I’ve written quite a bit about fraud, here, and here, but one thing that should be pointed out, and something I have not written extensively about yet, is that often fraud can be detected if you know what look for in everyday observations. First, and something I have pointed out in a previous blog post, is that no business owner, manager, or even auditor should assume that any organization is impervious to fraud. Every single organization has a risk of fraud. Why is that? Because fraudsters are typically normal people who start feeling an external pressure for more money, and they have the opportunity in their position to exploit a system that allows them to commit fraud. This is also a great reason to submit all potential employees who handle money or accounting functions to a background check, and also a reason to pursue criminal charges against fraudsters you’ve caught, but that’s a topic for another time.
Many business owners or managers are unaware that there are a number of behaviors to look for to identify potential fraudsters, and as written in a previous blog post, professional skepticism and due process are important to note, just because you believe someone is committing fraud you should still take measures to objectively fact find before asserting guilt. What are some of the behaviors that could give away a potential fraudster?
First is the obvious, someone who is spending well beyond their means, does your contracts manager who makes $60k a year drive a brand new Porsche, and sports a steel and gold Rolex (per Rolex sales people are not permitted to call them two-tone, they are steel and gold, no kidding go to their website). This is an indication that something is not right, and if you conduct an investigation in the right manner this person will never know unless of course they are committing fraud and you can prove it. Another situation is that you notice your procurement manager, or a purchaser, continues to get new stuff delivered to the office, this happens often and it usually means that your employee is giving preferential treatment to one vendor in exchange for gifts, sometimes money – see number one. Does your accounting manager refused to take a vacation or allow someone else to perform a certain duty that is essential to the internal controls? This one is extremely often for embezzlers because if they take any time off and someone else has to cover their position they know with certainty they will be caught. Lastly, does one of your employees who handles money often have a personal issue such as a gambling or substance abuse problem, do they have a family member with an illness that requires a large amount of money to cover, or are the possibly going through a divorce that is really contentious about money?
All of the above are indicia of fraud that may suggest fraud exist in your organization. It is always important to note that indicia, preponderance, and overwhelming evidence that prove fraud are very different things. The worst thing you can do as a manager or owner is accuse an employee wrongly of fraud. Every suspicion of fraud should be treated with the most objective and professional mindset. Often this requires hiring an outside fraud examiner to conduct the investigation, someone who will act as an objective fact finder who is neutral and liable for falsely asserting fraud.
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