The Perfect Storm: Lack of Internal Controls & Financial Pressures

According to the Association of Certified Fraud Examiners (ACFE) 2016 Report to the Nations on Occupational Fraud and Abuse, an organization’s lack of internal controls is the number one weakness contributing to fraud; while living beyond one’s means is the number one behavioral red flag of employees engaging in fraudulent activities.

Like many other fraud examinations, there was a recent fraud loss at an organization due to their lack of internal controls and an executive with the financial pressures to take advantage of those lack of internal controls. The following chart reflects the behavior red flags displayed by perpetrators according to the ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse. The executive in this situation displayed the top 5 behavioral red flags.


The organization had been going through financial difficulties, all while the executive was engaging in lavish spending for his/her personal benefit with business funds and excessive purchases for the organization. The executive was able to conceal the organization’s financial difficulties and their fraud scheme of personal expenses with business funds by controlling what information was shared with board members, the lack of internal controls regarding job duties and the organization not having the proper policies in place for documenting business’ purchases.

This organization lost hundreds of thousands of dollars and it all may have been prevented/detected earlier with some proper internal controls and additional oversight by board members and/or staff.

Take a minute to reflect on your organization to identify any weaknesses you have in your internal controls and do you have any employees displaying behavioral red flags? If so, address those concerns immediately before it’s too late!


Fraud is Everywhere—Is Your Business Next?

“It can’t happen here.”

“My employees would never steal from me.”

“I would know if something was going on.”

These are just some of the mindsets that organizations have had before falling victim to fraud. The truth is that fraud is widespread and occurs in all industries and all sizes of organizations. The following chart from the Association of Certified Fraud Examiners’ (ACFE) most recent Report to the Nations reflects the frequency of fraud cases by industry. As you can see, the banking and financial services industry reported more cases of fraud than all other industries and was nearly double the next closest industry.



According to the ACFE, as high as 60 percent of employees would steal from their employer if faced with enough pressure and the opportunity was available to them. With these alarming statistics, how is an organization supposed to protect itself? It starts with being aware that no organization is immune, knowing what fraud schemes are currently occurring in your industry and then ensuring your organization has the proper internal controls in place.

Common Schemes

The two most common fraud schemes in the banking and financial services industry are corruption and cash schemes. Understanding how these schemes are conducted will give you the inside knowledge on how to detect when one may be occurring or prevent them entirely.

Corruption schemes are carried out when an employee misuses his/her influence in a business transaction in order to gain a personal benefit, in an action that is in violation of the duty they owe their employer. An example would be a loan officer receiving a kickback payment from the customer in exchange for a favorable outcome on the loan. These can be difficult to detect as the “benefit” often will not run through the bank’s financials and is often paid in cash “under the table.” However, paying attention to close relationships between loan officers and specific borrowers, as well as understanding the employee’s lifestyle to see if they are living beyond the reach of their paycheck, will help detect these schemes.

Cash schemes are relatively simple and involve an employee’s theft of the bank’s cash. These can occur by an employee stealing money from the bank’s vault, ATM machines or in the account opening process for depository accounts. They are often concealed by lack of internal controls and with false documentation to balance out accounts. Surprise audits, job rotation and proper segregation of duties will help detect and prevent these schemes.

Internal Controls Necessary

The ACFE’s Report to the Nations outlines that the number one reason fraud occurs in an organization is due to lack of effective internal controls. To reduce the risk of fraud within your organization, take time to understand your vulnerabilities and implement the proper anti-fraud internal controls. As Ben Franklin once said, “An ounce of prevention is worth a pound of cure.”