Top management fraud: what are the red flags, and how to protect yourself?

top management fraud

Last modified on November 9th, 2023

We’ve all heard of how Enron’s executives committed fraud to inflate their results. This resulted in a scandal, bankruptcy, and the creation of tougher financial regulations. And yet, 5% of revenue is still lost to top management fraud each year, according to the ACFE. How can you spot it in your business? What can you do to prevent it? Find out in this article.

Trustpair blocks the effect of internal fraud by continually monitoring vendor information and checking each payment before it’s processed. It means no one can commit fraud without raising the alarm. Request a demo to learn more.

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What is top management fraud?

The Fraud Triangle

Top management fraud happens when an executive decides to abuse their position of authority either for their own gain (occupational fraud, also called internal fraud) or to advance the company’s agenda (corporate fraud). It’s considered a white-collar crime and it can take many forms:

  • Embezzlement,
  • Insider trading,
  • Self-dealing,
  • Corruption,
  • Money laundering,
  • Etc.

As perpetrators are high-level managers in the organization, it’s particularly hard to detect executive fraud. Fraudsters can easily hide, deceive, or remove anyone who questions their authority.

The Fraud Triangle allows us to better understand fraud risks. It is a widely used model to explain the psychology beneath this kind of fraud, leading to better risk management. Three elements need to be present:

  • Perceived pressure: the fraudster faces outside pressure, personal or professional. They might have accumulated debts, or fear losing their job.
  • Opportunity: they think they can perpetrate fraud without being caught.
  • Rationalization: the perpetrator logically justifies their crime, saying the money is “only borrowed” or thinking it’s owed to them for all their hard work. There is a strong sense of entitlement.

Damages beyond financial losses

Internal fraud carried out by executives (or owners) accounts for 20% of corporate fraud cases.

While internal fraud is mostly committed by employees or managers (especially in accounting and operations), senior executive fraud is the most damaging with a median loss of $600,000.

The Association of Certified Fraud Examiners’ 2014 report states “The higher the perpetrator’s level of authority, the greater fraud losses tend to be”.

But more than direct financial losses, executive fraud is particularly devastating for companies. It also causes:

  • Loss of good employees (whistleblowers),
  • Lack of trust in the company and its mission,
  • Distrust from the board directors and investors, especially if financial reporting has been tampered with.
  • Negative corporate social responsibility, leading to public cancellation and clients leaving,
  • Fines and legal repercussions.

Senior executive fraud has led many companies to bankruptcy. Even in a best-case scenario, the damage done to your company could take years to fix.

 

The red flags of top management fraud (and what to do about it?)

4 signs of internal fraud

The best way to spot internal fraud by executives (either occupational or corporate) is to know what you’re looking for. Here are some telltales signs that managers might be committing fraud in your company:

  1. Personal life. They might be going through a stressful life event (divorce, death, disease, debts,…). Also look for indicators that the person is living beyond their means, as that’s a sign that their income is supplemented.
  2. Unusually close association with key stakeholders, like someone being in casual acquaintance with a customer, vendor, competitor, or a board member for example. You want to make sure they’re not in a position to be an accomplice of illegal activity or in a conflict of interest.
  3. Control issues. Being unwilling to share their duties or to take days off is a warning sign of occupational fraud. A good executive shouldn’t micro-manage their employees.
  4. Lack of transparency. Making decisions that don’t make rational sense, without explaining their process, or having a general defensiveness/protectiveness about their work.

What to do if you’re a witness of senior management fraud?

If you (or someone you know) become aware of top executive fraud, your first action should be to report it to someone you trust: your direct manager, the CEO, or someone from HR.

Large businesses often have protocols for such scenarios, like an anonymous hotline, or even offer whistleblower protection.

About half the cases of internal fraud are detected through employee tips, according to the Association of Certified Fraud Examiners. In some situations, it might be necessary to involve an external agency.

Learn about all the types of payment fraud in our latest fraud report.

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How to nip top management fraud in the bud with fraud prevention?

Now for the good news: there are ways to prevent management fraud! To reduce and prevent internal fraud from happening, you need to work towards becoming a fraud-aware organization.

That happens through:

Regular security and fraud awareness training given to your employees and executives. Anyone in a key role (accounting, procurement, finances, etc.) should be able to recognize fraud. Organizations with fraud awareness training are more likely to prevent it for two reasons:

  • People can recognize the signs of suspicious activity and know how to act
  • Potential fraudsters know that and are less likely to perpetrate fraud.

Setting strong internal controls. Adopting the segregation of duties or the four-eye principle are ways to reinforce your corporate processes. It’s harder to commit fraud when your company is actively preventing it. Once more, this has a dissuasive effect as well as a controlling one.

Using fraud detection software. Solutions like Trustpair make it impossible for people to carry out fraud. Our tool automatically and continuously audits your third-party credentials before any transaction is sent. We have access to international databases informing us if the beneficiary’s account is suspicious-looking, and immediately flag the transaction as fraudulent.That would for example prevent a COO from asking a finance employee to send a transfer to a “new provider” by email. Using Trustpair secures your transfers and creates a clear record of outgoing transfers, making it impossible to hide internal fraud.

All these measures contribute to reducing the opportunity (remember the fraud triangle?) for internal fraud, corporate or occupational. With an anti-fraud policy that includes Trustpair, potential criminals will realize that they can’t commit fraud without being found out.

Key Takeaways:

  • Top management fraud happens when a high-level executive uses their power for their personal gain. It leads to financial and reputational losses and even bankruptcy.
  • To prevent it, you need to have a company-wide anti-fraud policy that includes prevention software. Using Trustpair means no unauthorized transaction can be sent.

FAQ

An executive (CFO, COO, HR director, …) manipulates financial statements or asks for a transfer to be made to their bank account under false pretenses.

The suspect lives beyond their means, is very controlling or defensive over their work, or has a close association with key stakeholders (client, tax inspector, vendor, etc.)

Trustpair continuously audits your vendor’s credentials to prevent any fraudulent transaction from being sent. This way, you always know who you’re sending money to.

Manage the risks related to corporate treasury.

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