People don’t like to talk about fraud. They don’t want to admit that someone they trusted stole money.
Businesses fall into two groups: businesses that know they’ve lost money and those that don’t know. You may think I’m being cynical, but I base my view on 30 years of experience working with hundreds of businesses.
For me, there are two red flags indicating fraud. The first is a business owner who operates under the Golden Rule — “He who has the gold makes the rules.”
The second red flag is a business owner who thinks keeping poor records is smart. Poor records cover the fact that he’s under-reporting income.
These signs reflect a poor attitude on the part of the business owners. Owners with poor attitudes tend to have employees with bad attitudes. Employees with bad attitudes tend to be unhappy employees.
Studies indicate that attitude has a lot to do with fraud. Unhappy employees are more likely to commit fraud. Happy employees will be quicker to report dishonest behavior of coworkers. They are your extra eyes in this battle.
Keeping accurate records allows you to detect fraud faster. By looking out for trends, you have a better chance to catch the problem before it becomes too large. However, the bitter truth is that most fraud is discovered by accident.
Before I present some specific examples of fraud, I’d like to talk about people. After all, people commit fraud. Knowing what to look for can make it easier to spot potential problem employees.
Let’s set the stage. You’re helping your longtime friend Frank. Frank says that, although business is going great, there’s no money. Where is the problem? He believes he has a good group of employees. The staff includes three counter agents, a supervisor and a bookkeeper. Some of the employees have been with him for years. Frank says he knows and trusts his employees.
Frank admits he’s taking some money under the table. “You know, a cash deposit here and there. Who’s going to miss it? It is, after all, tax-free money.”
This is your first indication of a problem. If the boss takes money, employees may interpret this attitude as permission to join in.