What Red Flags Indicate Potential Internal Fraud?

Undermining Segregation of Duties

Segregation of duties is a cornerstone of good financial management and one of the most important ways to mitigate the risk of internal fraud.

Every organisation should ensure it maintains strict controls around which individual employees have custody of assets, who can authorise the use of assets, and who maintains recordkeeping of assets.

The more that duties can be segregated between different individuals within your organisation, the harder it will be for anyone to carry out any internal fraud. With segregation of duties in place, two or more staff members would be required to collude in carrying out fraud, making it much harder to carry out.

However, if you see any evidence that a staff member is trying to circumvent segregation of duties, this should be a cause of significant concern and should be investigated immediately.

For example, if there is any evidence that one employee is solely responsible for issuing Purchase Orders, and is also approving those payments, this is clearly a circumvention of normal segregation of duties protocols and should be closely examined.

Not Taking Annual Leave

For any staff member engaging in fraudulent activities, the very last thing they want is to be discovered. The challenge for these staff members is that whenever they take annual leave, their duties are likely to be handled by a colleague who may uncover what they have really been up to.

To avoid this risk, many employees who are engaged in fraudulent activities avoid taking any annual leave. If they do take leave, it is usually for very short periods of time, reducing the risk that their activities will be revealed.

One way to overcome this is by mandating that employees take their annual leave and ensuring that another employee is tasked with performing the function during their absence. The risk of getting caught may be enough to dissuade employees from carrying out malicious activities.

Conflicts of Interest with Suppliers

Having good relations with suppliers is good business practice. However, a problem may exist if one of your employees has an overly cozy relationship with one of your suppliers.

When a staff member strongly advocates for one particular third-party, helping ensure they become a supplier, it may be an indication of a conflict of interest. The third-party may be owned by a friend or relative of your employee. The third-party may indeed be the best supplier for your organisation, however the relationship is something you need to be aware of, so appropriate controls can be in place to avoid any problems.

In other cases, employees have been known to become too friendly with supplier staff members over time. This can pave the way for your employee to conspire with the supplier’s employee to issue fake invoices.

Clear conflict of interest policies need to be in place that mandate that any personal connections to suppliers are made known to management. Furthermore, rotating staff members that work with your suppliers is one way to ensure that relationships with those suppliers don’t become overly cozy, and always remain professional.

Living a Lavish Lifestyle or Experiencing Financial Stress

High-end branded clothing, new luxury cars and extensive overseas travel. If it all seems too good to be true based on an employee’s salary, this should be regarded as a red flag.

When an individual staff member is seen to be living above their means, it may be an indication that they are engaging in fraudulent activities. Of course, you should never jump to conclusions. The staff member may come from a family with means or have other legitimate investments. However, lavish spending should cause you to pay closer attention to their activities to make sure nothing untoward is occurring.

By contrast, if you see employees experiencing severe financial stress, you should be aware that they may resort to theft out of desperation.

In all cases, you need to pay attention to what is happening in an employee’s private life. These are delicate issues, and no organisation should be prying into private matters unrelated to work. However, maintaining a broad overview of employees’ lifestyles can point to potentially fraudulent activities.

Gambling Addiction

One of the most common causes of employee fraud are gambling addictions.

All too often, staff members become hooked on the pokies, with their addiction funded by fraudulent activities. In many cases, an employee will delude themselves into believing that once they win a jackpot, they will repay all the money they “borrowed” from their employer.

Of course, that rarely happens. The funds taken to fuel their pokies addiction were never “borrowed.” In reality, the funds were stolen.

It’s important to have visibility over any staff gambling habits. One way to assist staff who may have a gambling addiction is through offering free confidential counselling services to staff and encouraging any employees experiencing any personal problems to utilise these services.

Another option is to have a confidential mechanism for staff to report any concerns they have about colleagues who may be addicted to gambling. Such concerns should be handled very delicately by human resources.

Disorganised or Incomplete Record Keeping

Employees who maintain disorganised or incomplete records may be doing so in a deliberate attempt to obfuscate malicious activities.

Without organised records, accurate audit trails become almost impossible.

Every organisation should invest in ensuring they have the right policies and oversight of records to ensure that proper standards are maintained. Regular internal audits will be able to identify problematic record keeping practices at an early stage, so they can be rectified promptly.

In short, you need to keep on top of employee record keeping. Thankfully, there are many applications out there that can help you achieve and maintain best-practice record keeping within all functions of your organisation.

Requesting Unnecessary Access to Systems and Files

In every organisation, access to systems and files should be on a need-to-know basis. In other words, access should be restricted and limited only to those who need access to perform particular duties.

Whenever an individual staff member requests access to a system or file, or requests greater privileges within a system they already have restricted access to, this should be questioned.

You should carefully assess whether granting or extending access will undermine segregation of duties policies. For example, an employee may have read-only access to supplier banking data and may be requesting write access. Such requests should always be carefully considered before agreeing to the request.

If an employee is requesting too much access that is not required to perform their job, it may be an indication of malicious intent and their activities should be carefully monitored.

Being Passed Over for Advancement / Promotion

One common cause of internal fraud is grievance against an employer.

Staff members who feel they are underpaid, or who believe they were passed over for advancement and promotion, may justify carrying out fraud against their employer as getting what they deserve.

A human resources department that has open communication with your staff should be able to identify employees who hold feelings of disgruntlement towards the organisation. Furthermore, when employees feel the organisation is committed to their long-term advancement, they are much less likely to feel disgruntled and carry out fraud.

How can eftsure help?

There are many reasons why internal fraud occurs. There are also many ways such fraudulent activities can be carried out. Whilst there are numerous red flags you should be on the lookout for, none of these is foolproof. Malicious insiders may still be able to defraud your organisation using clever tactics that are almost impossible to detect.

With eftsure integrated into your accounting processes, all outgoing payments will be cross-matched against our unique database comprising over 2 million Australian organisations.

This verification step makes it much harder for malicious insiders to carry out fraud. Any attempt to redirect payments to personal bank accounts will be flagged, allowing you to investigate the transactions more carefully before processing them.

Contact eftsure today for a no-obligation demonstration of the many ways we can help your organisation prevent internal fraud.

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