How to Spot a Possible Fraud?

Throughout the numerous fraud investigations been carried out, 15 common ‘red flags’ have been identified. Any one of these few common identified ‘red flags’ could indicate a possible fraud occurring within the organization. Being alert to red flags and responding appropriately can assist you to detect fraud earlier and, in some cases, prevent fraud from occurring altogether.

If one or two of these red flags alone are present, it may not necessarily mean that fraud is occurring; however, it would be prudent for the organization to investigate to understand the underlying details.

1. Employees not taking leaves - The accumulation of large amounts of annual leave coupled with a reluctance to take holidays or to delegate work when away. Similarly, an employee may refuse to take sick leave when they are really sick.

2. Unexplained changes in the lifestyle of employees - Individuals who appear to live beyond their means or have an unexplained lifestyle change. For example, an employee suddenly buys a new, expensive car or starts wearing expensive clothes and/or jewellery – when their income or personal situation doesn’t support this lifestyle change.

3. Significant observed changes in the attitude and behaviour of an employee - Individuals displaying a feeling of resentment towards their employer or having a perception of being owed something by their employer. For example, an employee suddenly becomes more animated and aggressive or alternatively becomes closed or even evasive when they had always been quite open.

4. An overly dominant management team - Managers with dominant personalities that people rarely question or are wary of questioning.

5. Working unnecessarily for long hours - Employees who routinely work excessive amounts of overtime, work over weekends or work early or stay late - for no apparent reason or business need, coupled with a reluctance to delegate work.

6. Unusually close relationship with vendors/suppliers - Employees who have unusually close personal relationships with vendors/suppliers. For example, an employee takes a holiday with a vendor/supplier.

7. Recurring transactions with a particular vendor/supplier for no apparent reason - A large number of transactions with a particular vendor/supplier – often when many are slightly below an employee’s authorization limit or when the vendor/supplier or goods/services supplied are not known to finance or senior staff.

8. Odd transaction patterns - Transaction patterns that are inconsistent with overall business and industry norms. For example, a payment to a supplier might be split into two smaller payments to avoid triggering the employee’s authorization limit.

9. Weak internal control environment - Management does not emphasize the importance of strong internal controls or does not take any corrective action when problems arise.

10. Unprofessional “manufactured/altered” manual invoices - Invoices that do not appear to be legitimate. Invoices that have been created for supposedly legitimate products or services that were never delivered or carried out, or legitimate invoices that have been altered to include false bank account details.

11. Finance Dept. having no or insufficient knowledge of vendors/suppliers - Payments made to suppliers, where the Finance Dept. or senior staff do not know of the vendor/supplier or do not know why the payments are being made.

12. Common contact details and bank account numbers - Two or more vendors/suppliers and/or employees that seemingly share contact details and/or bank account numbers.

13. Lack of supporting documentation - Lack of supporting documentation for payments, especially those incurred through corporate credit cards. This risk is magnified if there is no review or oversight of the expenditure.

14. Liberal accounting practices enacted by management that compromise internal controls - Internal controls such as separation of duties, delegation levels or review of expenditure are ignored or modified in practice.