Learn about red flags for internal fraud

Entities face an increasing threat of internal fraud. Over 1,300 internal fraud investigations were finalised during the 2018-19 financial year. Entities can better prevent and detect internal fraud by looking out for red flags - common traits of employees who have committed internal fraud.

Look out for the following red flags

An employee may be a higher internal fraud risk when a combination of the following red flags are present:

• Unwilling to share duties or take leave.
• Replacing existing suppliers with suppliers that they have a close connection with.
• Refusal to implement internal countermeasures.
• Skipping approval steps.
• Living a lifestyle above their means or lavishing gifts on colleagues.
• Failing to keep appropriate or accurate records/receipts.
• Bullying colleagues.
• Seeking access to areas which they should not be able to access.
• Long term shortage of cash/financial hardship.
• Consistently seeking loans or advances.
• Past legal/compliance problems.
• Addiction problems.
• Gambling problems.
• Significant personal stress.
• Strong sense of entitlement.
• Unhappy with employer.

Closely monitor the following high internal fraud risk activities

 Internal fraud most commonly occurs in the following activities:

• Vendor management and accounts payable.
• Cash handling.
• Crisis payments or pre-payments.
• Travel and subsistence payments.
• Contract management.
• Privileged system accesses, example:. Administrator access.
• Activities requiring access to sensitive data.
• Grant programs.

Key tips to prevent internal fraud

Apply the following methods to prevent internal fraud:

• Promote an ethical culture in your entity.
• Have mandatory fraud awareness training and refresher training.
• Have appropriate management oversight.
• Separate duties and delegations.
• Have hard coded IT system countermeasures.
• Have restricted access or dollar value limits for transaction processing.
• Have physical security measures including the use of safes and physical access restrictions.
• Conduct regular supplier reviews and maintain a register of non-compliance/breaches of contractual conditions and reporting requirements.
• Rotate staff in high-risk positions.
• Require staff to take regular annual leave.
• Create a gift policy and register and publish the gift register online.
• Make sure staff complete Conflict of Interest and Secondary Employment registers.
• Actively test existing countermeasures and make changes where needed.
• Intervene before non-compliance becomes fraud.