It’s an unfortunate fact that fraud is perpetrated from within many organizations, often by trusted leaders and executives. Most of the time, nobody sees it coming. It’s only after the fact that questions arise regarding how it could have been prevented, what signs were missed, and what could have been done differently.
But even when fraudsters are good at covering their tracks, they can’t hide forever. Electronic data analysis will always ferret out the fraudulent patterns. You just have to know how and where to look.
Who perpetrates internal fraud?
According to the Association of Certified Fraud Examiners, the world’s largest anti-fraud organization, one study found that over 80% of frauds examined in the study were perpetrated by people in accounting, operations, sales, executive level and upper management, customer service, and purchasing. This study also found that only 7% of fraudsters had a prior record of fraud.
This means that you can’t just run a background check on your employees and expect it to tell you who is most likely to commit fraud. You have to mitigate your risk in other ways.
How you can mitigate your risk for internal fraud
One of the simplest ways you can keep yourself and your team on alert for potential fraud is to pay attention to any red flags that may arise. While it may be easy to dismiss some of them as normal human behavior, they can be indications of fraud and should always be taken seriously. It doesn’t mean you need to accuse someone, but you should be paying closer attention when your staff members exhibit some red flag behaviors.
Red flags to watch out for include:
- Employees living beyond their means
- Employees buried in debt
- Employees experiencing financial hardship
- Employees exhibiting control issues
Investigate even if you don’t suspect fraud
There’s nothing wrong with periodically investigating and examining your company’s books in order to make sure nothing looks out of place. You don’t need to suspect fraud in order to do this. Especially if you’ve been in business for a while and haven’t recently looked into the books.
A great place to start is to hire a forensic auditor to assess your general ledger. They can use software to look for trends and patterns that may indicate fraud. A couple of patterns that could be a sign of fraud are:
- A reclassification from an expense account to an asset account in order to increase net gain.
- Wire payments using obscure expense accounts.
Software can uncover hidden patterns of fraud
Analyzing your books with software is one of the best ways to uncover fraud. For example, Bridgepoint Consulting was able to use transaction records from a general ledger to uncover fraud that involved a company filing for bankruptcy and escaping a $10 million debt to a creditor.
To discover the fraud, Bridgepoint noticed some of the company’s assets had suddenly been reduced in value the year prior to their bankruptcy. But the assets didn’t actually depreciate or get sold as most would think.
A sophisticated method of data mining was used to discover journal entries that went back and forth between accounts and ended up in the equity account which made the company appear insolvent. These assets were recorded as having depreciated by $20 million with a reduction in equity of $20 million as well. The assets were passed to a subsidiary so the company could close, file for bankruptcy, and escape a $10 million bill to a creditor.
More tips to prevent fraud
You may not see everything that goes on in your company, but your employees see more than you do. That’s why it’s imperative that you set up a reporting system that includes defining different types of fraud as well as the consequences associated. When people know they’re being watched by management and other employees, they’ll hopefully be less likely to commit fraud.
An anonymous tip reporting system would be the best option since your employees may be hesitant to report fraud directly.
For more tips, here’s a thorough guide for managing your risk of internal fraud that includes detailed tips for hiring experts, monitoring vacation balances, and even rotating employees to double check work performed by others.
By using proven risk management strategies, you can spot potentially risky patterns before they erupt into a bigger problem that could leave you blindsided and out a large chunk of money.
You’ve worked too hard creating your company. It’s worth the time and effort to mitigate your risk, and you can start with the wonderful strategies outlined here.