The Cost of Corruption: The Warning Signs of Financial Fraud

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The first part of this series post relayed the alarming findings of the Association of Certified Fraud Examiners (ACFE). The organization reported on the increasing threat that corporate and financial fraud poses to companies around the world.

According to the ACFE, businesses became aware of fraudulent schemes and activities mostly through tipsters. Of the 2,690 cases of occupational fraud the ACFE analyzed, tips brought to light 40 percent of these criminal activities.

But businesses can’t just rely on tipsters to put an end to fraud, not when 22 percent of fraud cases cause more than $1 million in losses.

Companies must recognize the warning signs of fraud outside of internal audits and other procedures. Below are some of the most common red flags that an employee could be committing financial fraud.

  1. Disproportionate lifestyle spending. An employee living beyond their means is the most common sign that an employee could be committing financial deception. The ACFE reported that 41 percent of perpetrators exhibited this red flag. Workers who can suddenly afford to go on luxury vacations, buy a nicer car than their supervisors, or generally have more expensive possessions could be receiving funds through illicit means. Although there can be perfectly reasonable explanations for their sudden influx of money, such as an inheritance or bank loan, it might be time for a perfunctory audit.
  2. Opposition to restrictions. When companies implement stricter control procedures for certain processes, they should take note of dissenters. Fraudsters would be the last people in the company who would be pleased with tighter regulations, especially if these regulations impede them from skimming off their employer’s resources. If there is fierce opposition against regulatory procedures, perhaps it stands to disrupt something unsavory.
  3. Monetary problems. Necessity, not greed, is sometimes the root of criminal activity. If an employee experiences sudden financial difficulty, they may turn to fraud trying to solve their money woes. Financial difficulty doesn’t just cover emergencies, such as sudden hospitalization or car accidents. It could also stem from rising costs. In 2018, one site calculated that the minimum expenditure of a household in the Philippines is ₱20,000 per month. The cost of living has changed since then, and this can push employees into acts of theft and fraud.
  4. Unusually friendly relations with vendors or clients. Although companies should usually encourage friendly relations between certain representatives and key vendors or customers, they must also be wary of the nature of this relationship. The ACFE noted that 20 percent of fraud perpetrators were unusually close to sellers or clients. They also reported that 34 percent of employees involved in corruption cases exhibited this red flag.

These are only the most glaring of warning signs that employees and employers should watch out for in the workplace. Although the presence of any of these signs should alarm companies, what should worry businesses the most are the fraudsters who are clever enough not to display these warning signs.

Multi-layered systems and checks should be in place to secure the stability and security of your company. Only through constant vigilance and preparedness can your enterprise operate honestly and without fear of fraud.

In the next article in this series, Aptitude helps you examine the types of employees that can threaten your business’s profitability.

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