Ben Jacobs, BridgeTower Media Newswires
As the world evolves there are more controls to help monitor assets and activities within organizations than ever before; there are also new threats and opportunities to commit fraud that weren't even a thought 20 years ago. What is truly remarkable is the consistency in the characteristics present in perpetrators of fraud over that same time frame. In this article you will find some key risk factors that have been identified by case studies on fraud to keep an eye out for, to safeguard your organization from potential theft or fraudulent financial reporting.
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The fraud triangle
One of the cornerstones of accounting education when it comes to fraud awareness/education is the fraud triangle. It is called the fraud triangle because when these three characteristics are found within an individual, the risk of fraud is significantly heightened. The characteristics that make up the triangle are opportunity, pressure, and rationalization.
-Incentive/Pressure - A reason, or pressure, on the person financially. Common examples include significant liabilities, possibly from medical bills or student loans, or an expensive habit such as gambling. If individuals do not see another option to make payments, they may be tempted to begin stealing.
-Opportunity - An individual who has access to, or the ability to control, the assets of the entity. If many people have access to a cash drawer and separate tills are not maintained, or if a company has lax controls over equipment or supply items, employees may begin to take excess inventory or use company equipment outside of work for personal gain.
-Rationalization - The ability to justify the act, in the mind of the perpetrator. In order to commit fraud, the individual must be able to rationalize the act to themselves. Frequently this rationalization starts off with idea that it is temporary, such as skimming some petty cash thinking it could be paid back on payday, or inflating revenue numbers for a week or a month with the hope that sales can be gained in the coming weeks.
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Behavioral red flags
In addition to the conditions listed above that can increase the risk of fraud occurring, there are also common behavioral red flags that have been noted in many frauds that have occurred. According to the 2018 Report to the Nations by the Association of Certified Fraud Examiners, which was based on 2,690 real cases of occupational fraud from 125 countries, in 23 industry categories between January 2016 and October 2017, at least one behavioral red flag was displayed by perpetrators in 85% of the cases, and multiple red flag behaviors were present in 50% of the cases. The six red flag behaviors listed below have been the most common noted by the report in each of the studies prepared since 2008.
-Living beyond means - An individual whose lifestyle appears to exceed their means is a huge red flag. For example, an accounts payable clerk who earns a $40,000 salary, but drives around in a $250,000 car could be an indication that there is something to investigate.
-Financial difficulties - As mentioned above, if somebody is known to be having significant financial difficulties and they do not have another option to come up with the money they may begin to steal from their employer/business.
-Unusually close association with vendor/customer - This situation could be ripe for a kickback scheme. If we think about the accounts payable clerk mentioned above having a close relationship with a major supplier, the supplier could submit invoices for products not shipped and the clerk could process the payments in exchange for a portion of the funds.
-Control issues/unwillingness to share duties - This situation commonly occurs when an individual is actively concealing fraudulent activity that could be easily discovered if another person were to perform the normal control activities in place to prevent the fraud.
-Divorce/family problems - In addition to divorce being expensive, most divorced couples also face the increasing expenses of supporting two households rather than one. Financial stress is also one of the most common factors that leads to divorce, so for some people the potential to save their marriage may be worth the risk of fraudulent behavior.
-"Wheeler-dealer" attitude - Generally speaking, this is someone whose focus is on getting the deal done, by any means necessary. A sales manager for instance, who is trying to hit a goal, may resort to unsavory tactics to meet the goal. They always view the risk as being worth the reward of hitting the target or completing the deal.
Fraud continues to rear its head daily in the world we live in, the best thing you can do is to be aware and diligent. As a society we should always be on the lookout, whether we are at work, or if we are out shopping, or if we are trying to hire a contractor to redo the bathroom. Be alert of the common warning signs of fraud, and remember, if you see something say something.
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Michael DeBadts, CPA is a partner at Mengel, Metzger, Barr & Co. LLP. He may be reached at mdebadts@mmb-co.com.
Published: Mon, Mar 09, 2020
