Shadowy hand over a keyboard
Dimitrios Stefanidis/iStock

Top 10 Red Flag Warnings of Fraud

Aug 21st 2015
Share this content

How prepared are you to detect fraud if it slips through the cracks, or even detect fraudulent activity?

All organizations are at risk of fraud, each with its own way of preventing it such as implementing specific policies, procedures, programs and training. However, preventive measures cannot guarantee that fraud will not be committed.

Fraudulent acts by individuals can negatively impact the company’s reputation and incur significant legal costs, and lead to incarceration, not to mention the downfall of the entire organization.

As an accounting professional, an important aspect of your job is to identify fraud during an audit. To help accounting professionals detect fraud, we’ve listed the Top 10 red flag warning signs of fraud below. While one of these may not necessarily be cause for concern, the presence of two or more should raise suspicion and may require a more in-depth examination:

  1. Missing Documents -- It isn’t uncommon for documents to go missing in the workplace. After all, accidents do happen. However, if this becomes a frequent occurrence, fraudulent acts could be the culprit, especially for checks. Missing checks numbers or gaps in reconciled check numbers can also be an indicator of fraud.
  2. Complaints -- It’s easy to write off complaints as nonsense venting, but complaints are one of the best ways to identify fraud. If employees are complaining about something, don’t take it lightly. Dig further into the situation to identify the cause of the complaint and what else could be behind it.
  3. Excess Purchases -- Fake payees can be used to convert funds. Be aware of excessive purchases as they could be covering a possible payoff of a purchasing agent.
  4. Inventory Shortages -- Internal shrinkage and product loss happens. However, excessive shrinkage could be an indicator of a plethora of fraudulent activities.
  5. Excessive Voids/Returned Checks -- Voided sales slips mean that the sale has been rung up, but the payment was diverted, potentially into the wrong hands. This is similar to cancelled checks. While they are usually legitimate transactions, a cancelled check can be returned to the wrong hands and be re-written to the fraudster. Excessive voids and cancelled or returned checks are common indications of theft and should be watched carefully.
  6. Duplicate Payments -- Duplicate payments in many cases are not fraud-related. However, if a duplicate payment is accidentally made by a company, it is possible for an employee to forge an endorsement of the check. Watch this closely as well.
  7. Rounded-Amount Invoices -- Fraudsters will often create invoices with rounded amounts. If you don’t see any pennies, it may be a sign that you need to look into that invoice further.
  8. Abnormal Invoice Volume -- Rapid invoice volume increases may be due to a legitimate increase in business, but is also may point to fraudulent behavior. Monitoring vendor invoice volume and being aware of spikes is a good way to spot abnormal behavior.
  9. Invoices Just Under Approval Amounts -- Some employees may be aware of the dollar threshold for management approval and create an invoice just below that approval level. For example, if the approval level is $5,000 and you get an invoice for $4,998, you may want to do a bit more research on that invoice.
  10. Mail Drop Address -- A mail drop, or ghost address, is an entity that can receive mail in your name. Companies using a mail drop as their address rather than a P.O. Box may be doing so to hide their fraudulent activity.

Even the most buttoned up and process driven organizations are at risk for fraud. In order to find this “needle in a haystack” and confront fraudulent behavior, you must first accept that fraud exists and that it (unfortunately) occurs often.

Acknowledge the importance of fraud awareness and implement training for employees on how to detect fraud at work. By enforcing controls, policies and procedures, you will cut down your risk of fraud and be better equipped to identify it.

Jodi Chavez is a Senior Vice President for Accounting Principals, which is active in recruitment and placement of accounting and finance professionals. Chavez is responsible for business development, strategy, operations and financial performance for the west zone and Georgia. She has more than 14 years of experience in the recruitment industry, with eight years specifically focused professional services with an emphasis on finance and accounting.

Replies (3)

Comments for this post are now closed.

By coltledger
Dec 30th 2016 04:38 EST

Really Informative! Fake company also cheat people in many ways. Detection and prevention of fraud is really important. I got information to a investigation Firm Colt Ledger before investment in a startup company.

Thanks (2)
By RenaeFlanigan
Jun 30th 2018 18:07 EDT

Love this post! Very informative.

Thanks (0)
By TanishaFlanigan
Jun 30th 2018 18:09 EDT

Loved this post! Very informative and great points to memo.

Thanks (0)