Fraud cannot be ignored, particularly in an economic downturn when some individuals may be desperate for money and businesses may be crippled by a fraud loss. 

In our previous articles in this series, we have discussed ways to implement effective fraud prevention programs, establish whistleblower hotlines, and use technology to help analyze data for indicators of fraud. Finally, be on the lookout for various types of red flags that are often present when a fraud is being committed.

• Internal Control Red Flags - Segregation of duties is a key preventive control - identify any areas where one individual has custody of assets and the ability to authorize and post a transaction, and consider the fraud risk. Refusal to take vacation time is also a red flag, because fraud schemes are often discovered when someone else performs the perpetrator's job.
  
  
• Behavioral Red Flags - Be aware of signs that an employee may have an addiction to drugs, alcohol, or gambling, which can lead to fraud. Employee Assistance Programs may help employees get treatment before the pressures result in poor job performance or fraud.
  
  
• Lifestyle Red Flags - If an employee upgrades their lifestyle (house, cars, vacations, boats, etc.) over a short period of time without a reasonable explanation of the windfall, consider it a red flag for fraud. They may be funding it with your company's money or feel pressure to commit fraud to continue living beyond their means.
  
  
• Management Red Flags - If senior management makes financial decisions that do not make sense, makes decisions in a vacuum, overrides the decisions of department managers, or has a significant portion of their compensation in bonuses for meeting lofty financial targets, your company may be at higher risk for fraud.
  
  
• Purchasing / Inventory Red Flags - Pay particular attention to the vendor master file. Look for new vendors that were not properly authorized, vendors with no physical address, and vendor addresses that match employee addresses. Frequent stockouts are also a red flag for inventory theft.
  
  
• Financial Pressures Red Flags - Especially in an economic downturn, employees may experience financial pressures. Excessive medical bills, divorce, or the loss of a spouse's job can bring create financial stress that may lead otherwise honest employees to commit fraud.

While it is critical to be aware of the red flags of fraud, it is also important to recognize that many fraud red flags are just difficult situations that have nothing to do with fraud. Falsely accusing employees of fraud or unnecessarily raising suspicion can cripple morale. If you recognize a red flag, contact a trained fraud professional to help you develop an effective plan of action.

We hope you have found our fraud series to be helpful as you protect your business from the increased risk of fraud in these difficult economic times.

First four parts of the series:

Part 1 - Recession Increases Fraud Risk

Part 2 - How to Develop an Effective Fraud Prevention Program

Part 3 - How an Effective Whistleblower Program Can Benefit Your Company

Part 4 - Fuel Card Program Risk Can Be Minimized

Stambaugh Ness has several Certified Fraud Examiners ready to serve you. Contact Gary Markey at 717-757-6999 or 800-745-8233, or visit our website at www.stambaughness.com for more information about our Risk Advisory Services.