By Tod McDonald, CPA, CIRA.
Organizations lose an estimated 5% of revenue to fraud each year, yet most cases don’t involve elaborate Hollywood-style schemes. The tactics are surprisingly mundane, which is why it takes companies an average of 12 months to detect occupational fraud. The deception hides within routine business activities, camouflaged among legitimate transactions.
This oversight isn’t due to negligence but resource constraints. Accounting professionals lack the bandwidth to scrutinize every transaction, and when suspicious activity emerges, firms must weigh investigation costs against potential benefits. Sometimes, misplaced trust compounds the problem: Leaders assume staff loyalty and rationalize anomalies rather than investigating them.
However, ignoring warning signs only amplifies losses. Accountants must be equipped to identify fraud as it unfolds, not after the damage is done.
5 Critical Red Flags Every Accountant Should Know
According to the Association of Certified Fraud Examiners, asset misappropriation represents 51% of all fraud cases, while misappropriation combined with corruption accounts for an additional 35%. These schemes flourish within everyday operations. Through decades of forensic accounting experience, I’ve identified five red flags that consistently signal fraudulent activity.
1. Lookalike Vendor Schemes
Fraudsters exploit the familiarity of vendor relationships by creating payments to fake companies with names nearly identical to legitimate partners. A payment to “Acme Solutions LLC” instead of “Acme Solutions Inc.” can easily slip past approval processes when reviewers recognize the name at first glance.
Warning signs include:
- Vendors with names suspiciously similar to existing partners.
- Vendor addresses or tax identification numbers matching employee information.
- Payments resuming to previously terminated or inactive vendors.
2. Disguised Abnormal Transactions
High payment volumes create cover for fraudulent transactions designed to blend with legitimate activity. These schemes rely on routine processing where individual payments rarely receive scrutiny.
Common tactics involve:
- Duplicate monthly vendor payments.
- One-time payments positioned just below approval thresholds.
- Reimbursements or wire transfers lacking proper documentation.
3. Payroll Manipulation
Regular payroll processing creates ideal camouflage for fraud since these high-volume, recurring expenses typically receive minimal review. Small unauthorized additions compound quickly over time.
Red flags include:
- Payroll increases without corresponding headcount or wage growth.
- Compensation rates inconsistent with peer positions.
- Payments to terminated, inactive, or fictitious employees.
- Department expenses misaligned with actual staffing levels.
4. Inadequate Segregation of Duties
Fraud risk escalates dramatically when single individuals oversee multiple financial processes. Beyond capacity limitations that prevent detailed reviews, consolidated authority creates opportunities for schemes like fake vendor creation, payroll alterations, and unauthorized payments.
Warning indicators are:
- One person managing multiple financial functions.
- Absence of dual approval requirements for payments.
- No secondary review of vendor setup or expense reports.
- Irregular or absent audit procedures.
– Employee reluctance to take time off.
5. Cultural Tolerance for Financial Irregularities
Not every fraud begins with criminal intent. Many schemes start with opportunistic behavior—small unauthorized transactions that escalate when consequences don’t materialize. Casual oversight environments and insufficient controls create cultures where minor thefts grow into significant losses.
Cultural warning signs include:
- Dismissive responses to discrepancies and errors.
- Unchallenged workarounds bypassing established procedures.
- Repeated “one-time” exception behaviors.
- Trust-based systems without verification protocols.
- Resistance to internal control enhancements.
Each red flag represents a breakdown in financial oversight. Implementing fundamental internal controls—dual approvals, vendor verification, regular reconciliations, and role-based access—can substantially reduce fraud opportunities.
Leveraging Technology for Proactive Detection
Traditional fraud discovery occurs long after money disappears. Most teams lack resources for comprehensive transaction analysis, but technological advances now enable early detection through automated monitoring.
Verified Financial Intelligence (VFI) tools automate data review and flag anomalies across complete financial datasets rather than small samples. This capability allows CPAs and advisors to analyze entire financial pictures efficiently, responding quickly to concerns and conducting continuous monitoring instead of periodic audits.
Real-time visibility and reliable data enable finance teams to identify problems earlier while providing CPAs with stronger foundations for client recommendations and interventions before minor issues escalate into major losses.
Making Detection as Simple as the Crime
Occupational fraud schemes may be mundane, but technology can make detection equally routine. VFI systems reveal red flags as they occur, transforming high-stakes investigations into quick, targeted responses. When fraud tactics are simple, detection methods should be equally straightforward.
The key lies in empowering accounting professionals with tools that match the sophistication of modern business operations while remaining simple enough for practical implementation. By recognizing these five red flags and implementing appropriate technological solutions, firms can shift from reactive fraud response to proactive fraud prevention.
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Tod McDonald, CPA, CIRA, is co-founder of Valid8 Financial. Beginning his career as an Ernst & Young auditor, Tod has spent decades navigating complex financial investigations, including leading the unraveling of a $200 million real estate Ponzi scheme in Washington State. This experience motivated him to co-found Valid8 Financial, developing Verified Financial Intelligence solutions that expedite data preparation, eliminate sampling risks, and improve professional opinion quality in complex financial cases.
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