Addressing red flags of employee misconduct
When it comes to internal fraud and misconduct, it pays to be on the look-out for some behavioural red flags. These ‘red flags’ are common indicators exhibited by employees engaged in potential internal fraud. While the existence of a particular red flag isn’t an open and shut case, it is a potential warning sign. In my 20+ years of investigating fraud, this has certainly been my experience.
Recent data from the Association of Certified Fraud Examiners (ACFE) suggests 91 per cent of fraud cases had at least one red flag identified. In 57 per cent of the cases, the fraudster exhibited two or more behavioural flags.
There are 6 common behavioural red flags according to the ACFE, including:
Living Beyond Means – identified in 45.8 per cent of perpetrators
Financial Difficulties – identified in 30 per cent of perpetrators
Close Association with Suppliers – identified in 20.1 per cent of perpetrators
“Wheeler-Dealer” Attitude – identified in 15.3 per cent of perpetrators
Control Issues – identified in 15.3 per cent of perpetrators
Martial or Family Problems – identified in 13.4 per cent of perpetrators
While “living beyond means” and “financial difficulties” make up the most common red flags, there are many other warning signs that an employee may be committing fraud. The presence of red flags isn’t categoric evidence, however it may indicate something unusual is occurring.
As such, it is vital organisations invest in educating their employees on the different types of internal fraud and most common behavioural ‘red flags’ to help with early detection. By educating your people, not only do you increase the likelihood to detect fraud earlier and limit losses, but you also provide support to the person committing fraud. Often fraudsters are first-time offenders and are committing fraud due to pressure within their lives.
How can we address red flags?
While remote and hybrid work environments are now the ‘new normal’ for a lot of organisations, there is increased risk of fraud and misconduct in this disconnected new world of work. The lack of visible supervision and reliance on IT systems may increase the opportunity for employees to engage in unethical or unlawful behaviour.
Adding to this risk are the increased economic challenges experienced by employees whose spouse or partner may have lost a job during the pandemic and are now the sole bread winner for their family. Increased financial pressures – coupled with remote working and poor internal controls – can create a ‘perfect storm’ for fraud and misconduct.
There are some simple yet important actions a business can take to address red flags and help reduce fraud and misconduct occurring in the workplace:
Set the tone from the top down: Setting the right culture comes from the top down. As a senior executive or business owner, you have the obligation to set an example for your organisation and ensure others maintain and strive for that standard. With remote working comes new challenges. That’s why centralised risk and compliance platform’s such as Corethix can help your people understand what is expected of them.
Make it easy for your people to report potential issues early: Make it safe and easy for employees to speak up with internal and external reporting options. It’s crucial to have internal reporting channels such as the ability to speak to your manager, senior leader or HR team, however you should also consider a safe and independent external reporting channel or hotline. Research from the Association of Certified Fraud Examiners shows 45 per cent of occupational frauds are detected via an ‘internal’ tip – this is three-times more effective than other detection methods.
Upgrade your IT Security: Cybercrime has spiked since the start of the pandemic, costing the Australian economy more than 1 billion dollars according to insurance comparison service, comparethemarket.com.au. Investing in upgrading your IT Security can ensure your people are working safely and securely within your network while at home. It’s important you can monitor and track employee behaviour in the event you need to respond to an incident or cyberattack.
Return to the office plans: As the number of new COVID cases remains low across Australia, organisations are now slowly returning to the office. While this may not involve working from the office full time, it is time to take the lead and structure a return-to-work plan that suits your organisation and employees.
When something goes wrong, you must respond quickly and effectively. Investigate and respond to allegations of fraud and misconduct in a considered and timely manner. Ultimately, the best way to manage fraud and misconduct is to prevent it.
Darren Murphy has over 25 years’ experience as an integrity risk professional spanning corporate risk and governance, investigations and protective security. Darren now leads a multi-disciplinary team of risk professionals through his business Core Integrity, who help organisations protect their people, reputation and bottom line. Darren’s CV also includes roles as Head of Investigations at one of Australia’s largest financial institutions as well as 13 years in law enforcement.