Behavioural Red Flags & Internal control weakness that contributes to Fraud

Even in organizations with anti-fraud programs, fraud can and does happen. To better understand the factors that can lead to occupational fraud, ACFE conducted the survey to identify the primary internal control weakness that allowed the fraud case to occur. The most common factor underlying occupational fraud in our study was a lack of internal controls; 29% of victim organizations did not have adequate controls in place to prevent fraud from occurring. Another 20% of cases involved an override of existing internal controls, meaning the victim organization had implemented mechanisms to protect against fraud, but the perpetrator was able to circumvent those controls.

Individuals with different levels of authority within an organization tend to have different amounts of access and influence, which can affect how they are able to perpetrate fraud. We analyzed how the internal control weaknesses varied by the position of the perpetrator, as shown in Figure 30. Not surprisingly, a poor tone at the top was the most common factor underlying schemes perpetrated by owners and executives. The most common control weakness for staff-level employees and mid-level managers was a lack of internal controls (34% and 29%, respectively).

What are common Behavioural Red Flags?

When a person is engaged in occupational fraud, that person will often display certain behavioral traits that tend to be associated with fraudulent conduct. The median duration of fraud as per the ACFE study was 12 months, which means that for a full year before the typical fraud is detected, the perpetrator may be exhibiting warning signs that could help the victim organization discover the crime.

ACFE presented survey respondents with a list of 20 common behavioral red flags of fraud and asked which, if any, of these red flags were displayed by the perpetrator before the fraud was eventually detected. Figure 44 shows the results of this analysis. At least one red flag had been identified in 85% of the cases in our study, and multiple red flags were present in 51% of cases. The eight most common red flags were: (1) living beyond means; (2) financial difficulties; (3) unusually close association with a vendor or customer; (4) excessive control issues or unwillingness to share duties; (5) unusual irritability, suspiciousness, or defensiveness; (6) bullying or intimidation; (7) recent divorce or family problems; and (8) a general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior. At least one of these eight red flags was identified in 76% of all cases. Fraud Examiners must remain vigilant with these behavioral red flags while performing a fraud investigation.

Participants in the ACFE survey answered several questions about the fraud perpetrators’ job details, basic demographics, prior misconduct, and behavioral warning signs that might have indicated fraud. This information helps us identify common characteristics and behaviors of fraud perpetrators, which can be used by organizations to assess relative levels of risk among their own employees. Owner/executives only committed 23% of the frauds in our study, but the median loss in those cases (USD 337,000) was significantly larger than losses caused by managers. In turn, managers caused much larger losses than staff-level employees.

Frauds committed by higher-level perpetrators also typically take longer to detect. As shown in Figure 32, the median duration of a fraud committed by an owner/executive was 18 months, whereas fraud committed by staff-level employees had a median duration of only eight months. One of the challenges of dealing with fraud committed by high-level perpetrators is that these individuals often have the ability to evade or override controls that would otherwise detect fraud. Additionally, fraudsters in positions of authority might bully or intimidate employees below them, which can deter those employees from reporting or investigating suspected wrongdoing. Both of these factors might contribute to the longer duration of fraud committed by high-level employees.

Common Occupational Fraud Schemes in High-Risk Department

The eight departments shown in Figure 35 accounted for 76% of all occupational frauds in the ACFE study. In this chart, we have identified the frequency of various types of occupational fraud that occurred in each department. Boxes are shaded from light to dark, with darker boxes indicating higher-frequency schemes. This information can help organizations assess fraud risk and implement effective anti-fraud controls in these high-risk areas.

Detection is an essential step in fraud investigation because the speed with which fraud is detected—as well as the way it is detected—can substantially impact the magnitude of the fraud. It is also an important component of fraud prevention because fraud examiners can take steps to improve how they detect fraud within their organizations. As a result, this might increase the staff’s perception that fraud will be detected and possibly deter future misconduct.

Key Findings as per ACFE Survey on occupational fraud

Together, nearly half of the frauds could have been prevented with a stronger system of anti-fraud controls and the implementation of strong detective controls.

Learn more about the most common Anti-Fraud Controls at victim organizations in our previous article.