Are you being scammed? Here’s how to spot fraud in your business

fraud detection

Men are so simple of mind, and so dominated by their immediate needs, that a deceiver will always find someone who is willing to be deceived.”  Niccolo Machiavelli

The media is rife with cases of investment scammers, employee fraudsters and seemingly successful business people who turn out to be crooks. But deep down most business owners think it won’t happen in their business.

Big 4 fraud

Last month, one of the largest accounting firms in the world, Deloitte, launched a case against one of its own Australian partners for more than $3 million in allegedly sham work expenses. Documents filed in the Federal Court claim the partner perpetrated a deliberate, sophisticated, and ‘nefarious’ scheme to embezzle from Deloitte to fund a luxury lifestyle, including the purchase of designer furniture and more than 100 pieces of art.

How did it miss that?

Deloitte is a high-end firm famous for conducting detailed audits on some of the largest and most sophisticated companies in the world. How on earth did it miss such an obvious scam as fake work expenses? Sure the company turns over a lot of money, but I would be surprised if many Australian partners were racking up $3 million in suspicious work expenses.

Failure to detect fraud

In my experience, there are two reasons high level fraud by partners often goes unnoticed.

First, it’s a matter of culture — business owners simply don’t expect one of their “partners” to be behind serious fraud. Fraud and embezzlement are seen as something that humble accounts clerks or procurement managers do. 

The partners, particularly in professional service firms, are seen as ‘one of us’ and they are expected to manage their own ethics. Even outside of professional services businesses, the owner, the long-term accountant, or the business partner is simply not suspected.  

Partner authority

Second, failing to detect fraud is a matter of organisation structure. Many professional service firms, despite being very large companies, do not have corporatised delegations, accountability, and governance systems. They are run more like hundreds of little businesses banded together with each business headed by an all-powerful partner.

The partner usually has broad authority to hire and fire, take on clients, manage invoicing and do virtually anything else they like.

If they are making money, few questions are asked. Far from being a cohesive business, each partner does their own thing and can at times be openly hostile towards one another.

Transparency

Even outside of professional services, many businesses are run as the personal kingdoms of the owners or senior managers. They do not apply systems of transparency and accountability to the people at the top of the hierarchy — the very people who often have the best opportunity to embezzle on a massive scale.  

Govern the partners

The best way to reduce your exposure to fraud is to address the culture and structure of the business. Apply audit, responsibility, and reporting systems equally to all levels of the business.

Have all partners singed up to a detailed partnership agreement (or shareholder/unitholder agreement as the case may be) setting out delegations, conduct standards and consequences of misbehaviour.

And finally, ensure at least two people have a hand in every function of the business. Most fraud is done alone.

Red flags for fraud

Over the years I have seen some patterns emerge which have become the red flags I use to detect fraud in business partners and take legal action against the perpetrators:

1. No leave

Working for long periods without taking any time off is a red-hot sign of fraud. Fraud leaves a trail, and the person cannot take leave, even for a day, because they don’t want anyone else doing their job and finding that trail.

2. Living beyond their means

Any sign of someone spending more money than you would expect them to have is a red flag. Especially lavish lifestyle items or extravagant presents for family or friends. Fraudsters often crave status so will not hide their extra income.

3. Gambling

Many of the fraudsters I have dealt with were gamblers. Sometimes they gamble heavily, get into debt, and then embezzle to try to win it back. Or they might be a recreational gambler and start gambling much more heavily once they start taking money from the business.

4. Data missing

Almost all embezzlement and partner fraud involves concealing transactions in the business systems. Books being out of balance or entries not reconciling with other documents are red flags.

5. Back to basics

Don’t look at a spreadsheet or some other summary document. They can easily be manipulated. Look at the original records. The actual bank statement is the first place you should look. It contains all your transactions and is very hard to falsify.

If you discover signs of fraud, think before you act. The early stages of the investigation can make or break the outcome. Get the experts in so you can minimise the damage address the real causes and hold the right people accountable.

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