How to recognise employee fraud 'red flags'

Posted by James Price | JPAbusiness on 26-Jul-2017 04:23:00

employee fraud | JPAbusiness

This blog comes from our free JPAbusiness eBook: Employee fraud – 15 strategies to reduce the risk. 

By David Harrison
CRE Insurance Broking

I recently read an article in the Australian Financial Review (AFR) which quoted Detective Superintendent Arthur Katsogiannis, commander of the NSW Police fraud and cybercrime squad.

Superintendent Katsogiannis said that in 100% of corporate crime investigations he had been involved in, corruption goes hand-in-hand with a “compromised personal life”.

Gambling, drinking, drug taking, living beyond their means and inappropriate sexual conduct were all indicators of a personal life as compromised as the perpetrator’s professional life.

Over recent years the frequency and volume of economic crime experienced by Australian businesses has increased dramatically.

How to recognise 'red flags'

When talking about risk management and understanding employee fraud, experts often say there are precursor behavioural patterns that should be identifiable to an employer.

For example, one common red flag is a CFO or person with other financial responsibilities who won’t take holidays. They may just be a very hard worker, but this behaviour could also be an indicator of something more sinister, i.e. they don't want to go away and let someone else stumble across what they have been doing.

The AFR article I mentioned above also cited research by the Association of Certified Fraud Examiners (ACFE).

ACFE says it’s common for occupational fraudsters to exhibit the following behavioural traits or characteristics while committing their schemes:

  • Living beyond their means – 43.8%
  • Financial difficulties – 33%
  • Unusually close association with vendor/customers – 21.8%
  • Control issues/unwillingness to share duties – 21.1%
  • ‘Wheeler-dealer’ attitude – 18.4%
  • Divorce/family problems – 16.8%
  • Irritability, suspiciousness or defensiveness – 15%
  • Addiction problems – 11.6%
  • Complained about inadequate pay – 9.4%
  • Past employment-related problems – 8.9%
  • Refusal to take vacations – 8.6%
  • Excessive pressure from within organisation – 8.4%
  • Social isolation – 7.4%
  • Complained about lack of authority – 6.5%
  • Excessive family/peer pressure for success – 6%
  • Instability in life circumstances – 5.9%
  • Past legal problems – 5.6%

Source: ACFE Report to the Nations on Occupational Fraud and Abuse –
2014 Global Fraud Study

In 92% of the cases ACFE analysed, the fraudster displayed at least one of the behavioural red flags listed above, and in 64% of cases, multiple red flags were observed before the fraud was detected.

By keeping an eye out for any of these behaviours, business owners may be able to recognise employee fraud early and minimise the impacts.

Case study – when lightning strikes twice

There are cases of employee fraud occurring in Australia every day, but one of the most incredible cases I’ve ever heard of involved the ASX-listed transport group K&S Corporation.

K&S Corporation is controlled by the family of the late trucking magnate, Allan Scott.

In 2004, when Mr Scott was still alive, the K&S company secretary and financial controller, Dennis Craig Telford, was sentenced to 14 years in jail (nine and a half years non-parole) after being convicted on 32 counts of fraud.

Mr Telford had defrauded K&S to the tune of $22 million over nearly three years to feed his gambling addiction, which involved placing bets of up to $300,000 on horse races.

Sounds like a nightmare, doesn’t it? It gets worse.

In 2015 the company revealed it had again been defrauded, with $7.1 million siphoned off between 2007 and 2014.

At the time the Adelaide Advertiser reported that two former employees had been charged and “investigations were ongoing”.

Impacts of employee fraud

The obvious impact of employee fraud – as seen in the K&S Corporation case – is the direct financial cost to a business. But employee crime does not just hurt your immediate bottom line.

Below are some other impacts to consider:

  • Staff morale can be affected as staff feel a sense of betrayal that a colleague could do such a thing and/or management allowed the fraud to occur.
  • Good employees do not want to work for a business where fraud is widespread, not investigated or not acted upon.
  • The reputation of the business in the eyes of suppliers, customers, competitors, possible employees and other business partners (for example banks) can be damaged.
  • Businesses may become overly internally focused in response to a fraud.
  • For individuals that supervised the fraudster, the fraud can impact their reputation and therefore their career, particularly if the manager is in a financial role, as others will expect that given their expertise, they should have prevented the fraud.



For more information about the business advisory services offered by JPAbusiness, contact the team on 02 6360 0360.

For information about the risk management and insurance broking services offered by CRE Insurance Broking, call 02 9463 6100.


Employee Fraud eBook | JPAbusiness


JAMES PRICE | JPAbusinessJames Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.


Topics: Advice, Employee fraud

Disclaimer: The information contained in this blog is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and obtain independent, professional advice before making any decisions, taking any action or relying on any information in this blog. 





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