Picture an accounting department employee who regularly works long hours and handles his responsibilities without a lot of oversight or assistance from others. At first glance, you might assume that employee has a strong work ethic and attention to detail. That may often be true, but behaviors like these can also be tell-tale warning signs that an employee in your accounting department is stealing from the company and committing fraud.
Corporate fraud costs organizations an average of 5 percent of revenue annually, according to the Association of Certified Fraud Examiners’ Report to the Nations on Occupational Fraud and Abuse 2016 Global Fraud Study.
Common types of fraud
Fraudulent acts like check tampering, skimming, payroll and cash larceny schemes are twice as common at smaller organizations, according to ACFE. It’s often more difficult for small companies with lean accounting departments to segregate duties. If the same person enters the invoice and cuts the check, that creates an opportunity to generate dummy invoices to a fake vendor or a real company the employee created to perpetuate the fraud.
Why do employees commit fraud?
There are some common factors that motivate individuals to commit fraud. These factors are known as the fraud triangle. In almost all cases of fraud, at least two of the three components are present:
- Opportunity– At some point the employee realizes he has the opportunity to commit fraud by forging checks, falsifying invoices, etc.
- Pressure – Medical bills or credit card debt are possible financial burdens that could lead an employee to start engaging in fraudulent activity.
- Rationalization– Many employees who steal from their employers successfully convince themselves what they’re doing is not wrong.
If an employee has the necessary opportunity, pressure and ability to rationalize his crimes, they may soon start exhibiting some of the following indications that they’re stealing from the company.
Warning Sign #1 – The employee works long hours with no vacations
Employees who consistently come in early and stay late may not simply be hard workers. They may be spending those extra hours creating fake invoices or altering QuickBooks records to cover their tracks. Once they’ve started the cycle of theft and cover-up, they aren’t able to take time off.
Warning Sign #2 – The employee refuses to give up control
If an employee can’t take a vacation, he certainly can’t let a co-worker take over some of his responsibilities, which will cut off his illegal source of income and increase the chances he’ll get caught.
Warning Sign #3 – The employee lives beyond his means
For an employee who’s regularly complaining about making ends meet, suddenly driving an expensive sports car or splurging on season tickets should raise suspicions.
Warning Sign #4 – The employee evades questions and makes excuses
The disconnect between an employee who wants to handle every aspect of the accounting process, yet can’t answer basic questions when asked directly, is a clear red flag.
Steps to Take Before and After You Suspect Something
There are several proactive steps organizations can take to prevent fraud from occurring in the first place. Accounting departments should have separate employees initiate, process and authorize transactions whenever possible.
Business owners should also have bank statements mailed to their personal residences. The owner should hand the opened envelope to the employee responsible for bookkeeping — a clear message the owner is paying attention.
If you suspect an employee of committing fraud, begin investigating before alerting or accusing the employee. Check financial records for suspicious activity, such as invoices for utility bills paid more than once a month or inconsistent charges for regularly occurring expenses. You may also want to consider bringing in an external forensic accountant unbeknownst to the fraudster to investigate the financial records.
You may need to utilize a forensic computer expert as well so that the original electronic records can be preserved for use in court at a later date. Once you’ve identified the fraudulent activity and your forensic accountant has gathered some hard evidence, contact local authorities before the employee has a chance to skip town.