Top 5 Fraud Red Flags That Organizations Shouldn’t Ignore

By Emily Paszkowski, CPA, CFE, Shareholder, Hungerford

You notice a duplicate payment on your company’s bank statement, but your employee assures you it’s nothing to worry about. Is it an honest mistake, or do you have a potential fraud case on your hands?

Fraud isn’t just limited to Enron, or more recently FTX and Theranos and other high-profile cases; it affects all industries in all regions throughout the world.

The Association of Certified Fraud Examiners’ Occupational Fraud 2024 report reviewed 1,921 submitted fraud cases from across the globe between January 2022 and September 2023. The report found total losses of more than $3.1 billion with an average loss of $1.6 million per case.

Small businesses certainly aren’t exempt from fraud, as the report noted 21% of cases came from businesses with less than 100 employees.

But what are the telltale signs of fraud? Here are the top five warning signs organizations shouldn’t ignore.

1. Unexplained Financial Discrepancies

The first thing you should keep an eye on is unexplained financial discrepancies, aka when the numbers don’t add up. We’re talking about irregularities in records, cash flow or inventory.

For example, look for any numbers that stick out — either higher or lower than usual — on your profit and loss statements. To do this, compare year-to-date statements with monthly statements to see if you can find anomalies.

Ask yourself: Is there a reasonable explanation for what’s happening on the financial statements, and does it align with what’s happening operationally?

The more often you review your statements, the easier it becomes to spot trends and deviations from those trends.

2. Employee Behavior Changes

Even after you’ve built a team of trusted leaders, as a business owner, it is still important to have a hand in what’s going on, and to to be aware of any behavior changes in your employees.

Expensive cars, new jewelry or other big purchases that are drastically different from their normal purchases could be signs of fraud. That’s not to say any expensive purchase is a red flag, but if it’s unusual for their normal buying habits, it’s worth investigating.

Additionally, if employees who have access to financial statements or assets don’t want to share those duties, won’t go on vacation, or have defensive attitudes about new procedures, that’s a cause for concern.

3. Weak or Circumvented Controls

Hopefully, your organization has policies in place regarding financial control, but those policies don’t mean anything if they aren’t put into practice.

We always recommend business owners implement segregation of duties so there is more than one person with financial access, creating an internal checks and balances system. You don’t want a situation where one person has “all the keys to the kingdom” without some oversight.

For example, if you have one accounting person who has full access to bank signatory rights, and they’re also the one writing checks and approving expenses, there should be at least one more employee (or you, as the owner) reviewing bank statements to ensure nothing suspicious is happening.

4. Vendor and Customer Anomalies

Fake vendors, duplicate payments and unusual contract terms are classic examples of fraud.

Duplicate payments, especially, should stick out like a sore thumb on financial statements and are a big red flag.

We worked with a bank that noticed a client of theirs made back-to-back payments to a vendor every period. Upon investigating the matter, the client was sending one legitimate payment to their vendor and another to a fake vendor connected to an employee’s personal bank account.

Unusual contract terms often pop up when employees at two different companies know each other outside of work.

There’s nothing inherently wrong with friends working together, but when contract terms don’t match what you would expect to see in the market, then you have a reason to be skeptical.

5. Lack of Oversight in High-Risk Areas

Do purchasing and expense reimbursements go unchecked at your company?

Company credit cards present a unique opportunity for employees to steal. Compared to a personal card where one person monitors their spending, business credit cards often are used by multiple people in multiple departments.

If there’s no accountability for how employees use the company credit card, then small unauthorized purchases here and there could turn into larger problems down the road.

Additionally, long-tenured employees may be given the benefit of the doubt, which opens the door for misuse.

Catch Fraud Before It Ruins Your Business

It’s important to implement a culture of integrity and practice what you preach to discourage employees from committing fraud.

Never assume “it can’t happen here.” Let’s talk about reviewing your financial controls to protect your assets before it’s too late.