Seven signs of internal fraud

Many business owners are of the opinion that their organizations are immune to internal fraud and embezzlement for two reasons:

  • They do not have many employees and are therefore “on top” of everything; and
  • The one’s who deals with money usually have close relationships with the owners.

Following up on signs of fraud can stop fraud and save a company from financial loss or even ruin.

Seven danger signals to look out for in your business:

  1. A business is placed at risk for fraudulent activity if an in-house accountant works without proper supervision on every aspect of the business’s financial operations, e.g. payroll, receivables, deposits, payments etc.  (also referred to as improper segregation of duties).
  1. A business is placed at risk for fraudulent activity if an in-house accountant continuously looks for excuses why not to follow recently established accounting and / or administrative guidelines.
  1. A business is placed at risk for fraudulent activity when work is not properly observed and supervised, e.g. an accountant continually works after hours, frequently works over weekends or insists on taking work home.
  1. A business is placed at risk for fraudulent activity if an accountant continuously has reasons why not to take annual leave.  This person may be thought of as highly dedicated and hard working, but it could be that the person does not want anyone to discover how the records are being manipulated.
  1. A business is placed at risk for fraudulent activity if an accountant insists on handling activities that other departments / individuals are normally responsible for.  This can include collecting daily mail, acting as a sole go-between with the business’s banks, auditors etc.
  1. A business is placed at risk for fraudulent activity if an accountant continually misfiles important items, e.g. payroll records, deposit records etc.
  1. A business is placed at risk for fraudulent activity if deposits are frequently lower than what was expected.  Owners should carefully compare sales receipts with amounts deposited into the bank account and query any differences.

 Global findings – internal or external fraudsters? 

According to the findings of the 4th biennial PricewaterhouseCoopers Global Economic Crime Survey, of the 43% of companies that reported a significant economic crime, more than 76% reported that a party external to the company played a role in the fraud. And of that 76%, over 34% reported that, in at least one of the reported cases, the external party was located in a foreign country.

 When asked to comment on one or two more specific instances of fraud that their company had experienced, respondents indicated a slightly different picture of the perpetrator’s relation to the business, with half of the perpetrators being inside the company (50% internal and 50% external). 

Furthermore, the results showed a decreasing number of frauds being detected among company employees higher up the corporate ladder. This may be because the more complex economic crimes such as accounting fraud, which are harder to detect, are more likely to be committed by senior management figures, whereas more “simple” frauds such as asset misappropriation, which are often easier to detect, may be perpetrated by staff in positions across the organization.

 The typical perpetrator

According to the survey, the demographics of a typical fraudster are as follows:

  • Male (85% of cases)
  • 31 – 50 years (72% of cases)
  • Reached high- school level (50%)
  • Bachelor’s or post graduate degree (50%)
  • Middle or senior management (52%)

Neither high education levels nor management positions limits any individuals desire to increase their own material gain. In certain instances it may even help in the circumvention of sophisticated control systems. And while many new controls are able to detect the frauds committed by staff at all grades, in our experience they do not of themselves prevent the committed fraudster. In fact, it is the frauds committed by those in the senior and middle management that cause the greatest financial and collateral damage to a business.

Fraud in the future

The results of our research have shown that the controls that have been implemented will not be sufficient to mitigate the risk of economic crime on their own. Instead, our hope rests in organizations establishing a culture that supports those controls with clear and ethical guidelines, engendering a loyalty to the organisation’s brand and showing that every perpetrator, no matter what their position and function within the company, will be subject to equivalent sanctions.

 As with all crimes and unwanted business risks, consistent and effective prevention is better that after-the-fact reactions.