In Summary
- Financial misconduct is primarily detected through behavioral red flags, not audits or background checks, as 84% of occupational fraud cases involve at least one warning sign in an employee’s behavior.
- The greatest risk comes from insider employees, especially those who control an entire financial process end-to-end. The most common warning signs include living beyond one’s means, financial difficulties, and unusually close relationships with vendors or customers.
- Business owners can mitigate risk by revisiting internal controls, such as separating duties so no one person has full control over a process, rotating responsibilities, and actively paying attention to shifts in employee behavior.
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Most financial misconduct is not caught by background checks or audits. It is noticed by someone who sees a change in behavior. According to the 2024 Report to the Nations, 84% of occupational fraud cases involved at least one behavioral red flag. That makes these day-to-day observations one of the most effective early warning tools available to business owners. Fraud is rarely the result of a single bad decision. It tends to develop in environments where financial pressure, opportunity, and rationalization overlap. Business owners who understand what to watch for can respond earlier and reduce both financial and reputational damage. To help clients, prospects, and others, Hanson & Co has summarized the key details below.
Who Poses the Greatest Risk?
Fraud is typically committed by someone inside the organization. This includes employees who manage vendor relationships, process payments, handle cash, or approve invoices. Many hold trusted positions and have no prior record of misconduct. That’s why background checks often fail to identify the risk.
The highest-risk situations involve employees who control an entire process from beginning to end. If one person initiates a transaction, approves it, and enters it into the accounting system without oversight, the risk of undetected fraud increases. This is a structural issue, not a character judgment, and it can often be resolved with adjustments to workflow.
Behavioral Red Flags to Watch
Most fraud cases involve some kind of behavioral warning sign, often long before the issue is discovered. Across industries and roles, the same three red flags show up again and again:
- Living beyond one’s means
- Financial difficulties
- Unusually close relationships with vendors or customers
Living beyond one’s means has been the most common red flag every year since 2008. Sudden lifestyle upgrades like expensive purchases or unusual luxury travel may be a red flag. It’s not always an indicator of wrong doing, but it’s often the first visible clue.
Financial difficulties are another common factor. People in financial distress may rationalize behavior they wouldn’t normally consider. This often shows up in asset misappropriation, where someone facing personal debt or family situation starts misusing company resources.
Unusually close vendor or customer relationships tend to show up in corruption schemes. When an employee consistently works with one outside party, avoids competitive bidding, or pushes through contracts without review, it may point to favoritism or a conflict of interest.
Other red flags have to do with how employees handle their responsibilities. A person who refuses to share tasks, avoids taking time off, or is overly protective of a process may be keeping others from seeing what’s really going on. That lack of visibility makes it easier for fraud to go unnoticed.
Employees who become defensive, irritable, or frequently complain about pay may be feeling resentment. This pattern may show up in financial statement fraud, especially when someone is under pressure to meet performance goals and alters financial records to make the results look better.
No single red flag proves anything on its own. But when someone varies from usual patterns, it may be time to take a closer look. In fact, fraudsters who showed at least one behavioral red flag caused median losses that were much higher than those who didn’t. Ignoring the signs tends to result in bigger, longer-lasting problems.
Other Considerations
About 45% of all fraud cases involved at least one HR-related red flag. These include poor performance reviews, concern about job stability, or frustration after being denied a raise or promotion. On their own, these are common workplace issues. But when paired with behavioral changes or excessive control over a financial process, they increase the likelihood that a problem is developing.
What Business Owners Can Do?
Revisiting internal controls is generally the first course of action to reduce exposure and improve visibility. Simple steps include:
- Separate duties so that no one person has full control over a financial process.
- Rotate responsibilities and require time away from key roles to allow for natural review.
- Pay attention to behavioral changes and shifts in tone, attitude, or cooperation.
- Review vendor activity regularly, especially when one person is responsible for onboarding, approving, and paying vendors.
Contact Us
Financial misconduct usually becomes visible through behavior before it appears in the accounting records. Denver business owners who pay attention to these red flags can identify concerns earlier, strengthen internal controls, and protect the organization from larger issues down the road. If you have questions about the information outlined above or need assistance with a forensic accounting issue, Hanson & Co can help. For additional information call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.