It is common for people committing workplace fraud to display certain behavioral traits. Recognizing these behavior clues, or red flags, can help organizations improve their chances of identifying fraud and minimizing losses.
In the Association of Certified Public Accountants (ACFE) 2020 Global Study on Occupational Fraud and Abuse, it was reported that 85% of people committing fraud display at least one behavioral red flag. This percentage stresses the need for raised awareness around behavioral red flags. The seven most reported behavioral red flags are illustrated below.
These red flags can present themselves in one’s personal lives, job performance, or both. The #1 red flag by a large margin for at least the last 10 years, is “living beyond their means”. This is often associated with houses, cars, and vacations, that would not be realistically obtained given the salary or title of the employee. In addition to these red flags, fraudsters tend to also have poor job reviews, issues with workplace bullying or intimidation, excessive absenteeism/tardiness or fear that job loss is imminent.
Behavioral red flags are inherently subjective and, as such, they cannot be used to imply or conclude that fraud is occurring. Financial analysis, transaction level testing and interviews are a necessary part of investigating suspicions of fraud in the workplace. By considering both quantitative and qualitative factors, you can help your organization evaluate the efficiency and effectiveness of key internal controls and conduct a thorough internal investigation into fraud concerns, if warranted.
Headlines are full of examples of how organizations seemingly failed to associate behavioral red flags to workplace fraud. Here are just a few examples from the Department of Justice website:
Judge sentences rental car company manager for scheming to defraud his employer.
- Position: Manager
- Amount Stolen: $1.45 million
- Scheme: Check requests for fictitious and fraudulent expenses, money deposited in personal bank account
- Red Flags: Luxury vacations, expensive watches and jewelry and designer clothing
Judge sentences St. Louis man for wire fraud.
- Position: Director of Finance
- Amount Stolen: $1.007 million
- Scheme: Opened bank account in company name and made unauthorized transfers of funds to the account
- Red Flags: Lakefront property, purchased new car, boat and trailer
Ex-Accounting Manager Sentenced to 10 ½ Years in Prison for Embezzling More Than $36 Million from Internet Company.
- Position: Accounting Manager for professional services firm
- Amount Stolen: $36 Million
- Scheme: Formed a corporation and opened a bank account with a name similar to a vendor. Created fictitious invoices, approved and directed payments to the account he created.
- Red Flags: Paid off $23 million in credit card debt and transferred $8 million to a personal bank account
There are many other examples across a wide array of industries – no industry or business segment can be protected without taking precautions. We can help you and your organization proactively prepare against fraud. Contact us for a one-on-one review of your current position and to discuss your future state.