Fraud has been in the news a lot recently... Between the fallen unicorn, Theranos, and the collapse of FTX, we seem to be surrounded by large-scale scandals. But fraud isn't limited to multi-million-dollar enterprises. It's pretty insidious - even in smaller businesses. So, you must know what the tell-tale signs are.

We are very committed to helping smaller businesses detect potential fraud and nip any fraudulent activities. That's why we introduced our Anti-Fraud feature set and have built dedicated courses on Fraud and the Anti-Fraud tools on Syft Campus. In this article, we will look at some of the most common red flags that could alert you to fraud so that you know what to look for in your organization.

Fraud can devastate businesses, especially small businesses that cannot afford to lose their hard-earned profits. This is why the sooner fraud is detected, the better. No one wants to get to the point where they've lost so much money that the business goes insolvent. As Linda Rossouw, Business Growth Solutions Specialist, writes in her article on fraud red flags:

"Realistically, companies cannot prevent all occurrences and forms of fraud, however, they could apply various detection techniques to cultivate an awareness of warning signs that could point to fraud, known as red flags."

This article is largely informed by the red flags identified by Rossouw, with some suggestions as to how you can combat these different vulnerabilities with the help of educational tools and software. We will address three main types of red flags:

Let's dive in.

If something looks a bit off in your books, it may be the result of an innocent - albeit potentially costly - mistake, or it may be the result of fraud. This is why it's vital that you remain vigilant in auditing your books. A few unusual discrepancies or fluctuations you may want to be on the lookout for include:

Let's take a look at each of these in turn.

If your revenue suddenly or unexpectedly changes and you can't seem to find a logical explanation for this, then you may want to investigate further. Perhaps someone has crooked the books to inflate your sales numbers, recognizing certain items as sales when they were not in fact sales. As Investopedia states in an article on detecting financial statement fraud:

"Tell-tale signs of accounting fraud include growing revenues without a corresponding growth in cash flows, consistent sales growth while competitors are struggling, and a significant surge in a company's performance within the final reporting period of the fiscal year."

Investopedia cites the shocking fraud case of Enron back in 2001 as an example of a case where a firm committed "egregious accounting fraud" using shady accounting.

If you notice inconsistencies for comparative numbers across your profit & loss, balance sheet, and cash flow statements, this may be a sign that someone has been messing with those numbers and you should investigate this ASAP.

If your financial statements are being altered or restated multiple times, this may suggest that someone in the company is trying to cover their crooked tracks or maintain a specific financial result. Major red flag alert!

According to the Association of Certified Fraud Examiners (ACFE), financial statement fraud is the least common type of fraud in the corporate world, constituting about 10% of detected cases. However, when this type of fraud does occur, it is the most costly, resulting in a median loss of $954,000!

If you notice any transactions that look unusual or identify data patterns or trend flows that are out of the ordinary, either by not fitting within the usual business model or by being incredibly complex, you may want to dig a little deeper to see what's really going on.

Embezzlement is defined as the misuse or theft of company funds or property. This happens when an employee steals or misappropriates company funds for their own purposes. Some common examples of embezzlement and employee theft include:

These are things you will want to catch before they go too far. Is there something strange going on with the business's receipts? Have receipts been diverted to written-off customer accounts or to personal bank accounts? Is your accounts receivable looking a bit sketchy?

This is part of why we have tools to detect the use of duplicate accounts and contacts or dormant accounts and contacts in our Audit tool. Cleaning up any duplicate or dormant contacts or accounts can make it more difficult for employees to embezzle money into their own account through old supplier contacts.

Oftentimes, people who commit fraud have certain behaviors that may indicate their criminal activities. And, no, I don't mean anything as obvious as blatantly talking about corruption or embezzlement. It's more subtle things like refusing to take annual leave or delegate tasks. Why would someone be reluctant to take time off or to unload their plate at work? Is this because they're workaholics or control freaks or is it because they're worried that they won't be able to oversee their fraudulent activities?

Alternatively, if one of your colleagues appears to be living it up with a flashy new car or other very expensive lifestyle habits, you may wonder if they've been maxing out all their credit cards or if they've suddenly come into a lot of money? Did a wealthy relative recently die, did their partner get a promotion, or are they stealing money from the company?

If you start asking a colleague about financial matters within the organization and they become strangely defensive or secretive, this may also indicate that something is afoot. Equally, if they have a very close personal relationship with a vendor or other external party, this could indicate collusion or a conflict of interest.

None of these behaviors are necessarily evidence of fraud taking place, but they are certainly worth investigating even if it turns out that, yes, your colleague's millionaire grandmother just died and that's why they decided to buy a new Mercedes. Better safe than sorry.

In addition to these signs, you may want to consider the Fraud Triangle, a notion conceived of by criminologist Donald R. Cressey in the 1970s. Cressey outlines three key conditions that lead to higher instances of occupational fraud:

If someone is under a lot of pressure, whether that be due to a sick child they are caring for or an addiction, then they are more likely to look for ways to find some extra money. If you sense that someone is under a lot of pressure or is suffering from an addiction, it may be a good idea to find ways to help them, perhaps offering resources for rehabilitation or counselling.

However, it's important to note that every person finds themself under pressure at certain times and that doesn't make everyone a fraudster. Pressure alone isn't enough to turn someone into a criminal; there needs to be an opportunity for them to act and a way in which they can rationalize their actions. These are the sides of the triangle that support fraud taking place. If it's very easy to steal change from the till or abuse the company card, then someone is more likely to do so than if there are measures put in place to make such actions difficult.

Unfortunately, it's difficult to stop someone from rationalizing their actions as just. They may think that fraud is a victimless crime, but they couldn't be further from the truth. Fraud impacts everyone in an organization, especially a small organization. The best thing that you can do to protect your business is to limit the opportunities for this behavior and to try foster an ethical working environment.

As our technology becomes more sophisticated, so too do our criminals. Today, there are an abundance of opportunities for cybercrime and this is one of the biggest threats that businesses must protect against. A few technological red flags would be:

It's incredibly easy for fraudsters to get hold of sensitive company data if you don't have the right protections in place. If you haven't encrypted your data or made sure to implement strong passwords across all your accounts, then you are vulnerable to attack. This is why it's vital that you train your staff on the risks of cybercrime, as well as ways to identify spurious emails or messages and ways to strengthen their passwords. It's also worthwhile to implement firewalls and to encourage your employees not to work on public WiFi networks.

According to the 2023 Global Ecommerce Payments Fraud Report conducted by Cybersource, phishing, pharming, and whaling attacks are the most prevalent fraudulent attacks and merchants cite increasing challenges in managing e-commerce fraud over the past few years. What exactly do these strange terms mean though?

The good news is that businesses are beginning to work more proactively to curb fraudulent attacks by using an array of fraud detection tools and focusing on more secure payment methods for customers.

Now that we've considered some of the red flags you should be aware of when it comes to detecting fraud and ways in which you can make it more difficult for fraud to take place, I thought we could turn to something a little bit more positive. While fraud is widespread and there's no guarantee that you won't encounter it, there are a lot of ways to know that your firm is in a good position to defend against it.

If you work to instill an environment of honesty and integrity within your organization where fraud is taken seriously, you are taking a step in the right direction. The tone of the top is very important when setting the tone for the rest of the organization. Employees need to know that if they see any suspicious behavior, they are safe to report it to their superiors.

Next, you want to make sure you have thorough controls in place, that these are well communicated within the business, and that you educate your staff on the risks of fraud and how to prevent it from taking place. Remember, if you remove the opportunity for fraud, the Fraud Triangle comes apart.

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