Knowing the Signs: Behavioral Red Flags

Organizations, both small and large, continue to face the threat of occupational fraud, which is fraud committed by individuals against the organization that employs them. Despite employers’ efforts to prevent all fraud, statistics show that if an organization is operational long enough, eventually, an employee will commit fraud.

However, according to the Association of Certified Fraud Examiners (ACFE) 2022 Report to the Nations, 85% of fraudsters displayed certain characteristics and patterns of behavior, known as the behavioral red flags of fraud. Knowing these can be crucial in the early detection of fraud, potentially saving the organization from significant financial loss.

Management and co-workers often see the warning signs of fraudsters but dismiss them. According to the ACFE, 42% of fraud cases were detected by tips, which is almost three times as many cases detected as the next most common method, an internal audit, and over half of all tips came from employees. Therefore, regularly performing fraud awareness training for management and employees, including behavioral red flags, can significantly increase the likelihood of detection. By recognizing the behavioral warning signs, companies may be able to either prevent the loss from occurring or substantially reduce the loss.

To be clear, a red flag is only an alert that something may be amiss. It indicates that fraud may be occurring but does not mean it is actually taking place.  However, given their commonality, behavioral red flags can be a clue in detecting fraudulent activity, so it’s important not to ignore them. They could be the key to preventing or reducing the impact of fraud.

Some behavioral red flags that may indicate a cause for concern:

• • Employee lifestyle changes – Employees who seem to be living beyond their means or buy assets and services that are not within their normal income range. Abrupt or unusual changes in lifestyle without any increase in income may also be an indicator.
  • Employees with financial difficulties – Employees with debt problems or long-term shortages of cash are more likely to find opportunities to get extra income to cover the shortfall. Similarly, a sudden financial hardship, such as divorce or medical emergencies, can be a motivator to perpetrate fraud.
  • Behavioral changes – Addictions such as drugs, alcohol and gambling will often cause employees to look for other ways to supplement their habits or to gain quick cash to meet their needs. Due to their addictive nature, those employees may feel forced to do anything to earn extra income. However, other behavioral changes, such as a sudden fear of losing their job, may also be a change indicative of fraud.
  • Behavioral patterns – Fraudsters often have common behavioral patterns such as:
    • • Being unusually close to vendors or customers
      • Control issues / no cross-training
      • Defensiveness
      • “Wheeler-dealer” attitude
      • Bullying colleagues or intimidation tactics
      • Disgruntled employees
  • Performance patterns – Fraudsters often have common performance patterns of behavior such as:
    • • Crisis mode mindset / always “putting out fires”
      • Failing to keep appropriate or accurate records/receipts
      • Taking unusually long to perform work outside of their normal tasks
      • Seeking access to areas which they should not be able to access
      • Refusal to take vacation or sick leave
      • Always first in/last to leave

Displaying one or more of these behaviors isn’t absolute proof that an employee is committing fraud, but if someone in your organization exhibits several behaviors on this list, extra attention may be warranted. It is imperative that once a red flag is observed, action is taken to investigate if fraud has been or is still occurring. Knowing the signs to look for and acting on them when identified is a key component of fraud loss prevention.

Contributing author: Lori A. Beirman is the director of audit quality at Dannible & McKee, LLP. She has over 23 years of experience in audit, reviews and compilations in a variety of industries, such as construction, manufacturing and professional service firms. She also specializes in data analytics and fraud.  For more information on this topic, you may contact Lori at lbeirman@dmcpas.comcreate new email or (315) 472-9127.