Is your company being embezzled? Ten red flags of fraud
The woman seemed like the best employee, former FBI agent Randal Wolverton recalled.
She’d been at a Kansas bank for decades. She arrived early, stayed late, almost never took a vacation. She was the ruler of her corner of the bank.
But it was all part of the deception. She was embezzling, Wolverton said, and had been for some 27 years. Taking days off might have opened others’ honest eyes to her dishonest scheme.
“She was terrified of getting caught. She couldn’t retire,” Wolverton said. “So long as she was there, she could cover things up. She could control who was looking at the records. ... The best embezzlers, the most damaging embezzlers, have to maintain control of their little universe and keep prying eyes away.”
Weeks after the woman retired at age 67, her crime was uncovered, he said.
Had anyone really been looking, they would have seen what experts such as the Association of Certified Fraud Examiners and the Association of International Certified Professional Accountants list among the top 10 red flags of an embezzler or other fraud in your midst.
▪ Working long hours:Who wouldn’t want this among a loyal, dedicated and honest employee? But it is also a classic warning sign of a fraudster. People who embezzle, in particular, are keen at having outsized control of a little-watched corner of their business. They keep control — coming in early, staying late, avoiding vacations or even retirement — in order to keep others’ eyes away from their false accounts, lest they are uncovered.
▪ Living beyond their means: The employee may have a good salary, but even so, does it fully explain the flashy car, expensive clothes or repeated cruises, trips abroad or — not uncommon — gambling sprees to Las Vegas. Their constant luck at the casinos seems unusual. They talk about having family money or receiving a windfall inheritance. Might it all be true? Maybe. But if an employer has growing suspicions, it could also be time for some mindful auditing.
▪ Financial difficulties, divorce, family problems, addictions: Criminologist Donald Cressey came up with the Fraud Triangle in 1953. It begins with the belief that someone is under some kind of pressure and has a need — financial or personal, like the “need” to be seen as successful or a big deal. Also, an opportunity or means to steal has to be present. The third leg is rationalization, coming up with a reason fraud was deemed necessary.
▪ Long-time rulers of their domain: Embezzlers frequently are found to be the keepers of the books and other accounts in their part of a business. “When I talk about rookie errors in smaller companies,” Wolverton said, “usually all of these different accounting functions — setting up bank accounts, reconciling bank accounts, talking to customers, fielding complaints, approving vendors are either collapsed into one person or a very small number of people who have positions of trusts.
“The person reconciling the bank accounts shouldn’t be the person cutting the checks.”
▪ Control Issues, irritability, bullying, defensiveness and unwillingness to share duties: Again, fraud is about control and keeping away nosy co-workers or prying eyes. Irritability or bullying can be a sign that the fraud or the possibility of getting caught is weighing on them.
▪ Boys’ club: Anyone can commit fraud, but in the certified fraud examiner’s report, 73% of frauds in the United States were found to be perpetrated by men, 27% by women. Men also tend to steal larger sums of money.
▪ The older, the greedier. Fraud, by age, actually follows a bell curve, with 15% of frauds committed by employees age 30 and under and 68% by employees between ages 31 and 50. Then the curve declines to where 17 percent is perpetrated by employees age 51 and older. That said, the older employees are — meaning the more familiar they are with ways to skirt weak internal controls — the more they take. The median amount taken by young fraudsters, age 26 and under, is about $40,000. At ages 41 to 45, it’s $185,000. At 60 and older, its skyrockets to $800,000.
▪ Position matters: 23% of fraud is committed by owners or executives, 39% by manager, 38% by employees. The higher one’s position, the longer and more costly the fraud tends to be.
▪ Billing complaints, vendor irregularities: Vendors complain they were never paid? Or maybe there‘s a vendor you don’t recognize, or seems to be getting paid for services you don’t recognize. It could be because an embezzler is writing checks to themselves. Or, just as common, they’ve started a false company, put that company on the books as a vendor that is now getting paid through fake invoices. A spate of payments to unfamiliar vendors should be checked out. Billing complaints from vendors or customers ought to be taken seriously.
▪ Whistleblower tips. They should be heeded. Some 42% of frauds were detected by whistleblowers — more than half of whom (55%) are employees, 18% are customers, 16% come anonymously.
“How most fraud schemes are found, most are found by honest people,” Wolverton said. “Honest employees, really. That’s the best offense that business owners can do is harness the honesty of their employees.”
