Fraud Awareness: Do you know where all YOUR money is going?

By Ken Wilson, CFE, CSAR

In last month’s article, entitled “The Doctor’s Worst Nightmare,” I referenced what the Association of Certified Fraud Examiners call The Fraud Triangle and I mentioned watching for red flags. The principles behind the Fraud Triangle are when employees have an Opportunity, a Financial Need and are able to Rationalize their conduct; they are more likely to embezzle from their employer.  When just one of these factors of the triangle is absent, they will be the ideal employee.

This month, I will elaborate on what is meant by red flags. I should also point out that although all embezzlements might be prosecuted as thefts, not all thefts are embezzlement.  The distinction lies in whether the employee holds a position of trust involving money or not. Since this article addresses only embezzlement, it is those individuals I will discuss.

Red flags are nothing more than indicators that should cause a prudent owner to look more closely at their business affairs.  For example, several employees know another employee, who holds a position of trust, frequents casinos on a regular basis, or has other addictive behaviors and who comments about having financial needs.  The employee also rationalizes that bad behavior is okay because everyone else is doing it.  In addition, the employee might be very protective of his/her work and does not want help from other employees, thereby creating an opportunity to embezzle from the employer.  After a time, co-workers notice a change in the employee’s attire and that the employee is driving a new car or talks about other new expenditures. The employee provides only vague or inconsistent responses to questions or provides different explanations regarding his/her new found wealth. These factors, when considered together, should raise red flags, as well as other questions that need answers. 

One of those questions is: Where did the money come from for the purchases and lifestyle changes?  In addition, the owner should look for any unexplained or unresolved shortages in the accounts or cash-flow where the employee works.

It is important to remember that red flags are just indicators that something might be amiss. Often your own instincts have already suggested the same thing, but you were unable to articulate what it was your instincts were trying to tell you.  However, I caution you not to rely on instincts alone. My experience has shown that most victims of employee embezzlement will ask the question, “Why didn’t we catch this sooner?” and in every case the answer has always been the same, “Because we trusted the person.”

One of the most effective techniques for protecting the assets of a business is by empowering the employees to be the eyes and ears of management.  This is accomplished through training to recognize the red flags and by providing a system by which employees may safely and confidentially report their suspicions without fear of retaliation.

Businesses of all sizes should demonstrate their awareness of fraud and train their employees to do the same in order to deter and detect fraud.  Knowing what red flags might look like should be part of every fraud awareness training program and included in every employer’s fraud prevention policy manual.  It is also very important to set the tone from the top and for the owners to model ethical behavior. 

Most employees are honest and want to work in an environment that promotes honesty and integrity.  Dishonest employees will find employment where they may work without fear of detection. Who do you want working for you?