Ask any business owner whose company has been defrauded by an employee, and you’ll probably hear a common refrain: “I never would have suspected that person!” In many cases, spotting fraud perpetrators before they commit a crime is difficult, especially if you don’t work closely with them on a daily basis. But many fraudsters exhibit performance and interpersonal behaviors that can tip off owners, managers and HR professionals to more serious issues.

Overt and subtle signs

According to the 2022 Association of Certified Fraud Examiners’ (ACFE’s) occupational fraud study, A Report to the Nations, the vast majority of occupational fraud perpetrators have no previous criminal record. However, in 8% of cases, perpetrators have been terminated from a previous position and 9% have been disciplined by an employer.

The ACFE has also found that most fraud perpetrators exhibit at least one behavioral red flag before they’re discovered. Living beyond their means is the most prevalent (39% of cases) and unusually close relationships with vendors or customers are also common. Other behavioral red flags can be more subtle. A crooked employee may be the friendliest and most cooperative person in the office, but fraudsters often come into conflict with other staff members or fail to follow rules. They may also be socially isolated, unusually defensive or exhibit “control” issues.

Perpetrators in half of all occupational fraud cases engage in some non-fraud-related misconduct before or during the fraud incident. For example, they might be disciplined for bullying subordinates or frequently showing up for work late. According to the ACFE, a small number of fraud perpetrators are investigated for sexual harassment or inappropriate Internet use. Some dishonest workers also exhibit work performance problems. In the ACFE study, 15% received poor performance evaluations and 12% were denied a raise or promotion.

Nipping it in the bud

When misconduct or poor performance leads to disciplinary action, supervisors and HR professionals have a golden opportunity to potentially stop fraud in progress. After all, the longer a scheme goes undetected, the more costly it is for the organization. Fraud schemes with a duration of less than six months have a median loss of $47,000, but those with a duration of 13 to 18 months soar to a median $125,000 loss. So if you detect smoke, look for fire.

Although it’s usually a good idea to closely observe any worker who routinely flouts the rules, antagonizes coworkers or lets job responsibilities slip, be cautious. Most underperforming or difficult employees aren’t actually thieves. Talk to legal counsel before you make accusations about possible criminal activity.

Maintain controls

It’s also a good idea to establish and strictly enforce internal controls. Such controls can help protect your organization from financial losses even if you fail to notice a potential fraud perpetrator in your midst.

(This is Blog Post #1354)