Management is at risk for perpetrating fraud against a company in three basic situations.
The first basic situation is that of the incompetent manager. When the department or the employee are failing to perform up to expectations, there is the potential that fraud may be used to cover for the sub-par performance. The key here is to be on the lookout for signs that may point to incompetent management. Poor planning, poor delegation, inability to meet goals, or ignorance about the company’s business are all warning signs that fraud could occur.
The second situation which creates an environment ripe for fraud by management is the lack of oversight and controls. Even though management is entrusted with an entire department, area, or company in their hands, they should not operate with total autonomy. Policies and procedures should be in place to ensure that proper authorization of transactions occurs and that transactions are being properly recorded in the accounting system. Oversight should occur to help prevent theft and fraud by management.
The third major risk for fraud is the manager or executive who overrides the controls in place. In this situation, management is determined to not follow the established policies and procedures, and may likely be inclined to coerce or force employees to do the same thing. This may be the most dangerous manager of all, because it would seem that no level of fraud prevention policies or procedures would stop a fraud at the hands of this person.
It’s important that owners and boards of directors be on the lookout for warning signs of any of the above. Employees must know that they can and should report any unusual or suspicious behavior by management. If employees feel that it is truly okay for them to report their concerns to the ultimate authority at the company, there is a greater chance of discovering a fraud scheme early.