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Warning Signs & Red Flags of Fraud – Are Your Employees Stealing From You?

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Learning the warning signs and red flags of fraud can help business owners prevent and detect fraudulent activity.  

A staggering number of businesses falter and even fail because someone on the inside – an employee, vendor or even a partner – steals money, goods, data, or intellectual property from the organization.  In fact, one third of all business bankruptcies are due to employee theft and American businesses lose 7% of their annual revues to fraud!

fraudI recently had the opportunity to participate in a webinar called, Stealing More Than the Secret Recipe – Identifying and Safeguarding Against Business Fraud, with two really great ladies;  Kimberly Shannon of Off-Site Business Services, Inc. and Shamese Shular of SHU Books.  Each of us had specific topics relating to business fraud and I’ve decided to take my sections and turn them into a series of blog posts over the next couple of weeks. I believe that both Kimberly and Shamese will also be turning their sections of the webinar into blog posts – so be sure to visit their websites for additional information on this topic as well.

The Early Warning Signs or “Red Flags” of Fraud

Fraud always starts with a person, who displays certain character traits or mannerisms, and then transforms into an activity or something that the person does in order to commit the fraudulent act.  The following list of character traits is certainly not all inclusive and it is also not a “given” that anyone who displays these habits is also someone who is (or will be) a person who ultimately commits fraudulent acts against your company.  They are, however, the ones that I’ve frequently seen or heard about.

Character Traits and Mannerisms of people likely to commit fraud

  • Unwillingness to share duties or take vacations.  These employees work longer hours than their co-workers and refuseto take time off.  Because of their constant availability and seeming dedication to their jobs, business owners often assign them with increasingly important tasks.  As a result, they become solely responsible for one or more critical tasks.  With no one looking over their shoulder, they are free to commit fraud undetected.
  • Employees who are overly interested in the personal lives of their co-workers.  These employees LOVE to be involved in everyone’s business and strive to be everybody’s friend – but they may also be the office thief!  By showing an excessive amount of consideration for their co-workers, they garner trust, which in the wrong hands can become an opportunity for fraud.
  • Refusal to implement internal controls or procedures.  Managers, supervisors, or in-house accountants/bookkeepers with dominant or controlling personalities will often refuse or make up excuses for not delegating responsibility in order to hide or extend their own fraudulent activities.
  • Employees who work excessively yet keep poor accounting records.    Because the employee appears to be working so hard and has so much to do they are given leniency regarding their failure to keep detailed records or to provide receipts.  As a result, the early warning signs of fraud are often missed.
  • Chronic shortage of cash.  This is typically the person who always has a “sob story” and is frequently seeking payroll advances because of some unexpected or unforeseen circumstance.
  • Past legal problems.  Including minor theft.
  • Addiction problems.  Including substance abuse or gambling.

Activities that indicate fraud could be occurring

  • Financial information being reported is inconsistent with performance indicators.  Perhaps you own a restaurant and business is booming, you frequently see long lines of people waiting to be seated or standing in line waiting to place an order; yet when you look at your financial, the revenue from your business seems down or “off”.
  • Abnormally high or increased costs in a specific cost center.  When looking at a Profit & Loss Report you see increased costs for postage, office supplies, or perhaps the cost of employee cell phone usage has increased dramatically – these are areas that you should question.
  • Bank and/or Credit Card reconciliations are not up to date.  If you frequently hear “oh, I’ve just been so busy that I haven’t had time to reconcile the accounts” this is definitely a sign that something is up – especially if the accounts have not been reconciled for more than a month.
  • Inadequate segregation of duties.  One person has total or almost total control of all major activities.
  • Small cash discrepancies over a period of time.  If your business handles a lot of cash, perhaps you’ve noticed that small cash discrepancies have increased over a period of time.
  • Payroll frauds.  Perhaps you see checks cut outside of normal payroll processes, checks that have no withholding’s, are for an even dollar amount, contain memo’s such as payroll advance, petty cash, reimbursements, bonus, or retro pay.
  • Replacement of existing suppliers.  Perhaps you see existing suppliers being replaced by someone who has an unusually close relationship with an employee.
  • Living a lifestyle above their apparent financial means.  Sooner or later we all have an employee who “cries poverty” but yet always has the latest piece of technology, spends exorbitant amounts of money on their children, or is frequently buying gifts for other employees.

Download the slides from the Stealing More Than the Secret Recipe – Identifying and Safeguarding Against Business Fraud webinar.  And look for part 2 – Business Susceptibility to Theft and White Collar Crime and part 3 – Simple, Inexpensive Controls You Can Put Into Place to Discourage Fraud in the next couple of weeks.

I hope you’ve found these warning signs and red flags of fraud to be helpful, please feel free to leave a comment regarding any other warning signs that you’ve discovered – the more aware we all are the better off we will be.

 

3 Responses to Warning Signs & Red Flags of Fraud – Are Your Employees Stealing From You?

  • These are great examples DJ! Thanks so much for sharing them!

  • In the two cases I know of, employee fraud could have been EASILY DETECTED by a very cursory review of the balance sheet and the knowledge of what accounts should be zero and what accounts should not be negative. In one case, the payroll tax liability account kept growing – the employee was not smart enough to figure this out, the business owner was not knowledgeable enough and the accountant did not receive the balance sheet, or did not look at it. In the other case, the accounts payable account was negative – again the employee was not smart enough to figure this out, the business owner was not knowledgeable enough and the accountant did not look at it – even after discovering the fraud and “Correcting the Books”.

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About Your Host:

Nancy Smyth, Certified QuickBooks ProAdvisor

Nancy Smyth, Sunburst Software Solutions, Inc.
QuickBooks Construction & Payroll Expert


I've been using and supporting QuickBooks products since the early 1990's. I've worked with thousands of contractors, assisting them with QuickBooks setup, Certified Payroll Reporting requirements, AIA Billing and Weighted-Average Overtime.


QuickBooks is a powerful product, but learning how to use it in your construction business can be difficult. I hope you find resources available here to be helpful.

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