While direct observation may prove difficult, fraud can often be spotted indirectly through “symptoms,” or red flags. Matt Barberich identifies a few simple clues that could mean fraudulent activity is happening in your business.
Due to its nature, most fraudulent activity is unable to be observed directly; however, fraud is similar to a corporate disease. While direct observation may prove difficult, fraud can often be spotted indirectly through “symptoms,” or red flags.
Here are a few things that may point to fraudulent activities in your business. They don’t always indicate that fraud has occurred; however, they are generally good indicators:
- Cash shortages,
- Unauthorized or unusual electronic banking activity,
- Unusual order cancellations after the end of an accounting period,
- Customer complaints regarding payment application,
- Customers who are unable to be contacted (or located),
- Unusual levels of customer discounts,
- Duplicate shipments,
- Recorded assets that cannot be located;
- The “employee that never takes a vacation,”
- Sales dated subsequent to receipt of customer payments (where prepayments are unusual),
- Unusual or unexplained variances in accounting records, and
- Missing or altered accounting or operational records.
There are some simple steps you can take to help lower your company’s risk of fraud, mainly segregation of duties. Proper segregation of duties is a key element in order to reduce the actual or perceived opportunity for fraud to occur. In general, the Custody, Approval authority and Recordkeeping functions (the “CAR” principle) should be segregated among different individuals; however, most small businesses lack the necessary personnel to do so properly. Therefore, active management oversight and/or third-party oversight/reconciliation is often used to mitigate the lack of segregation of duties.