@Work | Fraud

Know the red flags of occupational fraud to protect your business

Employee misconduct is a challenge for small businesses. Do you know how to detect cons on the inside?

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Two confused office workers examining online information on a company laptopOccupational fraud—more commonly known as employee fraud—is committed against the organization by its own officers, directors or employees (Shutterstock/Antonio Guillem) 

Small businesses in Canada are disproportionately affected by fraud committed by their own employees, according to a survey of certified fraud examiners.

of by the Association of Certified Fraud Examiners (ACFE) looked at 82 cases of occupational fraud perpetrated against organizations in Canada between January 2016 and October 2017.

According to the ACFE study, occupational fraud—more commonly known as employee fraud—is committed against the organization by its own officers, directors or employees and is likely the largest and most prevalent threat to businesses. (See Understanding the 3 types of occupational fraud to know what it looks like.)

Responses from Canadian fraud examiners showed that businesses with fewer than 100 employees experienced a disproportionate number of occupational fraud cases (38 per cent) compared to medium- and large-sized businesses.

“[With] small businesses, quite often they don’t have a detection system in place,” says William Vasiliou, president of the Toronto chapter of ACFE. “There may be a financial issue with putting policies in place, or a sole proprietor may not be fully aware of how to detect fraud.”

They also lose more to occupational fraud than their larger counterparts. For Canadian companies with fewer than 100 employees, the median loss for reported cases was US$200,000, whereas for companies with more than 100 employees, the median loss was only slightly less than $200,000.

In addition to the lost revenue, affected organizations suffer from damage to their reputations, lowered morale and reduced productivity due to time spent investigating possible frauds and seeking recovery of losses.

SIX RED FLAGS THAT INDICATE OCCUPATIONAL FRAUD

Knowing the behavioural red flags of internal fraud can help businesses protect themselves, says fraud-prevention expert Jennifer Fiddian-Green, CPA, CMA. And while the details of the fraudulent activity may vary from case to case, the red flags are consistent across sectors, regions and time.

“Some things don’t change,” says Fiddian-Green, a partner and forensic accountant at Grant Thornton LLP. “If you have an employee who never takes vacation, if they’re never letting anyone else into the space where they work, if they’re not accepting help, your alert has to be on.”

According to the ACFE report, in 85 per cent of cases, the fraudster displayed at least one behavioural red flag. In 50 per cent of cases, the perpetrator exhibited multiple red flags. 

The six main indicators are:

  • employee is living beyond their means
  • employee has financial difficulties
  • employee is unusually close with a vendor or customer
  • employee is controlling and/or unwilling to share duties
  • employee is experiencing divorce or other family problems
  • employee subverts standard processes and acts as if the rules don’t apply to them

HOW TO PROTECT YOURSELF FROM OCCUPATIONAL FRAUD

According to ACFE’s report, tips are the most common means of detecting fraud, and anonymous hotlines are the best way to facilitate them. Other controls include surprise audits, anti-fraud policies and employee support programs, which provide counselling to employees with personal problems that are affecting their work. A code of conduct, audits and proactive data analysis are all associated with faster detection.

To learn more about how to protect yourself from fraud and what to do if you are a victim, CPA Canada offers a softcover book called Protecting you and your money: A guide to avoiding identity theft and fraud. You can also request a one-hour learning session about fraud with a CPA volunteer in your community.