Why Didn’t We See It?

There was a substantial fraud in our company and we missed it.

Hindsight is a wonderful thing. Conducting an enquiry after the event may show that there were many warning signs or red flags present. If only we had recognised the warning signs or knew what the red flags were, we could perhaps have prevented the fraud or considerably reduced the loss.

It is simply not the case that larger fraud and embezzlements that larger frauds and embezzlements are easier to detect and that they should have been discovered sooner. It is widely recognised that corporate frauds and embezzlements start small and continue to grow until something becomes glaringly obvious or different.

Red flags are different types of circumstances that are unusual in nature or perhaps vary from normal activities. They are indications that something is out of the ordinary and may need to be investigated further. Red flags on their own do not show guilt or innocence, but may provide a possible ‘heads up’ with regards to misconduct.

The ability to identify red flags is paramount, not only for auditors and accountants, but for every employee in any organisation, where the potential for fraud and embezzlement exists.

Studies of fraud and embezzlement cases frequently demonstrate that red flags were present and were not recognised or were recognised, but not acted upon. It is vitally important that once a red flag has been highlighted, it should be made known to senior management and thereafter investigated to determine if misconduct has occurred.

One red flag which is common to the majority of frauds and embezzlements is –

Obvious changes in employee lifestyle.

This may be demonstrated through an increase in spending, new cars, new clothes and jewellery and can also be described as someone living substantially beyond their means.

Who should be able to spot this change ? A Manager or Supervisor perhaps, but a co-worker is far more likely to identify this red flag.

What does the co-worker do with this concern? If they are aware that it is a red flag indicating possible misconduct, they may well advise a line manager or other person through an internal process. However, without any other indication or suspicion of misconduct, they may be unwilling to do so, fearing how they themselves would be viewed by others, if latterly no misconduct was discovered.

An uncertain employee is more likely to keep their concerns to themselves, resulting in the red flag not being highlighted.

What can be done to provide employees with an outlet to highlight a red flag?

The implementation of SeeHearSpeakUp, an independent and external whistleblowing/hotline service provides the opportunity for employees to highlight their concerns and red flags, 24/7, 365 days a year.