3 Warning Signs of Fraud in Employees

Tax Professionals' Resource
January 2, 2013 — 1,630 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

These days one can spot employee frauds not only in multinational companies but in small business organizations too. Misappropriation of assets is the most common type of fraud that one can find in most companies. An employee, who is under pressure and has an opportunity to misappropriate the assets, often, finds it very easy to rationalize the fraud committed.

Even though employee frauds cannot be completely eliminated, one should be able to notice the warning signs with a little systematic effort. There are many red flags which can act as fraud indicators. A red flag is a set of circumstances that are very unusual and vary from the normal activities.

Given below are 3 such warning signs of fraud that an accountant of an organization needs to notice in the employees and management.

Change in Employee’s Behavior and Lifestyle

Sudden and irrational changes in the behavior of an employee can be considered as an indicator of fraud. One may notice an employee working for excessive hours with no clear reason. He may also avoid taking holidays, even if situations demand it. An employee who maintains very close relationships with suppliers or clients should be kept under close watch.

A need for concern arises if an employee’s lifestyle suddenly changes and he indulges in buying expensive and luxurious items. Significant behavioral changes in the employee can also be an indication that he may be involved in a company fraud.

Managers’ Reluctance to Provide Information

There are many red flags which indicate that unusual activity is going on at the managerial level of the company. This may include reluctance of the managers to provide information to the auditors. The managers may also involve in frequent disputes with the auditors of the company. One may also notice that managerial decisions are often made by a very small group or one individual. There will be a weak internal control environment, and the managers may show disregard to the company’s regulatory bodies.

The need for concern also arises if a compensation program that is out of proportion is introduced by the managers. If any important and highly confidential managerial documents go missing all of a sudden, then one can consider it as one of the potential fraud indicators.

Problem with Financial Statements

Irregularities in the company’s financial statements can be considered as the warning of a major fraud happening in the company. Adding bogus inventory to the company’s financial statements so as to show record profits in transactions is an instance of this kind of a fraud. 

Sometimes, one may notice that financial transactions are taking place at a very slow or a fast pace. If these irregular financial transactions are not compliant with the company’s operational pattern, then one should consider it as a definite indicator of a fraud happening in the company. Financial transactions which take place at inappropriate times should also be considered suspicious. If there are frequent changes in the company’s bank accounts and there are an excessive number of year end transactions, then it should also be considered as an indicator of fraud.

Tax Professionals' Resource