather than as the receipt of cash. This would not cause the cash balances to differ but is also an abnormal accounting entry. The presence of abnormal accounting entries is an indication of fraud, especially when made by someone without proper authorization to do so.
8. Expense reimbursement request is always late or incomplete.
Expense reimbursement fraud occurs when an employee asks the employer to reimburse an expense that is not a legitimate expense of the employer. Such schemes often involve late submission of expense reimbursement requests, creating a false time pressure for the reviewer to sign off without looking too closely at the reimbursements requested, which often have no corroborating evidence.
9. Missing checks or check gaps.
Certain check fraud schemes revolve around stolen checks, which are often stolen in groups rather than individually. Therefore, there may be a group of checks missing when checks are accounted for. Checks are also normally written sequentially. Therefore, one indication of fraud would be if a group of checks went missing, only to be presented to the bank months down the line, well after the checks numbering before and after have been negotiated.
10. Checks payable to cash or employee.
One common indication of fraud, especially in smaller organizations, is a check written to cash or non-payroll checks to an employee. Many small organizations fail to detect such transactions because too much authority is granted to one employee or the organization does not have the personnel to check the transactions properly. As a result, perpetrators often simply write a check to cash or in the perpetrator’s name, expecting that no one will look too closely.
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Thomas Horne is a senior litigation consultant in LaPorte CPAs & Business Advisors’ Litigation and Forensic Accounting Services Group. His experience includes providing forensic accounting services in cases involving fraud investigations, lost profits, lost wages, contract disputes, insurance engagements, accountant malpractice and divorce.
