Red flags for internal fraud
In 2016–17, 27 Commonwealth entities finalised 2,371 internal fraud investigations. Of these investigations, 1,786 (75%) were substantiated as internal fraud incidents (page xii).
Between 2015–16 and 2016–17, the number of investigations that involved internal fraud increased by 89.9%. (page 66).
Australian and international research has shown that government officers who have committed fraud share some common traits.
The following list provides examples of factors that may indicate an employee presents an internal fraud risk.
The observation of just one of these red flags is not a reliable indicator of fraud; a combination of these red flags could indicate that the individual may present a higher risk of fraud or corruption:
- Unwillingness to share duties and/or take leave
- Replacing existing suppliers with suppliers that have an unusually close connection
- Refusal to implement internal countermeasures (e.g. skipping approvals steps)
- Living a lifestyle above apparent means or lavishing gifts on colleagues
- Failure to keep appropriate or accurate records/receipts
- Bullying colleagues
- Seeking access to areas which the officer should not be able to access
- Chronic shortage of cash/financial hardship – consistently seeking loans or advances
- Past legal/compliance programs
- Addiction problems (e.g. gambling)
- Significant personal stress
- Strong sense of entitlement
- Disgruntled with employer.
In addition to these red flags, some activities have a higher inherent internal fraud risk, such as:
- Accounts payable
- Cash handling
- Travel and subsistence payments
- Works contracts
- Activities requiring access to sensitive data
- Grant programs.
Key tips to prevent internal fraud
- Separation of duties and delegations
- Intervene in a matter prior to non-compliance escalating to fraud
- Promoting an ethical culture in your organisation
- Mandatory fraud awareness training and refresher training
- Hard coded IT system countermeasures (e.g. access restrictions or dollar value limits for processing transactions)
- Actively testing the implementation and effectiveness of existing countermeasures and making changes where needed
- Appropriate management oversight
- Physical security measures, including the use of safes and physical access restrictions
- Regular supplier reviews and the maintenance of a register of non-compliance/breaches of contractual conditions and reporting requirements
- Rotation of personnel in high-risk positions
- Requiring staff to take regular annual leave
- Creating a Gift Policy and register, and publishing a gift register online
- Ensuring staff complete Conflict of Interest and Secondary Employment registers.
Explore further measures and strategies to help you prevent internal fraud.
- International Public Sector Fraud Forum, A Guide to Managing Fraud for Public Bodies (February 2019)
- Association of Certified Fraud Examiners, Report to the Nations 2018 Global Study on Occupational Fraud and Abuse
- AIC, Commonwealth Fraud Investigations 2016–17 (July 2019), (see: Characteristics of offenders, page 32; Figure 25, page 38; Figure 27, page 39)
- KPMG, Profiles of the Fraudster: Technology and weak controls fuel fraud (June 2016)
- ACFE, The Red Flags of Fraud (2019).