Are You Listening to The Warning Signs of Fraud?

By: Penny C. Lutocka - Partner, London Witte & Company LLP

Category: Financial

Late one afternoon I received a call from a client who told me the longtime accounts receivable clerk had just confessed she had been stealing from the company for several months. She had a terminally ill parent and needed extra money to care for him. She only confessed because she couldn’t handle the pressure anymore of trying to cover up her fraud. She had every intention of paying the company back but kept getting further and further behind. If only the business owner would have paid more attention to the warning signs.

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Fraud is an intentional act of deception, performed by a person in a position of trust, for their own personal gain. When a fraud occurs, the act is concealed which makes it even harder to detect. According to the Report to the Nation published by the Association of Certified Fraud Examiners, organizations in the United States lose approximately 7% of revenues to fraud. This represents billions of dollars. Is this happening in your organization? Here are some warning signs:

Customer complaints/Employee tips
Keep your eyes and ears open for customer complaints and employee tips.
Have you ever had customers tell you that they received a delinquency notice for late payment when you know they always pay their bill on time? Client G received several. How about complaints regarding shortages or missing items from shipments received from you? Has a customer told you the clerk used a different credit card machine to ring up a return than for a sale? Has one of your salespeople told you that another salesman is bragging about padding his expense report? Not all complaints/tips mean fraud is present; however, ignoring them could be costly.

Unexpected financial results
Financial statements should be reviewed by the owner at least quarterly and preferably on a monthly basis. You should have an expectation as to the results. No one knows more about your business than you do. Are you surprised at what you see? Did you think you were making a certain profit level and are surprised that you didn’t? Do the statements reflect less cash than you believe you have? Are gross profit percentages in line? Are there higher than expected expenses that you can’t identify? What about the timeliness of the financial statements? Are you told by your bookkeeper that you will receive statements next week and then next week turns into a couple of months? There may be valid reasons but questions should be asked.

Accounting irregularities
Are you reviewing the original invoices from vendors? Have the invoices been altered? Do you look at the detail of credit card bills? Do you have a filing system in place that will enable you to find documents easily? Are there excess voids or credits? Are reconciliations of bank accounts, accounts receivable and other accounts done on a timely basis? Do you review them for unusual items? Had client G reviewed the accounts receivable reconciliation he would have spotted some items that could have revealed the fraud. Missing and altered invoices, lack of documentation, and unreconciled accounts should be investigated.

Unusual behavior
I work with a client who had a bookkeeper that acted exhausted every time I visited. The reason he was exhausted was because he was leaving work every day and heading straight to the riverboat to gamble. It turned out that he was using his employer’s petty cash to gamble. Many of the other employees knew this. Things were going well until he lost it all. Do you have a bookkeeper who is extremely nervous when asked accounting questions? Client G did. This nervous employee could be hiding something. Do you have an employee that refuses to take a vacation or works extra hours without pay? This employee could be working the extra hours to cover up what they are stealing. All employees should be required to take vacations.

Living lifestyle beyond one’s means
Desperation and greed can be strong motives. Do you have employees that have personal things that you wonder how they can afford? What about one that has a sick child or parent with substantial costs not covered by insurance? Is an employee involved in an affair? Does an employee have a gambling or drug addiction? These are all ideal situations for providing the motive to perpetrate a fraud that one might not otherwise commit.

Many business owners believe fraud won’t happen to them. In most cases, it’s the person you least expect that commits the fraud. Greater awareness and listening for warning signs can prevent you from becoming the next victim.

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