Fraud Guide


The Fraud Prevention Guide

Fraud is now a major problem facing Irish businesses. Annual losses due to fraud and misappropriation can be as much as 2% to 5% of turnover. The fact is fraud is hidden. So a fraud could be occurring in your business without your knowing about it. Here we describe 36 of the common signs you should look out for.

A Vulnerable Business

Fraud thrives under differing conditions. These are some of the common signs:

  • Internal controls are weak or not monitored.
  • One or two managers dominate the business as a whole or an individual department.
  • Management compensation is strongly linked to short-term results.
  • Employees are poorly managed, motivated or paid.
  • High degree of financial responsibility is concentrated in one person.
  • Internal reports are ignored or poorly explained.
  • Infighting among top management.
  • Low morale and motivation among employees.

A vulnerable organisation is one that does not take the risk of fraud seriously.

Look for these “Red Flags”

The signs that a fraud is occurring in a business are often ignored or explained away. Any one of these conditions may indicate that fraud is occurring in your business:

  • Understaffed accounting departments.
  • High turnover of staff.
  • An employee with a lavish lifestyle beyond his salary.
  • Employees who rarely have holidays or take on unusually high workloads.
  • A high level of complaints received by the business from customers, suppliers and regulatory authorities.
  • Inconsistent and surprising cash flow deficiencies.
  • The business overdraft facility is used to the limit for long periods of time.
  • Sales are decreasing while payables and receivables are rising.
  • High level of stock returns, credit notes issued or refunds made.

A very effective method of detecting problems early is to set financial budgets and projections and compare them to actual results. Unusual variances should be investigated and explanations obtained.

Internal Fraud Techniques

The vast majority of frauds suffered by businesses are internal in origin. Some common management and employee fraud techniques are:

  • Pre-billing customers for deliveries not yet made.
  • Recording sales that are not final.
  • Altering invoices and misappropriating the difference.
  • Altering credit card receipts for submission as business expenses.
  • Charging personal expenses as business expenses.
  • Financial statement fraud.
  • Making inadequate allowance for doubtful debts.
  • Teeming and lading – keeping one customer’s payment and covering it with subsequent payments from another customer.
  • Kiting – Showing the same amount on deposit in two banks at the same time.
  • Advancing loans without proper approval and documentation.
  • Front-end fraud – pocketing cash sales.
  • Secret commissions or “kickbacks”.

Fraudster Characterisation

There is no stereotype for fraudsters; however, they often have some of the following characteristics.

  • Act alone
  • Compulsive (e.g. workaholics or overeaters).
  • Have a hidden need for cash (e.g. alcoholics, drug abusers or gamblers).
  • Unable to deal with pressure – explosive tempers or aggressive.
  • Able to rationalise their thefts.
  • Able to exploit an opportunity and to cover up their fraud.