5 red flags of fraud businesses need to know during the COVID-19 shutdown

Call it “The Case of the Fraud Caught by COVID-19.”

Here’s the setup: An employee furloughed due to the coronavirus shutdown no longer had access to the company’s office and systems. Soon, the company controller notices an oddity in the books. A debit balance in accounts payable seemed to show that vendors owed the company money when it should be the other way around.

The discovery prompts a closer look for irregularities in account balances, and company officials reach a startling conclusion. Over the last four years, that furloughed employee had defrauded the firm of more than $100,000.

The pandemic was the fraudster’s undoing. Separation from the office forced a crack into a carefully constructed scheme.

Could an employee be stealing from your company? Now is the time to find out. Watch for these five red flags of fraud and learn how a business shutdown may illuminate an ongoing scheme.

Business beware: 5 red flags of fraud

In the case of the $100,000 embezzlement, the last theft occurred on March 10 with the cover up ready to be made over the next few days. Then came the shutdown, and the dishonest employee could no longer meddle with the books to conceal the theft.

These five warning signs may indicate that something’s afoot:

1. Unusual account balances: In the embezzlement case, the employee stole cash paid for services and used fictitious journal entries to have the cash sale appear as a sale on account. Records of the transaction were then moved from accounts receivable to accounts payable until finally, the employee created bogus expenses in miscellaneous expense accounts.
   • Why it’s a red flag: Unusual account balances should always be a red flag. Before disregarding unusual balances as “due to COVID” take some time to consider if these unusual balances are due to an employee’s lack of access to general journal entries during the shutdown.
2. Regular activity unexpectedly stops: Even during a pandemic, some bills are due, such as utility bills. Watch for a halt of disbursements to consistently paid vendors.
   • Why it’s a red flag: A stop in regular payments to vendors and other payees may signal an employee is diverting company funds for their personal use.
3. Regular amounts unexpectedly change: A salaried employee’s paycheck amount suddenly decreases, even though management hasn’t cut salaries.
   • Why it’s a red flag: It may be a sign that someone with access to payroll was manipulating the process, often at the point between approval and processing, to increase their own pay or the pay of a ghost employee.
4. Favorable metrics, despite an expected revenue downturn: Business is slowing, but revenues are rising.
   • Why it’s a red flag: Someone was skimming revenue before it got entered into the accounting system. During the shutdown, the actual income starts showing on the books.
5. Strange behavior: An employee is set up to work from home but insists on coming into the office. During regular business circumstances, perhaps this person was reluctant to take a vacation or accept help from a coworker.
   • Why it’s a red flag: The fraudster needs physical access to cover up the fraud, perhaps by manipulating or destroying paper documents. Be wary of employees who, now working from home, offer to “help” speed-up processes by reconciling their own work. You wouldn’t drop that procedure in the office setting, and you certainly shouldn’t let down your guard now. 

What to do if you suspect fraud

When fraud seems apparent, it is essential to act swiftly to prevent further loss and stop the employee from destroying evidence.

Start by contacting legal counsel. An attorney can establish a strict chain of custody, preventing the fraudster from claiming you manipulated the evidence.

If you suspect fraud, a forensic accountant can help you conduct a comprehensive review. Once the fraud is confirmed, you’ll need a forensic accountant to determine how the employee committed the theft, the amounts involved, and the timeline. If you have legal counsel, the attorney should hire the forensic accountant to ensure attorney-client privilege is in place to protect conversations and interactions.

As forensic accountants conduct their investigations, they can suggest corrections to procedural gaps that the fraudster leveraged.

Protecting your business

During an economic upheaval, businesses are highly susceptible to fraud. Now is the time to watch for signs of existing fraud, be on the alert for newly hatched schemes, and corral remotely scattered financial procedures.

Given that most employee frauds go undetected for months, even years, you may want to consider hiring a forensic accountant who can check for wrongdoing and suggest process improvements that can protect against employee theft.

The forensic accountants of Boyer & Ritter LLC can provide the guidance your business needs to protect its assets and emerge from the pandemic lockdown in a position of strength, ready to move forward.

Scott A. Koman, CPA, CFE, MAFF, is a supervisor with Boyer & Ritter LLC, where he is a member of the Forensic, Litigation Support and Consulting Team. Contact Scott at 717-761-7210 or skoman@cpabr.com