What is Fraud?

Red Flags for Fraud in the Workplace

A red flag is a sign that something is out of the ordinary and that a closer look may be warranted. An “employee red flag” refers to a sign that an employee may be engaged in an activity outside of their normal or assigned duties. Similarly, a “management red flag” is a warning sign that applies to managers and executives. A warning sign does not necessarily mean that fraud is taking place, but it may mean that more oversight is necessary. 

To report suspected fraud or other wrongdoing involving public funds or public property, contact our confidential hotline. To report suspected fraud or other misuse of public funds or public property related to MassDOT or the MBTA, contact our MassDOT fraud hotline.

Examples of employee red flags:

• Willingness to cut corners or be deceptive in business dealings
• Reluctance to share information or control over vulnerable areas
• Annoyance or defensiveness when questioned about files, decisions or business practices
• Sudden changes in personal spending
• Financial pressures, including significant personal debt and credit issues
• Drug, alcohol or gambling problems

Examples of management red flags:

• One individual or small group that dominates decisions
• Ability of one person to make major decisions without knowledge or approval of second person or group
• Use of an excessive number of bank accounts
• Missing documents (especially original versions)
• Inventory discrepancies
• Irregular or questionable transactions
• Expenses over budget

Time fraud

Time fraud is one of the most common types of workplace fraud. It occurs when an employee or manager claims hours they did not work and receives payment from the employer for them.  Examples include:

• Taking a vacation but not accounting for the leave time on the agency’s time records.
• Submitting for overtime that was not worked.
• Leaving work early or arriving late, but claiming to work a full shift.

Additional Resources

Joint Investigation Leads to Indictment of Former DDS Employee for Overtime Fraud

Guide to Developing and Implementing Fraud Prevention Programs, October 2009

Red Flags for Fraud

Fraud Awareness and Prevention in the Workplace (Video)

This video is designed to help you understand the concept of fraud and to provide tips on how to prevent and detect fraud in the workplace.

View transcript 

The Fraud Triangle

How does an employee decide to commit an act of fraud? The fraud triangle helps explain the reasoning behind it.

 

Examples of Motivation

• Financial pressure, such as credit card or medical debt
• Pressure to live beyond your means
• Substance use disorder or a gambling problem
• Revenge against an employer

Examples of Rationalization

• "Borrowing funds is not stealing funds."
• "The jurisdiction will not miss the money."
• "I deserve this money because of the hard work I do."
• "Everyone is doing it."

Examples of Opportunity

• Weak internal control environment: Not having a system of internal checks and balances in place.  A common control is referred to as segregation of duties. To ensure process integrity, the same person who makes a bank deposit should not be the one to reconcile a bank statement.  Also, the person who approves the payment for an invoice should not be the one to process the payment.     
• Access to systems: A staff person has unrestricted or controlled ability to access and possibly manipulate data in both paper and electronic files. An employee with access can alter records to make things look different from reality. 
• Knowledge of how to beat the system: An employee learns where system weaknesses or loopholes may exist in the organization. This gives them the ability to “beat the system,” given the opportunity and motivation to do so. 
• Lack of an audit trail: No system of record keeping in place to hold employees accountable.
• Ability to override the process: An override occurs when someone uses their authority to bypass, get around or simply not follow the rules. Overrides basically invalidate any system that is put in place. Overrides should be a well-documented and auditable exception to the rules.
• Lack of management oversight: Managers fail to monitor employees' activities or lack a system to keep them accountable. 
• Poor tone at the top: Tone at the top is considered an internal control. It is the culture, environment and tone that is set by management at all levels concerning expectations for accountability, transparency and integrity in an organization.  A poor tone at the top usually refers to an organization whose leadership does not value a strong control framework or the prevention of fraud, waste or abuse.   

Examples of OIG Fraud-related Cases

Example	Causes
Example: A library director embezzled funds to live beyond her means.	Weak oversight by board of trustees Director had sole ability to account for funds, deposit funds into the bank and sole access to the funds.
Example: A firm overbilled jurisdictions despite a contractual obligation. In this case of corporate fraud, greed was the likely cause.	Poor oversight and contract monitoring: Recipients of supplies did not verify pricing.
Example: Town collector embezzled funds in part to pay her own tax bills but also a likely motive was to live beyond her means.	Opportunity existed because no one else in town had ability to audit or review her transactions.  A governance failure: When external auditors informed town selectboard that recordkeeping was poor and the collector could not be audited, they took no action for years.