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Financial Fraud Investigations: Spotting the Red Flags and Stopping White-Collar Criminals

Kelly J. Todd
Managing Member
March 18, 2021

If you scatter a thousand $1 bills around the company breakroom and hang a sign asking employees not to steal, how long will it take before someone gives in to temptation? Perhaps an employee might start taking cash by rationalizing that no one would miss a few dollars. Or worse, they might take advantage of the lack of oversight and steal it all.

Dropping cash in the breakroom is not an experiment we recommend, but it’s worth considering whether your organization is making it easier for employees to commit financial fraud.

Ask yourself the following questions: Are you able to spot the warning signs that a potential fraudster may be at work; are your internal controls designed to deter fraud; if you do suspect theft, are you prepared to launch an effective financial fraud investigation that will catch employees who are stealing and prevent future theft?

Why Good Employees Become Fraudsters

Even employees who may seem the most honest might consider taking money under the right conditions. The key to preventing them from doing so is reducing the twin forces that drive financial fraud—temptation and opportunity.

The temptation to commit fraud usually begins in environments with lax internal controls. Pay particular attention to employees positioned to check their own work with little or no oversight, or who have unfettered access to money going in or out of the business.

Those factors alone do not mean an employee is on the path to wrongdoing—but they do increase the odds, especially when combined with external stresses the employee may be facing. Bad economic times, a divorce, an illness, a gambling habit or the failure of their own business may drive an employee to consider theft. They may even tell themselves, “I’ll only take a small amount, then return it later when I’m in a better situation.” Lenient or lax internal controls simply feed the temptation.

Habits of Typical Perpetrators

Remember the Where’s Waldo books? Each page asked readers to find the striped-shirted hero in a highly detailed scene. Finding workplace criminals is similar. You must pay close attention to the details and pick out anomalies in employee behavior to spot fraudulent activity.

Those behavioral anomalies often include employees showing consistent unhappiness with their jobs or habitually finding ways around established procedures to “beat the system,” They might demonstrate an extreme reluctance to relinquish control or share information with colleagues or management.

All of these actions should serve as red flags of potential fraud. They don’t always mean that an employee is guilty of something—the employee may really just be a curmudgeon or a control freak. However, if these signals are present, it is a good idea to take a closer look. And if a fraud is suspected or discovered, you must be prepared with an action plan to stop the plot before it causes irreparable damage to the company.

Appropriate Responses to Workplace Fraud

If you suspect employee fraud, taking the following steps can aid your financial fraud investigation team.

  • Secure any evidence. This includes computers, flash drives, cell phones and digital accounts. “Secure” is the operative word—don’t tamper with the evidence. An act as simple as attaching an external device to a computer can render the evidence useless. Instead, assemble a team of forensic experts to investigate as quickly as possible.
  • Don’t immediately fire the employee. Resist the temptation to terminate an employee accused of fraud. Employees have a duty to cooperate with employers during a lawful investigation. Consider keeping them on payroll until the evidence has been sufficiently developed by the financial fraud investigation team.
  • Restrict access. Once employees know they are the subjects of an internal investigation, restrict their access to their office and company information systems. This will prevent them from covering their tracks, encrypting programs, stealing confidential information and deleting incriminating evidence.
  • Contact your insurer. You should contact your insurer as early as possible. Many policies have a 30- or 60-day notification provision, beginning from the first day that you discover a loss may have occurred. Failing to notify insurance may void your coverage, making an already difficult loss even greater.

Preventative Measures to Take Now

Even if you do not currently suspect employee fraud in your workplace, taking precautionary measures now can deter fraudsters from committing financial crimes in your workplace.

Preventative measures include: segregating duties; placing daily and monthly limits on company credit cards; and monitoring electronic audit trails. Also, be sure to maintain strong employee recruiting controls to check the background of all potential new hires, thus helping to avoid hiring those with a questionable past.

Finally, if possible, try to rotate staff within critical financial areas, such as cash management, accounts receivable and purchasing. This ensures that no single employee can gain too much control over or become secretive about a segment of your business.

Discovering employee fraud in the workplace isn’t easy. Unlike the movies, criminals don’t wear black hats and aren’t accompanied by a sinister theme song when they enter a room. However, with the right tools, you can identify real-life criminals in your office, one red flag at a time.

To learn more about how FSS helps organizations combat and investigate employee fraud, contact us.