6 Red Flags That Point to Fraud

Posted By: Gita Faust ICOR Blog & News,

As technology evolves, it becomes much easier to identify and even prevent workplace fraud. Unfortunately, however, the advancement of technology also makes it easier for fraudsters to do their thing, especially when you don’t know the warning signs of fraud. Computers and software help a great deal, but they can only do so much when you don't even know where to start looking.

Countless red flags can indicate a fraud scheme going on right under your nose; it is vital that you educate yourself, management, and employees on the warning signs of fraud to work collectively to catch and prevent any fraud scandals. While there are thousands of different types of fraud schemes that occur, these six signs can be attributed to almost all of them:

  1. Accounting inconsistencies. If you suspect that somebody within your company is committing fraud, review your financial reports every week. Irregularities in data can manifest in simple forms, such as strange balances and unreconciled accounts, and complex forms, such as on-top entries (entries made after the books are "closed").

    For example, suppose a construction company controller does not reconcile the accounts for several months. Management continuously requests that he does, but they do not push him enough, so the accounts remain unreconciled. Eventually, the company let go of the former controller and hired somebody seemingly more competent. However, when the new controller reconciled the accounts, she found that the numbers were not in agreement; upon further investigation, the new controller discovered that the former employee had been committing fraud and stealing from the company. Management should have realized early on that unreconciled accounts were abnormal; they could have prevented the whole scheme if they had taken action earlier.

    However, it is not always easy to identify accounting irregularities that point to fraud. Workers who commit fraud typically know what is expected of them to keep the numbers within that expected range. As a result, sometimes investigators have to dig deeper into the data to uncover the irregularities within the books.
  2. Weaknesses in control. Control deficiencies are a major red flag for fraud. It is normal in many companies that some processes are not as secure as they should be, but when there is a significant deficiency in control procedures, it should be cause for concern.

    There are several different characteristics of control weaknesses, the first being a significant lack of separation of tasks. For example, suppose just a few people or just one person has complete authority over a specific financial sector or task. In that case, it creates several opportunities to commit fraud with little risk of being caught. For example, if one employee receives payments, records the data, makes the deposits, and reconciles the statement, they can easily conceal any fraud. However, if the work is delegated among several employees, the chance of fraud being committed is much less likely.

    Several other things can indicate that there are control deficiencies within your company: when employees can easily override the limits of authority, when (again) accounts are not reconciled regularly, and when accounting records are just generally poorly maintained. Unfortunately, many companies who let control weaknesses slip also fail to look into any major issues; oftentimes, they will just ignore or fix the problem without digging deeper into the root of the issue. So, if you notice control deficiencies within your company's accounting procedures, it is definitely worth it to take a closer look.
  3. Missing or incomplete information. Accidents happen, and human error is a thing, so a lost document every once in a while does not entirely cause alarm. However, when information goes missing regularly, you should dig deeper (and even if it is not a regular occurrence, you should still do some research if the missing information is too suspicious to ignore).

    Suppose that a company's bookkeeper continuously struggles to find canceled checks requested by the auditors, so the auditors rely on carbon copies alongside the general ledger detail. Unfortunately, the payees on the carbon copies were not accurate; the canceled checks were actually issued to the bookkeeper. He destroyed the canceled checks whenever the bank statement arrived and hoped that the auditors would not request copies of them.

    When you notice that information goes missing, look into it. Keep an eye out for any patterns, like blocks of time, particular customers or vendors, transaction type, certain employees, and other such things. One or two missing documents is no big deal, but when it becomes frequent, and all of the documents are related, then you should definitely investigate.
  4. Apparent deception. If somebody is acting suspicious, you should be suspicious. When people try to hide information, alter documents, or generally engage in suspicious activity, it understandably raises suspicions about fraud.

    An example of deception would be a claimant filing for disability insurance. Still, she does not mention her ownership interest in a business related to her current job (the job she is apparently unable to perform due to her disability). Meanwhile, a fraud investigator discovers this ownership and becomes skeptical of the claimant, thinking that she might actually be working at the business even though she "cannot" work at her regular job. However, if the claimant is not working at the other business and therefore has nothing to hide, why would she hide it?

    When people lie about little things, they are more than likely lying about bigger things. Even if they do not lie and just omit certain information (such as asset ownership, licensing, or other such facts), it still shows that they might be trying to hide something. Deception is usually not isolated, so take it as a sign of other issues; if you feel that it might be related to an instance of fraud, look into it.
  5. Behavioral changes. If your employee's behavior shifts significantly, you should consider it an indicator of something shady going on. Keep an eye out for both behavioral and lifestyle changes. For example, when an employee commits fraud, he might become less cooperative, argumentative, and drastically more stressed. The employee might also suddenly display newfound signs of wealth, such as luxury purchases or vacations.

    For instance, everybody at a small firm was stunned when the controller showed up to work in a brand-new luxury sports car. The controller and his wife did not make enough money to afford such an expensive purchase, but nobody said anything for fear of sounding judgmental. Then, roughly one year later, management found out that the bookkeeper had been working to defraud the company, and the fraud scheme was the source of funds used to purchase the sports car. If somebody had said something and management had investigated earlier, the firm could have saved thousands of dollars.

    Of course, outlying factors aside from fraud might be causing behavioral and lifestyle changes, but these might be signs of something nefarious going on behind the curtain. Therefore, it is essential that you watch these employees and their behavior red flags carefully because there is a chance that all of these changes point to fraud.
  6. Tips from employees. Tips from employees prove to be the most effective method for detecting fraud. However, it is crucial to ensure that the tips you receive are credible. In contrast, anonymous tips might be just as helpful; employees willing to put their name behind their suggestions are typically more credible. On top of that, tips backed by more information are more reliable.

    A vague tip might sound like, "John was at his computer and was acting a bit strange." However, there are no details to back up the suspicion, and the details provided are extremely vague in and of themselves. On the other hand, if Jane reports that "John was at his computer hours after his shift was over while there were very few other employees in the office, he acted extremely shifty when anybody approached him." Not only does Jane openly express her concern to management, but she also gives several details that augment the credibility of her tip.

    While all employee tips carry some weight, you should definitely investigate the more credible ones. Keep in mind that sometimes people report false information in order to cause trouble, so try to gauge the potential motivation of the employee that tips you off as well.


If you get the feeling that you might have a fraud scandal on your hands, then you should dig deeper into the details. Many companies use accounting software to track their money inflow and outflow, and some software has audit logs that you can check; QuickBooks is a good example of this.

QuickBooks is not the only software that needs to be reviewed for inconsistency. We have found discrepancies even on the free online software and paid ones, too, such as AppFolio, Buildium, and Yardi, to name a few. So always get the books reviewed by a consultant to find those inconsistencies and ensure the accuracy of your financial records. After all, we are in real estate to build our wealth!

One of the most important things to keep in mind is that your sense of intuition is invaluable; investigate if you feel that somebody might be committing fraud in the workplace. If you investigate and there is no fraud occurring, then at least you took precautions; if you choose to ignore your hunch and one of your employees is committing fraud, then you could lose thousands. So, trust your instincts and know the signs of fraud, so you can learn how to catch it and even prevent it in the first place.


HammerZen helps businesses save time & money by keeping track of The Home Depot purchases and efficiently importing receipts and statements into QuickBooks.  National REIA members receive discounts on QuickBooks services and software. Learn more by visiting www.hammerzen.com/nreia.