A Guide to Identifying White Collar Employee Fraud Risks

March 22, 2018

You can call it psychology or human nature. When some managers or employees are exposed to certain conditions, the odds go up that these individuals will commit fraud against your business. The situation is worse if your company doesn’t have a full range of internal controls designed to stop fraud before it happens. In other words, when the motive for fraud meets the opportunity for fraud, watch out! 

Specifically, beware of these red flags:

Personal financial stress. Sometimes, managers or employees with access to company assets are under serious personal financial stress (due to bad investments, divorce, family illness, drug and alcohol addiction, credit card debt, and other factors). In many cases, the only way to discover this is by knowing your employees and talking with them regularly. That way, they may feel comfortable telling you about personal challenges they face. This sounds cold-blooded, but the health of your business could depend on your ability to draw out even trusted employees before circumstances tempt them to act in ways that may be uncharacteristic for them.Lots of cash and valuable items around. Your company may generate large amounts of cash or hold inventory items that are small in size but large in value. This situation can encourage bad employee behavior. In other words, motive meets opportunity. The key is to eliminate the opportunity with better internal controls.

Employees worried about layoffs or outsourcing.  In this situation, some employees may feel justified to commit fraud against your company because they perceive that their livelihoods are being threatened. In other words, “one bad turn deserves another.”

Impending M&A activity. Similar to a fear of layoffs or outsourcing, this situation occurs when employees find out about an upcoming merger or acquisition and believe they will lose their jobs. They may even fear layoffs when none are actually in store. Obviously, the key here is good communication with staff members, so they don’t worry about things that are not going to happen.

Poor internal controls and accounting. Once again, motive can meet opportunity when an employee in a position to commit fraud has a weak moment. By putting in place better financial controls, better asset management, and better accounting procedures, you can shut down the opportunities.

Bottom line: If your business has any of these risk factors, consider bringing in a professional to evaluate your system and install procedures to minimize fraud risk. You may even want a special fraud study conducted to confirm that nothing has already happened.

Keep in mind that your company’s trusted high-level employees are the ones who are in the best position to do the most financial harm and conceal it for a longest time. Without some effort, you may have no way of knowing that your company is being ripped off until after very serious fraud has already been committed.

A “Typical” White-Collar Criminal

Although white-collar criminals are often difficult to identify by their appearance, here are some other characteristics to look for:

  • They can be well respected, long-time employees in sensitive company positions.
  • They can be motivated, intelligent and well educated.
  • They might be without any “priors.”
  • They may be subject to personal and financial stresses that you don’t know about.

The moral:  You’ve heard the old saying, “Don’t judge a book by its cover.” Similarly, don’t judge employees’ honesty by their appearance and demeanor. Instead, make it very difficult or impossible for potential white-collar criminals to strike at your business. Install adequate financial controls and asset safeguards and recognize changes in your business that necessitate updating those protections.








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