Mitigating Employee Fraud – Be Aware Of The Signposts

Wednesday, November 16, 2011 - 10:44

As the economy continues slowly down the road to recovery, business leaders need to be more aware of the signposts of fraud in their employees. Owners and managers have reduced the recession’s impact on the bottom line by making their organizations run efficiently. They have closely managed their cash flow despite a continued shortage of credit and reduced their payroll as much as possible. While  this has mitigated some of the recession’s effects on profitability, these actions have only weakened the internal control system and shifted pressure from employers to their employees.  

Employees, most likely, have to worry about doing more at work and stretching their paychecks at home. With fewer coworkers, duties and responsibilities are being shifted and consolidated, creating more opportunity for fraud. In this type of economy, employees may have an unemployed spouse, a home that is underwater or growing piles of bills. These types of situations are all too common and create the pressure needed to commit fraud. In this protracted recession, with the opportunity and the pressure present, rationalizing fraudulent activities is only too easy.

Despite the increased possibility of fraud, if employers are aware of the signposts of fraud, they will be better equipped to recognize it early on. When hiring employees, employers should investigate any past legal or employment issues.  Credit history is also an important factor to consider when hiring. All three could be signposts of a potential fraudster. The remaining signposts can be broken down into two main categories: changes in lifestyle and changes in behavior. 

Employers are less likely to notice a change in lifestyle, but they are important warning signs. Be vigilant of employees who live beyond their means, stop going on vacations or have sudden instability in their personal life. When evaluating these types of changes, employers should use their knowledge of the employee. Is it reasonable for an employee who hasn’t gotten a raise to be able to afford a new luxury car? There may be circumstances that could ameliorate these changes.  However, if employers become aware of an employee’s unexpected financial need, such as a medical issue or a divorce, they should review the employee’s work more closely. Employees who develop an addiction that employers become aware of could also be cause for alarm. The employee may dip into the employer’s coffers to fund a drug, alcohol or gambling habit. Also important to find out is if employees are pressured at home to succeed at work. This pressure may create a need to steal in order to maintain a pre-recession lifestyle. Although harder to detect, these changes in lifestyle are important to be aware of.

More noticeable signposts of fraud, especially in the workplace, would be changes in behavior. Employers should be on the lookout for employees who suddenly become irritable, suspicious or defensive. With duties consolidating, an unwillingness to share duties may be cause for increased scrutiny. Employees who develop close relationships with vendors or customers may be receiving kickbacks or siphoning off funds. Employees who complain either about their lack of authority within the organization or their level of compensation may be leaning toward fraud in order to right these perceived wrongs. Monitoring employees’ behavior at work is an important way for employers to detect fraud schemes early.

Furthermore, it is important for employers to create an antifraud atmosphere in the workplace.  Employers should discourage wheeler-dealer behaviors, as they may be red flags. Employers should also not exert any pressure on employees to improve or augment financial results, which could lead to employee fraud. Instead, employers should stress the importance of following procedures and maintaining the integrity of the financial process. Also, any layoffs should be handled transparently and, if possible, be limited to one time. Employees who anticipate future layoffs may decide to fund their unemployment with the organization’s money.

Despite the slow recovery, employers can protect themselves from fraud by watching for the signposts of fraud. For reference, these are listed below:

1. past legal problems
2. past employment-related problems
3. poor credit
4. changes in lifestyle
5. living beyond one’s means
6. refusal to take vacations
7. instability in life circumstances
8. unexpected financial needs
9. divorce or family problems
10. addiction problems
11. excessive family or peer pressure for success
12. changes in behavior
13. irritability, suspiciousness or  defensiveness
14. control issues/unwillingness to share duties
15. unusually close association with vendor or customer
16. complaining about lack of  authority
17. complaining about inadequate pay
18. wheeler-dealer attitude
19. excessive pressure from within organization
20. anticipating future layoff

A greater awareness of these signposts will continue to benefit employers well after the economy recovers.

Leon A. LaRosa, Jr., CPA, CFE, CFF is a partner at EisnerAmper LLP, specializing in litigation support services, fraud and forensic accounting investigations. Mr. LaRosa is also director and an adjunct professor at La Salle University’s Fraud and Forensic Accounting Institute. He can be reached at (215) 881-8185Nicholas Adelizzi, CPA is a senior accountant at EisnerAmper, LLP, specializing in litigation support services, fraud and forensic accounting investigations. He can be reached at (215) 881-8104.

Please email the authors at leon.larosa@eisneramper.com or nicholas.adelizzi@eisneramper.com with questions about this article.