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

Occupational fraud continues to plague businesses, as it has for decades, even during and after the pandemic. The Association of Certified Fraud Examiners (ACFE) reported in its 2022 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 $117,000, with corruption and billing schemes as the most common frauds. 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
• Bullying or intimidation

While all of these behavioral red flags can be clues to help detect fraud, none should be considered in isolation. If someone in your organization 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 staff member is committing fraud. Likewise, consider assessing segregation of duties (SOD) at your organization. SOD — an effective and successful strategy to increase transparency and reduce fraud risk — will not only give you greater oversight of these warning signs but can dramatically improve the way your organization manages risk beyond fraud.

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Traits of a typical fraudster

In addition to observed behavioral red flags, the ACFE 2022 Report also analyzed the traits of fraudsters. Those traits include:

• Gender. 73% of U.S.-reported fraud cases were committed by males. And the median loss of frauds perpetrated by males is 25% higher than fraud 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 staff level, the median losses among male and female perpetrators are equal.
• Age. The survey concluded that 54% of the reported frauds involved a perpetrator between the ages of 31 and 45. The correlation between age and the amount of the loss appears to be strong; median losses involving fraudsters over the age of 60 was more than double other age groups.
• Education level. 65% of the reported frauds were committed by individuals who attended or graduated from college. The median loss was also larger among this group. Staff with a college degree absconded with a median amount of $150,000, 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 staff member was likely to begin stealing from it, the study did conclude that longer-term staff tended to commit larger frauds in terms of median losses per incident.  This makes sense since longer-term staff have gained knowledge over time of processes and controls of an organization, including any gaps.
• Position. More than 75% of fraud is committed by staff and managers. While owners and executives commit a smaller fraction of fraud (just 24%), the median loss from these reported incidents was over six times greater than that of fraud committed by staff.
• No prior record. The study found that a large majority of reported fraud 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 staff 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.