Recognizing the fraud red flags early can significantly mitigate potential risks and protect businesses from substantial financial losses.
Prevention and early detection of internal fraud are always preferable to intervention after the event. Once a fraud has become firmly established or entrenched within an institution, the financial, legal, reputational, or regulatory ramifications will be considerably more severe. One very effective method of prevention is the pro-active identification of fraud indicators.
What are the behavioral indicators of fraud?
Within an institution, internal fraud may be perpetrated by any employee, from the most junior to the most senior levels.
Where fraud is perpetrated from outside the institution, it may be with the assistance of an employee or ‘insider’.
There are several recognized warning signs or ‘red flags’ which may indicate that an employee is engaged in fraudulent activity. These indicators can be a powerful part of risk assessment when combined with other relevant information.
Recognizing the Fraud Red Flags: Red flag indicators
Identification and understanding of internal fraudulent behavior of fraudsters are a big issue for institutions and fraud identification and investigation specialists. The following behavioral indicators may be used or analyzed by the specialists:
Opportunistic crime: employees commit fraud for their financial benefit and they try to find opportunities to carefully plan the fraudulent activity or act. Fraud investigation specialists need to identify and understand possible opportunities that employees may use or exploit, to commit fraud or a crime.
Lack of corporate behavior: in some institutions, employees behave in a way that they are not supposed to do. Such behaviors may be due to the lack of governance and ethical culture in the institution.
Recruitment of criminals: some fraudsters seek employment to commit fraud, therefore they use the human resource (HR) departments or recruitment personnel for their employment. The HR recruitment personnel or team needs to be investigated to understand their behavior and practices related to recruitment.
Employee intimidation: organized criminals or criminal groups are increasingly involved in the intimidation of staff to directly participate in committing financial fraud. They offer and provide financial benefits to the existing employees of an institution, to help them in committing fraud.
Criminal groups may also threat employees, for not providing support in committing financial fraud.
Several warning signs may indicate that there may be a problem within the business processes. These should not be taken alone as evidence that fraud is occurring within the institution, there may be other legitimate explanations for the occurrence of these indicators.
The following fraud indicators are interrelated, and need to be assessed while identifying existing or possible frauds or performing fraud investigations:
Employees who consistently work longer hours than their colleagues for no apparent reason.
Employees who are reluctant to take holidays and/or time off.
Employees who are excessively secretive about their work.
Employees are known by others to be under stress for personal family reasons.
Employees with a sudden change in their lifestyle or social behavior.
Employees under apparent stress without identifiable pressure.
Employees with an aggressive or defensive attitude when challenged and/or dealing with certain colleagues.
Employees who are subject to an increased number of complaints and those who habitually break the official rules.
Employees who delay in providing data or who provide different or wrong replies to different stakeholders or functions.
Employees who ask to defer the conduct of internal audits or provide fake data or information to internal auditors.
Employees with new and unusual relationships with other colleagues or officials within the institution.
Employees who request significant detail about proposed internal audit activities.
Excessively high or low staff turnover in an institution.
Final Thoughts
The integrity and financial well-being of an institution lie heavily in its ability to prevent and detect internal fraud. With a multitude of behavioral indicators available, vigilance becomes the institution’s first line of defense. Recognizing red flags, fostering an ethical work culture, and ensuring vigilant HR practices can curtail the potential damages of internal fraud. As the adage goes, prevention is always better than cure. Every employee, from junior to senior, plays a pivotal role in safeguarding an institution’s reputation and assets. Institutions must remain proactive, educated, and prepared in order to effectively counteract internal fraudulent activities.
