Warning Signs of Occupational Fraud and Some Internal Controls to Help You Prevent It

Occupational fraud is in essence defined as taking advantage of an employment situation to attain or obtain personal benefit by intentionally misusing, misapplying or misappropriating an organization's resources.

There are generally three (3) types of occupational fraud. The first is fraudulent financial statements. This type involves "cooking the books" or other techniques to skew the financial accounting statements of the organization. The second is misappropriation of assets. An example of this type of fraud might be when an employee uses monies collected on behalf of the company for their own personal purchases. And, the third is corruption (i.e., bribes, kickbacks, etc). Regardless of the type of fraud involved small businesses are especially vulnerable to occupational fraud.

In general there are often subtle warning signs or indications that fraud is occurring inside your organization. By being aware of what these warning signs are you can be alert to them and possibly help prevent a loss from fraud in your company.

Oftentimes, the discovery of occupational fraud comes in the way of a "tip" from another employee or a 3rd party outside of the company that is affected by the fraud.

In these times of poor economy and financial strife by all the predominance of occupational fraud is on the rise. Here is a brief list of indicators of potential occupational fraud that might help you detect and possibly prevent this type of fraud from occurring:

1. Accounting Irregularities. If the fraud is of a large dollar amount, it will usually show up somewhere in the company's financial statements. For example, when a company adds a significant amount of bogus inventory it makes the company's profits look abnormally high. Subsequently the company will probably show record profits even though it did not have enough operating income to maintain its daily operations.

2. Unusual Timing of Transactions. This includes the time of day, day of the week, or the season.

3. Frequency of Transactions. Financial transactions that are taking place too frequently or not frequently enough should be suspicious. Every company has its own operation patterns, and financial patterns should be accounted for and recorded accordingly.

4. Rule Breakers. Employees who break rules including ignoring the generally accepted accounting principles when preparing the company's financial statements and routinely violating the company's own internal controls policy for their own purposes.

5. Giant Spenders. These are perpetrators that are normally people who are living beyond their means. Employees that are flashy with their big spending have led to the discovery of countless fraudsters. Is the employee earning a salary that would afford them to drive a Yugo, but they are driving a Cadillac?

6. Employees with Financial Problems. People with financial problems have a large motivation to commit occupational fraud. While most people with financial issues do not steal, some do.

These are just a few clues or indications to be considered, and the totality of the circumstances needs to be considered when looking into the possibility of occupational fraud. Hopefully these warning signs of occupational fraud can also prompt further thought on the topic of preventative, detective and corrective internal controls. Some of these internal controls might be:

1. Background investigations for all new employees and tighter hiring practices

2. Monitoring of employee's within the company, their work habits, and associations

3. Segregation of duties

4. Close examination of financial documentation

5. Close examination of cancelled checks

6. Independent verifications

7. Surprise audits

8. Rotation of employees through employment positions

9. Rotation of vendors

10. Physical plant security

11. Educating employees about fraud and how to detect and prevent it

Of all the threats to business, one of the most dangerous and increasingly overlooked comes from within. That's occupational fraud! It is an equal opportunity risk that spans across all sectors and businesses. It's a risk that all industries face at all levels. So, be proactive-not just reactive. Financial security starts from within -- .