Businesses lose millions (if not billions) of dollars due to fraud. But how do so many cases of fraud go unnoticed until the damage is done? Often, it’s because businesses don’t recognize the red flags of fraud soon enough.
Working with many entrepreneurs and their companies for the past 25+ years, I have unfortunately have come across numerous instances of fraud in companies. The harsh reality I’ve discovered is that if an employee wants to commit fraud, they can do it. It’s just a matter of how easy you make it for them.
If you suspect there may be fraud in your company, start by confirming that your unit economics are in line with expectations. Download the free Know Your Economics guide to break down what’s going on in your business.
Red Flags of Employee Fraud
One of the most noticeable warning signs of fraud is employee behavior. Do they act controlling or feel the need to over-compensate their role? If your employee needs to have sole responsibility, or if he or she needs to have the final say in a decision, it’s probably a good idea to monitor that employee’s activity to determine the reason for their behavior.
Here are some other behavioral signs of fraud to look for:
Refusal to take mandatory vacation or sick leave
Coworkers and managers love an employee who never takes a vacation and works hard. Many of us wouldn’t question this behavior because it’s getting us faster results. Sometimes, what looks like hard work is actually an employee covering their tracks. Employees, particularly those working in a position where fraud is more likely, should be required to take time off. This not only short-circuits fraudulent activity, but it ensures that employees are cross-trained.
Employee lifestyle changes (new house, expensive jewelry, cars or home)
According to a 2014 Global Fraud Study, 43.8% of occupational fraudsters live beyond their means. Does your employee have a better house than you? What about his or her car? Here’s my general rule of thumb: if your employee has nicer belongings than you, that’s a red flag. It’s time to check your books.
One time, I recommended to one of my clients that she should outsource her payroll to an external payroll service. I usually recommend this because it’s easier and less-prone to fraud. Rather, my client declined this suggestion and claimed that she could do payroll better than a service.
This client always dressed nicely, to the T. She’d walk in with a kind of confidence and drove a nice car (nicer than her boss!). Everyone saw her as a nice person, because she offered to stay back and let the cashiers go home.
Seems like the perfect employee, right?
Actually, it turns out that she had been cashing checks to herself by voiding cash transactions and pocketing the cash. See what I mean? If your employee has nicer belongings than you, that’s a red flag. It’s time to check your books.
Significant personal debt and/or credit problems
Ideally, a company should perform background and credit checks before hiring. However, some companies just don’t want to go through the paperwork.
For example, one client I had never made copies of their original checks. When I did my audit, I found half a dozen missing checks. The controller had been running the checks for his own personal use.
One day, the controller went to lunch and never came back. After running a background check, we found out that he was convicted of embezzlement five years prior.
Borrowing money or requests for pay advances
In the same study, 33% of occupational fraudsters have financial struggles or difficulties. When a fraudulent employee steals or “borrows” money, oftentimes he or she will rationalize. “It’s okay, I’ll just pay them back later.”
For instance, let’s say someone is in charge of a company credit card and uses the company credit card on accident. When she gets to work the next day, it’s written off. No one questions the personal expense. So then a pattern begins – an accumulated rationalization that she will “pay it back later.”
Easily annoyed at reasonable questions
If an employee snaps because of an obvious or reasonable question, he or she is likely suffering from guilt or preventing the questioning from going further into detail. If this ever happens, keep asking questions. You’re bound to get the answer you’re looking for (even if you don’t like it).
There are many other signs or “red flags” that you should be aware of. However, controlling behavior doesn’t always reflect fraudulent employees. Basically, all you need to know is: be careful who you trust, be aware of your employees’ behaviors, and know your economics.
How to Prevent Fraud
Outsource your Payroll
Payroll processing is a hot area for fraud to occur. Because of this, I recommend payroll to outsourced companies because it’s easier to prevent fraud. Instead of keeping track of multiple employees’ checks, you only have to write one. The person writing the checks (you) is not the same person running the transaction.
Know your Economics
If you are regularly checking to see that your unit economics are in line with expectations, it’s more difficult for fraudulent activity to go unnoticed. Anomalies will come to light and be investigated and resolved sooner. Creating an environment where business performance is closely monitored discourages fraudsters much like an alarm system on your house discourages burglars. If you perform a consistent audit within your company, you’re less prone to fraudulent activity.
Perform Background and Credit Checks
Save yourself the heartache of dealing with fraud in your company and invest in a regular background check process. You never really “know” your new employees until you’ve worked with them for a couple of years, but at least you’ll have their “red flag” behavior in writing.
Conclusion
In conclusion, security is not only an issue externally. Here are a few key points to take with you: If your employee in a position of trust has a nicer car than you and nicer clothes, check your books. Stay aware of your employees’ behavior. Be prepared – do background and credit checks on your new hires. And finally, don’t wait until a crisis to know your economics. Want to create an environment that discourages fraud? Keep track of your company’s economics with our free guide and start taking a closer look at what’s going on in your business.
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