Finding a thief: Personal red flags of fraud

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Tracy L. Coenen

As victims of occupational fraud reflect on crimes committed against their companies, they wonder if there were any signs that a fraud was occurring. They wonder how a trusted employee could steal from the company. Sadly, frauds are committed by people in positions of trust. What is it about those people that leads them to commit fraud?

Corporate thieves have many things in common with one another. There are many tell-tale characteristics about people and their lifestyles that signal the potential for fraud. These range from personal financial circumstances to attitudes on the job. A few of these traits alone do not indicate the potential for fraud, but the probability rises as we identify more of the characteristics.

Work Habits

Employees who steal from their employers often appear very dedicated. They work long hours and seem willing to take on extra responsibilities. For a normal person, these would be desired traits. An employee who helps accomplish more is seen as an asset to the company. For someone with the potential for fraud, however, these characteristics are worrisome.

An employee who shows up before everyone else and leaves after the other employees may have opportunities to cover up theft. As a dishonest employee walks through the office unchecked, imagine what documents and information that employee might access. Additional responsibilities for a dishonest employee offer another chance to access assets and records, and may give her or him the opportunity to conceal crimes.

It is important to be aware of employees who are almost compulsive about working long hours and doing everything themselves. What might appear to be unusual dedication to the company and the job, could possibly be an indicator of an employee scheming and devising ways to beat the system.

The flip side of an overly dedicated employee is the employee who is constantly fighting the rules and regulations. This employee objects unusually to following the established company procedures. She or he is constantly bucking the system and refusing to follow the rules. This type of employee may be unusually agitated at changes in policies and procedures, especially if these changes may impact a theft scheme.

This is different from the employee who says “we’ve always done it this way.” Employees who have been with a company a long time may establish their own routines and procedures, and change might be difficult for them. Resistance from an employee like this is probably not unusual or problematic.

The problem employee is the one to which the rules do not apply. She or he feels exempt from controls and accountability. Even when management begins stricter enforcement of rules, an employee who continues to challenge those rules may be at risk for committing fraud.

Attitudes on the Job

In addition to the above work habits, certain employee attitudes can signal a higher risk of occupational fraud. One of the foremost personal characteristics that can point to fraud is the lack of personal ethics. Those employees who exhibit low morals and ethics in their personal lives are likely to do so on the job. Those who are willing to cheat on small matters might be inclined to cheat on more significant things too.

Note that the inclination to steal from one’s employer doesn’t always appear so blatantly. Sometimes it is seen in more subtle ways. Look for negative attitudes such as a persistent dissatisfaction with the job and the company. Resentment of peers and superiors can also indicate the potential for fraud.

When employees feel that they are underpaid, underutilized, or underappreciated, they can run a higher risk of committing fraud. Those who don’t feel fairly treated can more easily convince themselves that it is okay to steal from the company. They may rationalize it as supplementing their below-market pay or making up for a promotion not received.

Rationalization of poor performance can also be a red flag of fraud. It is normal for employees to want to perform well and to perceive their own performance in a positive light. However, when clearly poor performance is argued by the employee as stellar, this is a cause for concern.

One of the most obvious attitudes that should cause alarm is that of the “wheeler dealer.” This is the person who is always trying to beat the system, get ahead quick, or pull a fast one. This employee can usually be seen bragging about what a great deal she or he got on something, or how she or he swindled someone else. This person prides herself or himself on getting ahead in dishonest ways, and can be very risky to a company.

Employees who exhibit sudden or unusual changes in behavior and work habits should be eyed carefully. While such a change could be an innocent result of something happening at home, sometimes it is a red flag of fraud. It can signal an attempt to conceal dishonest behavior.

Lifestyle Issues

A number of factors outside one’s work life can signal problems of which employers need to be aware. Criminal backgrounds are certainly of interest, and anyone convicted of a financial-related crime might not be the best employee for an accounting or finance position. Even though a company might not legally deny employment based upon a criminal conviction, management should still keep a close eye on employees with known convictions.

Personal financial problems have the potential to spill over into the workplace, especially if the employee sees an opportunity for theft. Companies need to pay attention to evidence of bankruptcy filings, a poor credit history, and high personal debts. While it’s not possible to be aware of all the details of the financial status of employees, it’s prudent to pay attention when information does come to light.

Employers should take note of employees with lifestyles that exceed their known means. The employee who drives a luxury vehicle and buys expensive jewelry on a modest salary should draw the attention of management. That employee might have a spouse with a higher salary or might have received an inheritance. However, that’s not usually the case. Such an employee should be monitored because she or he might be stealing to fund these luxuries, or the items may be purchased on credit.

The stress of loan and credit card payments could push that employee to theft at a later date.

Habits such as gambling, alcohol, and drugs can also indicate the potential for fraud. These habits are expensive and can lead to a host of other problems, from financial pressures to criminal records. Dishonesty often plays a part in addictions, and that doesn’t bode well for employers.

Instability in an employee’s personal life can spill over into the workplace. Some factors which require caution include frequent changes in residence, romantic relationships, and family situations. Personal instability can be expensive, and financial pressures can push employees toward theft. Instability at home can also negatively impact job performance, and an employee might utilize fraud to cover up poor performance.

It’s important to remember that a couple of these characteristics by themselves don’t mean that your employee is stealing from you. However, it is the convergence of several of these risk factors and red flags that should signal a problem.

Identification of red flags of fraud is the first step in stopping a theft-in-progress. The red flags themselves may not be cause for an employer to take action against an employee. They are, however, cause for increased scrutiny and possibly further investigation.

Tracy L. Coenen CPA, MBA, CFE is the president of Sequence Inc, a forensic accounting firm with offices in Milwaukee and Chicago. Coenen can be reached at [email protected] or 414.727.2361.