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How to spot a fraudster: Red flags that may indicate occupational fraud

October 13, 2021 Article 3 min read
Michelle D. McHale-Adams Eric Conforti

Occupational fraud continues to cost businesses, some quite severely. In most cases, the perpetrators exhibit several common traits and behavior patterns. Be on the lookout for these red flags.

Person holding telescopeOccupational fraud continues to plague businesses, as it has for decades. The Association of Certified Fraud Examiners (ACFE) reported in its 2020 Report to the Nations on Occupational Fraud and Abuse that U.S. organizations lose an estimated 5% of their annual revenues to fraud, from misuse of an organization’s assets to fraudulent financial reporting and beyond. This percentage has remained constant for the last several surveys. The report also outlined that the median loss per case was $125,000, with corruption and billing schemes as the most common frauds carried out. In most cases — 85%, according to the survey — the perpetrators exhibit certain personal characteristics and patterns of behavior.

Fraudsters’ common behavioral red flags

Management and co-workers may see warning signs of “fraudsters.” According to the ACFE reports, the two most common red flags continue to include living beyond one’s means and financial difficulties. Other warning signs include:

  • Getting too close to vendors or customers
  • Control issues
  • Defensiveness
  • “Wheeler-dealer” attitude
  • Family problems
  • Addictions

Fraudsters’ two most common red flags continue to be living beyond one’s means and financial difficulties.

Owners and executives commit a smaller fraction of fraud; however, the median loss from these reported incidents was up to seven times greater.

While all of these behavioral red flags can be clues to help detect fraud, none should be considered in isolation. If your organization has someone who exhibits several behaviors on this list, extra attention may be warranted — but keep in mind, simply displaying one or more behavioral red flags isn’t absolute proof the employee is committing fraud.

Traits of a typical fraudster

In addition to observed behavioral red flags, the ACFE 2020 Report also analyzed the traits of fraudsters. Those traits include:

  • Gender. Almost 60% of U.S.-reported fraud cases were committed by males. And the median loss of frauds perpetrated by males is nearly twice that of frauds committed by females. The difference may stem from males holding more management and executive-level positions, which provide a greater opportunity to commit larger-dollar frauds. Conversely, when isolating cases to only those committed at the employee level, the median losses among male and female perpetrators are equal.
  • Age. The survey concluded that 53% of the reported frauds involved a perpetrator between the ages of 31 and 45. On the other hand, the correlation between age and the amount of the loss appears to be strong; median losses involving fraudsters over the age of 55 was almost three times higher than for other age groups.
  • Education level. Seventy-eight percent of the reported frauds were committed by individuals who attended or graduated from college. The report also showed that as the perpetrator’s education level rose, so did the median loss incurred by the fraud. Employees with a college degree absconded with a median amount of $175,000, more than twice that of fraudsters with no college education.
  • Tenure. While the study showed no strong correlation between the length of time an individual worked for an organization and when that employee was likely to begin stealing from it, the study did conclude that longer-term employees tended to commit larger frauds in terms of median losses per incident.
  • Position. More than 75% of frauds are committed by staff and managers. While owners and executives commit a smaller fraction of fraud (just 20%), the median loss from these reported incidents was 10 times greater than that of frauds committed by staff.
  • Prior record. The study found that a large majority of reported frauds involved offenders with no prior criminal record. However, keep in mind this doesn’t mean it’s the fraudster’s first time committing this type of scheme. It’s possible they weren’t caught the first time, that their previous employer chose not to take the matter to the authorities, or the prosecutor decided not to bring charges against the individual.
  • Collusion. Less than half of the cases reported involved only one perpetrator. In addition, when collusion occurred, the median loss increased with each additional perpetrator. That seems logical given that internal controls go by the wayside when employees are working together to perpetrate a scheme.

Be alert: Don’t overlook fraudsters’ frequent behaviors

Organizations, both large and small, face threats of loss related to occupational fraud; it’s been going on for decades, and there’s little reason to think it will go away. All companies should remain aware of the behavioral red flags. Remember: the most effective fraud prevention programs incorporate knowing who and what to look for, always being on the lookout for telltale signs, digging deeper to gather the facts when fraudulent activity is suspected, and taking swift action when fraud is detected.

Have questions about these red flags and how to prevent fraud at your organization? Give us a call.

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