Warning Signs of Employee Fraud

Bruce Roher • July 13, 2016
Bruce Roher

Fraud is a growing problem in many food and beverage businesses. Most organizations only take steps to improve their controls after a fraud has been discovered and the damage has been done. But the good news is that you can reduce the risk of fraud by being aware of the red flags to look out for.

This article will illustrate three warning signs of employee fraud and what measures you can take to minimize the opportunities for fraud in each case.

Red Flag #1

One warning sign of employee fraud is a supplier who insists on dealing with one specific employee. Some purchasing frauds are committed by inflating supplier invoice amounts. A corrupt purchasing agent may be receiving a kickback payment from a supplier for goods purchased. The kickback will often be paid directly by the supplier to the employee. Alternatively, the employee may establish a fictitious purchasing company which then submits invoices for payment.

In order to detect this type of fraud:

  • Have an employee outside of the purchasing department check supplier invoice prices against documented price lists and quotes obtained.
  • Review contracts that were issued without competitive bids.
  • Require two signatures on all cheques with careful scrutiny of invoices and supporting documentation. Be suspicious of invoices that indicate a post office box as the address.
  • Compare all addresses and telephone numbers recorded for employees to the master file of suppliers.

Red Flag #2

When an employee does not take annual vacation time, it could indicate that the he or she does not want their responsibilities taken over by other employees who may detect fraudulent acts. An employee who is over-protective of their work activities and processes may have something to hide.

In order to detect this type of fraud:

  • Consider insisting that employees take annual vacations and have other employees perform their duties during their absence.
  • Implement a policy of rotating job responsibilities and cross-training employees to perform different functions.

Red Flag #3

Another warning sign of employee fraud is a sudden or drastic change in lifestyle. Management should be suspicious if an employee exhibits significant changes in lifestyle or if they appear to be living beyond their means. In many cases, fraud occurs because an employee is desperate or greedy for funds beyond the income earned from employment.

In order to detect this type of fraud:

  • Be vigilant and keep your eyes open for suspicious activity.
  • Follow through by further investigating any activities that seem irregular or out of the ordinary.

What You Can Do

One of the most important internal controls that can be easily implemented is a “segregation of duties.” For example, be sure to separate the purchasing/receiving functions from the invoicing/cash/payables and general ledger functions. Further, all bank accounts should be reconciled by someone other than those responsible for cash receipts and disbursements. Restricting access to records and databases depending on the employee’s position and responsibilities is another effective internal control that can help prevent fraud.

In today’s uncertain economic climate, employees may be more motivated or tempted to perpetrate a fraud. Protect yourself and minimize the risk! Your business advisor can be a valuable resource for evaluating the state of your internal controls, recommending best practices, and implementing improved fraud risk management strategies, policies, procedures and internal controls.