The High Life: Do Lavish Lifestyles Indicate Fraud and Corruption?

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Is one of your employees suddenly driving a brand-new sports car? Maybe they’ve abruptly taken their whole family to a luxury vacation overseas. Or maybe they’re suddenly able to eat at expensive places for lunch.

There may be reasonable and innocent explanations for their sudden lifestyle upgrade. Maybe a rich relative passed away and left them a hefty inheritance. Or maybe they sold some property for a tidy profit.

What if the explanation isn’t so innocent after all?

According to experts, a lavish lifestyle could be one of the biggest warning signs that your employee is engaging in financial fraud.

Lifestyle as Red Flags for Fraud

Experts in detecting fraud have cited lavish lifestyle spending as one of the most noticeable red flags of fraud in the workplace. In a study of 2.690 cases of occupational fraud, 41 percent of employers noted that the perpetrators were living beyond their means.

In the field of public service, the Commission on Audit of the Philippines also uses lifestyle expenditure and accrued assets to ascertain that public officials aren’t spending more money than what they’re earning. This is primarily the reason executives and other public authority figures are asked to submit statements of assets liabilities, and net worth.

The logic behind using lifestyle expenditure and asset review to detect fraud is simple. When someone starts spending more on their way of life than what their visible revenue streams can afford, logic dictates that they’re getting their funds from somewhere else.

But how can you tell if an employee is simply enjoying the rewards of a great investment or spending ill-gotten wealth? Professional fraud analysts have a few methods of analysis they use to determine the fortunate from the fraudulent.

Analyzing Lifestyle Expenditure

Just because an employee went snorkeling in the Bahamas for a week doesn’t mean that they’ve been embezzling from you. A basic way to find out if they funded their trip on their own or from pilfering is through expenditure analysis.

You or an accountant specializing in expenditure analysis adds up all the known expenses the employee incurs for a given period. These expenses usually include recreational spending, grocery bills, income taxes, and credit card payments. An analyst then compares the sum of these expenditures to the sum of their sources of income. If the expenditure is larger than their income, there could be financial chicanery afoot.

Handcuffs crimeComplications in Calculations

You can encounter a few snags when you’re analyzing an employee’s lifestyle expenditure. The employee in question could have received large cash infusions from sources they refuse to discuss. This unknown income provider could be legitimate but suspicious.

If the employee has their own business or a casual occupation aside from their desk job, this could explain their alternate revenue stream. It also gets more complicated if their second job compensates employees for travel fees or offers vacation stipends.

Although a qualified professional can sort these calculations, if you suspect an employee of financial trickery, you could already be too late. Unless you were suspicious of them from the start, this employee has already had time to deal some damage to your company’s credibility and financial stability.

Lifestyle analysis is like a blood test in a hospital: you do them to determine if you’ve caught something. Even if you detect a fraudster, remedying the damage they’ve done is another problem entirely. When it comes to corporate fraud, the adage about wellness applies as well: better an ounce of prevention than a pound of cure.