Five signs your business may be a victim of fraud

For businesses, financial fraud has unfortunate and even devastating consequences – and has only intensified since the pandemic. Could your organization be a target of fraud? Here are five signs to watch for.

In February 2022, MNP published some sobering survey results. Of the 250 Quebec owners and senior officers that took part in the firm’s study, 80 percent considered the risk of financial fraud to be very low to moderate for their business.

Corey Bloom, a Partner and the Eastern Canada Leader for MNP’s Forensics, Investigations and Disputes services, asserts that in her experience, this risk is often grossly underestimated, adding: “Misconceptions about fraud put businesses in danger, because they may result in blind spots and flaws in fraud risk management and increase the probability of fraud going undetected.” 

With Simon Gaudreau, a Manager with MNP’s Forensics, Investigations and Disputes she lists signs that point to potential financial fraud in a business. While there are many others, which vary from one industry to another, the five explored here are amongst the most common.

1. Employee behaviour

A high turnover rate could be a good indication that something is not right.

“High turnover, for example, new hires who quickly decide to quit, can mean that employees are not comfortable with the company culture or environment. Perhaps because they have noticed a laxity toward internal fraud or the behaviours which increase such risk,” explains Corey.

Employees can also jump ship if they’re afraid of being caught or not comfortable with what they see going on around them. Such was the case at Enron: just before the scandal broke, the company experienced an unusually high turnover rate, especially in leadership roles and other key positions.

Strong resistance to change, including to new internal controls, is another sign that should not be ignored. According to Corey, “There is generally a certain opposition to change, which is normal, but if you are faced with stiff resistance, you should dig deeper.”

Certain behaviours can also be a red flag. For example, an employee who exclusively uses certain suppliers and does not want to share their workload with colleagues, or regularly works outside of normal business hours. It is worth investigating such actions to understand what’s motivating them,” Simon adds.

2. Differences between actual and expected results

Cash balances that are lower than expected, consistent inaccurate inventories, frequent changes in suppliers, and unanswered questions are all worth delving into. Simon adds: “When you are familiar with the ratios of your business, it is easier to notice any deviation from what is expected.”

Don’t hesitate to dig deeper and to hold people accountable. Simon gives the following example: “If an employee regularly works outside normal office hours or if the employee does not adhere to expected procedures, you should ask questions in order to find out the reasons and assess their legitimacy”.

3. Overly complex structure and transactions

When a business has a very complex structure and multiple levels of management, there is an increased chance that fraud will go unnoticed. The same goes for transactions.

According to Corey: “If something that should be simple is not, for example, a transaction carried out over multiple steps or across several countries, you should ask yourself if that is normal or if it requires a review.”

4. Frequent reversing entries

Frequent reversing entries in accounts payable or receivable should also be taken seriously. “Accounting entries should generally be simple. An unnecessarily complicated entry can have another purpose or can be used to hide something,” warns Simon.

5. Reconciliation problems or unavailable support

When there are too many unreconciled transactions or when a bank reconciliation raises questions, be vigilant. The same goes for credit cards. Corey cautions that missing or hard-to-obtain expense vouchers and invoices as well as missing related supporting information can be signs of fraud.

“Financial fraud is a real and increasing risk for businesses, particularly in the current climate. Many businesses may underestimate the risk or fail to recognize the signs of fraud,” says Corey. “However, by being vigilant and proactive, businesses can take steps to prevent fraud and protect themselves from its potentially devastating consequences.”

If you've noticed any of the five signs listed, it's important to investigate further and seek guidance from experts who can help you understand what's happening. Additionally, training your employees to recognize financial fraud is essential, as they are your first line of defense.

Contact one of our experts today to help ensure that your business is prepared to prevent and address financial fraud.

Contact us

Corey Bloom, FCPA, CA•IFA, CFF, CFE, ACFE Regent Emeritus

Partner and Eastern Canada Leader (Quebec, Ottawa and National Capital Region and Atlantic Canada), Forensics, Investigations and Disputes

514-228-7863

[email protected]

Simon Gaudreau, CPA auditor, CFF, CFE, FIS

Manager, Forensics, Investigations and Disputes

514-906-4641

[email protected]