As with people, every company is different. Some are small and some are large. Some are growing, while others may be shrinking. Companies have an identity or culture, which is formed by its owners, executives, managers, and employees. These characteristics can be important when evaluating red flags of fraud.
The next three blogs in this series will focus on the red flags within companies. This blog will highlight five red flags that could be present in any size company when fraud is being committed.
- Messy or missing records – Unorganized or missing documents lead to transactions that may lack support, which isn’t a good way to run a business and could be an indicator of fraud. As businesses move from paper files to electronic files, the evidence to evaluate this red flag may not be as clear today. However, it is a sign of potential fraud when you look for a file and the support is insufficient or nonexistent. It becomes a red flag when it becomes a frequent occurrence.
- Hard to get answers to questions – I have seen this in numerous cases, and it usually stems from the red flag above. Oftentimes, the person who should have the answer to the question can’t provide a direct answer or it may take them a long time to get back to you. The person who should have the answer may become defensive or may shut down as more questions are asked. This red flag is often ignored because the people asking the question will write the behavior off as them being too busy or overworked.
- Resistant to change – When new systems or processes are discussed and people fight the change, this is human nature because we inherently don’t like change. Most people will come around once they see there will be benefits from the change. However, this can be a red flag if the people fighting the change never buy in to it and continue to resist the change. Some people may even quit because of the implementation of the change.
- Adjustments to balance sheet accounts – This one can be tricky and requires experience to identify as a red flag rather than “normal” activity. You should look for large or frequent journal entries that increase profits (by reducing expenses or increasing revenues) by reducing liabilities or increasing assets. Another red flag would be adjustments directly to retained earnings. If there are any questions about journal entries, you should ask for help to determine if you should be worrying about fraud in your company.
- High turnover – Turnover happens in every company, but there is a difference between healthy turnover and “high” turnover. You should look for the scenario when a manager has higher turnover than other managers or if there is a certain department or group that has higher turnover than others within the company. The turnover may be caused by people leaving because they are being asked to do unethical things or a manager may push people out if they challenge the status quo.
Be on the lookout for these red flags, and if you see any, don’t ignore them. Ignoring these red flags could lead to a fraudster taking you to the bank, and may even lead your company into bankruptcy. In next week’s blog, we will cover the red flags within a small company.
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