Understanding and Preventing Fraud in the Workplace: Key Causes, Red Flags, and Solutions

Fraud in the workplace poses a significant threat to a company’s financial health and employee trust. To effectively prevent fraud, it’s essential to understand its primary causes: pressure, opportunity, and rationalization. When employees face unrealistic performance targets, they may feel compelled to distort results. Additionally, insufficient internal controls can create a false sense of security, allowing unethical actions to go unnoticed. Moreover, personal financial difficulties can lead individuals to justify dishonest behavior as a means of coping.

The 3 main reasons that fraud occurs in a company are:

Pressure

If management puts pressure on employees to hit unattainable goals, this could cause employees to overstate revenue.

Opportunity

a) If internal controls are not strong (i.e. there is no one going behind and checking someone else’s work), this could cause an employee to think they are able to write checks to themselves and no one will notice.
b) Neatly half of fraud cases are due to weaknesses in internal controls.

Rationalization

“Is it wrong to steal bread to feed your starving family?” If employees are going through a tough financial situation, they could rationalize that they deserve to take money from your company.

Red Flags that you should look for when detecting fraud:

Employees who are living beyond their means.

Refusal to take vacation on share duties.

Family or financial problems at home.

Defensiveness/deflecting issues onto someone else/blaming others.

Past legal troubles.

The most common way that fraud/theft is discovered is by others tipping off supervisors. “If you see something, say something.”

Types of Fraud

Intellectual Property

Employees steal information about company to competitors or personal gain

Asset Misappropriation

Embezzelment, false expense claims, payments to ghost vendors.

Theft of Assets

Include cash, inventory, supplies, or equipment.

Payroll Fraud

Falsifying timesheets, manipulating pay rate, additional comissions that were not earned, fictitious employees.

Ways to Prevent Fraud

Inventory Counts
Strong controls for handling purchases and receiving goods
Checks and balances
Segregation of duties
Stay aware of unexplained differences and ask about them
Restrict access to information
Audits
Never give 100% trust to your employees/co-workers

As 2024 comes to a close, organizations should conduct an annual review of their internal controls and fraud prevention measures. Contact us to learn more about how we can enhance your processes and protect your organization.

Carly Corte, MACC

Carly is a Strategic Analyst who excels at performing internal control analysis, audits, compilations, and reviews for small businesses, government agencies, 401(k) plans, and non-profit organizations.

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