There is nothing worse than falling victim to fraud. When you learn that an employee or close associate is behind the crime, the disbelief may be overwhelming. Seeing your profits dwindle, losing your hard-earned money and realizing that your reputation is permanently tainted—all these paint the worst case scenario.
Fraud is so destructive that around $50 billion is lost annually because of it, a survey by Static Brain states.
Fraud investigations are now becoming common due to the surge in fraudulent activities within companies. The goal of a fraud investigation is to recover all, or at least a part of, stolen finances or inventory, and avoid damage to reputation and relationships with clients, vendors and investors.
No matter how brilliant your security intelligence approach is, fraudsters are always one, two or several steps ahead of you. Know the common signs that you have been deceived—before it’s too late.
1. Unexplained records and transactions
An unusual change in bookkeeping records is a warning sign, especially if they happen more than once, and at certain patterns. Do you notice an unjustified change when the profits peak? Is there a correlation between missing records and an increase in sales? Do you see an unexplained decrease in revenue despite a complete payment record from clients and vendors? Are invoices detailed in rounded amounts, without pennies?
All these are indicators that someone may be behind the scheme, putting money into another pocket. Conducting a fraud investigation can identify all missing records, unexplained transactions and other unusual details to help you analyze the situation, calculate how much losses have been incurred, and pinpoint the culprit.
2. Complaints
As a CEO, director, manager, supervisor or employee—you receive complaints all the time, either about you or someone else within the same organization you’re in. But complaints shouldn’t be dismissed as nonsense ranting by a disgruntled employee.
There are two ways to handle employee complaints—you either shrug them off or dig deeper to find out the real issue. As far as fraud is concerned, investigating the complaint will help you speak with the people involved and see a clear picture of the grievance. The community of employees is a house full of secrets. You’ll be surprised to discover hidden information once you connect the dots.
But what about complaints from vendors or clients? This is something you must not ignore, especially when you belong to an industry focusing on customer service like F&B, retail and tourism. Every customer complaint should be dealt with accordingly, and more so if the situation in question involves loss of money, inventory and your own employee.
Fraud investigations can help you come up with strategies to combat employee fraud, such as completing purchase orders, controlling cash receipts, and installing surveillance measures.
3. Shrinkage
Shrinkage is inventory loss that happens anytime during storage, transit or the actual point of purchase by the customer. This is common in retail stores where the loss is so huge—amounting to losses worth over $49 billion in 2016, according to the National Retail Security Survey.
Shrinkage is also attributed to consumer-related causes like shoplifting. In this case, a fraud investigation can help by identifying the shoplifter and to return and compensate any loss in favor of the affected business.
Internal shrinkage happens every once in a while, too, as there is always a margin of error. However, excessive internal shrinkage is a red flag of employee theft. Since fraud-related modi operandi are becoming more sophisticated, even employees and customers connive with each other.
Through fraud investigations, analysts can see patterns and relationships. Once they assess the severity of the shrinkage, they can correlate this with other information to determine the extent of the fraud.
4. Doubtful vendor information
Have you noticed how businesses rely on the Internet? Even small and medium enterprises, in the absence of an official website, build their own social media pages to establish their online presence.
Have you received an e-mail about a business proposal from an unfamiliar vendor? Does the message sound too promising? Were you asked to pay a certain amount of money via an unusual payment platform?
A quick search can give you a vendor’s contact details and address, but even these details—or the absence thereof—can tell a lot. Is the address non-existent? Are the phone numbers unreachable? Does the e-mail domain seem suspicious? Inconsistencies in the most basic details are warning signs, and you should take these with a grain of salt.
Depending on where the vendor is located or operating, you can do further investigation by checking with state-maintained databases such as the Better Business Bureau for US vendors and Corporations Canada for Canadian vendors. Other states, cities or provinces have their own databases as well.
However, a fraud investigator can do more than just searching on the Internet. There’s no harm if you inspect yourself, but you may not find the right information. If you employ an expert in fraud investigations, you can expect a more in-depth investigation. In this case, the investigator actually goes to the declared address and may even look into other databases that you have no access to.
5. Unusual employee behavior
Once fraud is confirmed, monitoring the behaviors of your employees is imperative. But how does behavioral profiling work? Simply observing them reveals a lot of clues that will help you determine who did what.
Personal circumstances
Is any of your employees going through a rough time, such as divorce or sudden death in the family? Does the employee have a high outstanding debt? Is the employee a gambler known to “splurge”?
Over-efficiency
Is the employee holding a sensitive position? Does the employee refuse to take leaves? Do you notice unusual working patterns, such as staying late in the office even after office hours or refusing to share duties with other employees? Does the employee ocntinually refuse a lucrative promotion or transfer?
Lifestyle changes
Does your employee have a new property? Have you heard of high-value purchases such as vehicles, jewelry or luxury items? Is the employee on frequent overseas trips? Can the employee’s income compensate for the expensive lifestyle?
Close associations
Does the employee have an unusually close relationship with a certain vendor, while not showing the same for others? Does the employee seem to gain the trust or confidence of an auditor or manager?
Conducting interviews is part of fraud investigations. Eliciting answers from the interviewee can give a lot of clues that aid in behavioral profiling. Experienced and qualified investigators are the best people to do this in a professional, non-compromising manner.
The very moment that fraud is suspected, an internal investigation conducted by the company is always the first step. If you feel that you need a more structured, expert approach in investigation, fraud analysts do the job well. The cost of fraud investigations may go very high if you want a full-scale scrutiny of all internal dealings within your company, but you will be as content as you will be shocked with the results.
Remember that these warning signs should not be the made as the sole basis for pinpointing the fraudster. Assessing the totality of circumstances is key. After all, fraud investigations can establish the facts of the crime—the who’s, what’s, where’s, when’s and why’s—in an objective manner.
Once you get the results of your investigation, you gain insight as to how the fraud occurred, allowing you to assess the effectiveness of control systems and to fix any weaknesses. Ultimately, fraud investigations help to strengthen your anti-fraud measures to ensure your organization doesn’t fall victim again.
