Is your business at risk? Tips to identify the red flags of fraud

Understanding the warning signs can help you detect fraud early and reduce the damages to your business. According to the ACFE’s 2024 businesses suffered a median loss of US$150,000 to perpetrators who exhibited at least one behavioural red flag.

In the case study below, an organization retained MNP’s Forensics and Litigation Support Services team to investigate after spotting some red flags of financial fraud:

The issue

The owner/director of an organization suspected that a long-term employee in a position of trust had misappropriated assets after noticing deleted electronic records and inconsistencies in internal reports. Additional inquiries from the owner/director were met with silence or vague responses and the employee appeared uncomfortable when questioned. He also showed visible reluctance to cooperate and delayed providing documentation (or provided no documentation at all). An internal enquiry was undertaken to review the activities of the employee.

How MNP helped 

The organization retained MNP’s Forensics and Litigation Support Services team to conduct an investigation. Our team performed investigative procedures related to cash, credit cards, loans, and other payments. We then performed a flow of funds and spending analysis, conducted various interviews, and performed digital forensic procedures including the review of emails and electronic devices.

Our investigation revealed that the employee had made unauthorized transfers to personal accounts and used company credit cards for personal expenses over a period of seven years. To conceal the misappropriation, the employee had registered fictitious shareholder loans in the owner’s name. Our investigation showed that the scheme intensified in the years following the employee’s divorce.

Our team prepared a comprehensive report to be filed in court and was called to testify as expert witnesses during the trial.

What are the red flags of financial fraud?

Keeping an eye out for potential red flags in your business can help you stop fraud early — before the financial losses escalate. According to the ACFE’s 2024 Report to the Nations, 84 percent of all perpetrators of fraud displayed at least one behavioural red flag, including:

Living beyond means

The most common red flag of financial fraud is living beyond means, according to the ACFE’s 2024 report. Many documented fraud cases revealed that the perpetrators led extravagant lifestyles that could not be supported by their salary or known income — suggesting undisclosed income from other sources such as fraud.

This creates pressure for the fraudster to maintain their lifestyle and often escalates to bigger and more risky acts of financial fraud. However, it is difficult to hide these visible lifestyle changes, which makes it one of the most reliable early indicators that fraud is occurring within your business. 

Financial difficulties

Financial difficulties are the second most common red flag of financial fraud. This might include excessive personal debts, unexpected medical bills, or recent legal fees related to divorce or separation. Additionally, some perpetrators may manipulate financial statements to meet the organization’s financial targets in uncertain economic conditions to receive pending compensation arrangements.

These factors can put significant pressure on an individual to commit fraud to solve their problems. Pressure is one part of the fraud triangle, which consists of pressure, opportunity, and rationalization. Assessing the anti-fraud controls within your business and implementing strong measures can help reduce opportunities for fraud to occur.

Close relationship to vendors or customers

Twenty percent of perpetrators had an unusually close association with a vendor or customer, according to the findings of the ACFE.

Strong internal controls are necessary to reduce the risk of this type of financial fraud within your business. This includes the segregation of duties to ensure that no single employee controls contract approval, vendor selection, and payment processing. However, an alarming 95 percent of respondents to MNP’s recent survey did not identify segregation of duty as part of their business’ preparation in the fight against financial fraud.

Control issues

According to the ACFE, 13 percent of perpetrators exhibited control issues, or an unwillingness to share duties with others in the organization. This helps reduce the risk of someone noticing financial irregularities and enables the perpetrator to cover up discrepancies without detection — allowing the fraud to continue unchecked.

It is important to implement measures such as making the rotation of positions or functions mandatory to address control issues and reduce the risk of fraud. Additionally, enforcing mandatory vacation time and leaves of absence is a simple yet effective measure to protect your business. However, this was the measure least adopted by businesses according to MNP’s recent survey — leaving many vulnerable to risks.

Take the next steps

It is crucial to take action when you identify the red flags of fraud within your business to prevent financial and reputational damages. Contacting a forensic accountant when irregularities, potential red flags, or suspicions of wrongdoing arise can help you get the answers you need to determine whether fraud has occurred.

Discover more insights in our whitepaper Misconceptions about fraud risk pose significant threats to Quebec businesses. This report analyzes the results of our survey — and provides insights and tips from our Forensics and Litigation Support Services team to help reduce risks to your business.