Spotting the red flags of fraud in your organisation

Technology has changed over the years enabling frauds to be committed much quicker, at a far greater distance from the victim and are often faceless, but all frauds still have the same core ingredients – a motivation, a rationale and, most importantly, an opportunity.  I’ll write more about these in further articles. But I wanted to kick off ‘International Fraud Awareness Week’ with the red flags of fraud – flags which are ignored at your peril !

I can’t think of a single company that I have dealt with over the last 20 years where a fraud came to light and the directors and senior management didn't kick themselves for not responding much sooner to what, with hindsight, were obvious red flags of a fraud taking place weeks, months or even years earlier.

So let's start with the most common red flag. Even serial fraudsters struggle not to flaunt some of their new found wealth from the frauds that they have committed. Although the opportunity for extravagant foreign holidays is restricted right now, fraudsters can still be upgrading their cars, moving to larger properties, sending the kids off to private school – all purchases that are difficult to explain in a world of salary freezes, furlough and cancelled bonuses.

Equally the behaviour of fraudsters will often change. Even with remote working, they will be the ones logged on early in the morning and still logged on late at night. Covering a fraud is hard work and they will need to put in the hours to keep it from being uncovered.  A lot of staff are reluctant to take holidays during a lockdown, but staff refusing to take even a couple of days could be a potential red flag. A recent fraud case in the north west of England  involved the fraudster working through her maternity leave as she “wanted to help her employer” and “not leave them in the lurch” ….I’m not sure that stealing thousands of pounds from them was seen by the directors as “helping” !

With many firms resizing their teams, managers are asking staff to take on additional responsibilities to cover redundant posts. Staff overly keen to take more than their fair share of additional tasks could well be trying to increase their opportunities to commit fraud and / or reduce the risk of a second set of eyes spotting their fraudulent activities. ‘Helpful Harry’ in the Finance department could actually be your company fraudster.

Internal audit and compliance teams are still having to do their work, even with the vast majority of companies working remotely. Obtaining the files that they need and gaining explanations can be tricky when we are all working from home. The auditee who is overly helpful to them, extracting the data on their behalf and “saving the auditors’ precious time” can seem like a hero, when in fact they are desperately trying to keep his or her audit colleagues at arms length from the fraudulent transactions.

A division doing particularly well, when the other divisions in your business are struggling in the current economic conditions, should raise some questions. Is this genuine good news ? A bit of cynicism never did any manager any harm. Equally divisions ending the year dead on budget. Is that really the case or have figures been inflated to ensure no scrutiny from head office ? An increase in sales in the last month, with the annual target suddenly finally achieved, never look that great in Q1 of the new year when they need to be written off as they turned out to be fraudulent.

As the year end approaches, are your stock write offs independently validated ? Equally are bad debt write offs being used to hide away funds stolen from elsewhere in the business ? A sudden flash flood or an IT glitch are convenient explanations for a peak in write-offs. Are you getting independent assurance that they are justified ?

And as for digital frauds, the red flags may be different but the old saying of “if it looks too good to be true, it probably is” still applies. A sudden peak in demand for a new online product could well be good news, but it could also be a fraudster making use of a gap in your ‘know your customer’ checks, a gap that was deliberately missed as your marketing team wanted to ease checks as they disrupt the customer online journey – shame they didn’t speak to your compliance and fraud prevention teams first !

Any sudden significant change in trends from online transactions needs to be immediately communicated, assessed and investigated further if required. Sudden peaks in sales are not so good if payments are never actually received. Alerts should go out to the right teams for any significant variation from the norm, good or bad.

And finally listen to your employees. High staff turnover in a team could well be an indication of staff uncomfortable with the unethical behaviour that they are seeing. Calls through to your whistleblowing hotline or to HR need to be looked at in terms of trends. Lots of small complaints or allegations could be the loose thread that needs to be pulled in order to unravel the full goings on.

In summary trust your instincts. If it smells bad, or looks bad, it probably is bad. 

I hope this short reminder helps you to maintain a healthy level of cynicism in the workplace.  Look out for my future articles on responding to fraud suspicions and also cost-effectively protecting your business from the risk of fraud. And don't forget to look at www.fraudweek.com for some great articles and further tips on fraud prevention from the Association of Certified Fraud Examiners.