Fraud in the Workplace, Can You Spot the Warning Signs?

Written by Dalton Hopper, CFE, CVA

Recently, the American Institute of Certified Public Accountants (AICPA) FLS Fraud Task Force released its Eye on Fraud. This publication discusses some of the common motivations behind financial fraud schemes, what some of these schemes are and how they are conducted, as well as some of the red flags for detecting financial statement fraud. We would like to provide a summary of these highlighted issues so you are better able to protect yourself and your business.

The quarterly update of Eye on Fraud begins by discussing what can drive a person or company to commit fraud. Some of the most common motivators of fraud include:

• Weathering periods of poor financial performance,
• Meeting goals for performance-based compensation, such as bonuses or stock options, and
• Retaining employment during difficult economic times or company downturns.

With the economic rollercoaster we have all ridden over the past few years, there has certainly been incentive for employees, and businesses, to commit fraud. Whether it’s manipulating revenue to weather the storm, committing theft to maintain one’s lifestyle in high inflationary times, or padding revenue/shifting expenses to meet goals for compensation, businesses must stay vigilant. One of the most important steps business owners and managers can take is to set the tone at the top. If management dismisses minor violations as unimportant, it may indicate to others that a culture of wrongdoing is acceptable.

Fraud schemes can be classified as either corruption, such as bribery or conflicts of interest; asset misappropriation, such as theft of cash or fraudulent expenses; or fraudulent financial statements. The most common fraud schemes are asset misappropriation, while the costliest are fraudulent financial statements. Additionally, asset misappropriation schemes mostly impact small to medium size businesses and are often perpetrated through fraudulent expenses. Examples of this include billings paid to false companies, payroll paid to ghost employees or falsified wages, and fake reimbursement schemes.  Business owners and managers can be proactive though! Regularly reviewing payroll reports, examining invoices and purchase orders, and verifying expenditures can help in your fight against fraud.

Finally, some indications of fraud may include:

• Growth in periods of economic stagnation, or when the industry is in a down cycle
• Inconsistent revenue or expenses when compared to other periods
• Discrepancies or unexplained accounting reconciliations
• Manual journal entries made on weekends or holidays
• The sudden appearance of a new customer or vendor
• Unusually high or round dollar amount journal entries

While one red flag is not predication of fraud, its existence could require further investigation. Additionally, indicators should be viewed as a “whole forest” instead of one tree. Fraud occurs when three elements are present: the incentive to commit fraud, the opportunity, and the rationalization that the fraud is excusable.

One way you can take proactive steps against fraud within your business is by conducting a fraud risk assessment. This process is a thorough analysis of the business and its processes to identify and prioritize areas of fraud risk.

If you would like to learn more, or if there are ways our Certified Fraud Examiners can help your business, please reach out to our Business Advisory Team at (833) CPA-BMSS or visit our website for more information.