Fraud Indicators

Only the symptoms of fraud, the red

flags or indicators, exist to alert
management of wrongdoing.

Unfortunately, many such fraud

symptoms go unnoticed and, in some
cases, signals that are recognised are
not vigorously pursued.
6 Main indicators of fraud

 Accounting anomalies
 Internal control symptoms
 Analytical symptoms
 Lifestyle symptoms
 Behavioural symptoms
 Tips and complaints.
Accounting Anomalies

When perpetrators commit fraud against

their employers, accounting records
such as documents, journal entries,
ledgers, or financial statements are often
altered, forged, or missing.
Accounting Anomalies

 Dummy suppliers
 False invoices
 Fictitious expenses
 Fictitious journal entries
 Missing vouchers
 Alterations on vouchers
Accounting Anomalies

 Duplicate payments
 Out of sequence entries
 Questionable handwriting
 Photocopied documents
 Unusual items on reports
 Entries with no documentary support
 Unexplained adjustments
Accounting Anomalies

 Journal entries that do not balance

 Entries made by people who would not
normally make entries
 Entries made at or near the end of the
accounting period
 Control account balance that does not
equal the sum of the individual accounts
Internal Control Symptoms

Fraud occurs when pressure,

opportunity, and rationalisation come
together. Most people have pressures.

Everyone rationalises. When internal

controls are absent or overridden,
everyone also has an opportunity to
commit fraud.
Internal Control Symptoms

 Poor control environment

 Lack of segregation of duties
 Lack of physical safeguards
 Lack of independent checks
 Lack of proper authorisations
 Lack of proper documents and records
 Overriding of existing controls
Analytical Symptoms

Analytical fraud symptoms are

procedures or relationships that are too
unusual or too unrealistic to be
believable.

Basically, analytical symptoms are

anything out of the ordinary. They
represent the unexpected.
Analytical Symptoms

 Transactions or events that happen at

odd times or places.
 That are performed by, or involve people
who wouldn't normally participate, or that
include odd procedures, policies, or
practices.
 They also include transactions and
amounts that are too large or too small.
Analytical Symptoms

 That are performed or occur too often or

too rarely
 That are too high or too low
 That result in too much or too little of
something
 Increase in complaints
 Decrease in quality
Lifestyle Symptoms

Most people who commit fraud are under

financial pressure. Sometimes the
pressures are real; sometimes they
represent mere greed.

Very few perpetrators steal and save -

most immediately spend everything they
embezzle.
Lifestyle Symptoms

As they become more and more

confident in their fraud schemes, they
steal and spend increasingly larger
amounts until they are living lifestyles
far beyond what they can reasonably
afford
Lifestyle Symptoms

 Once perpetrators meet their financial

needs, they usually continue to steal,
using the embezzled funds to improve
their lifestyles
 Examples include:
 New cars ,exotic holidays, home
improvements or a move into a more
expensive house, purchase of expensive
jewellery or clothes.
Lifestyle Symptoms

The most difficult of all symptoms to

recognise. Common excuses for
“increased wealth or spending power”

 Family Inheritance
 Investment Maturity
 Windfall Win
 Sale of Assets
Behavioural Symptoms

Research indicates that when a person,

especially a first-time offender, commits
a crime, he or she becomes engulfed by
emotions of fear and guilt.

Those emotions cause stress, and in

order to cope with the stress, the
individual will exhibit unusual and
recognisable behaviour patterns
Behavioural Symptoms

It is not any particular behaviour, but

rather changes in behaviour that signal
the possibility of fraud.

People who are normally nice may

become intimidating and belligerent;
people who are normally belligerent may
suddenly become nice.
Behavioural Symptoms

 Insomnia
 Increase in alcohol abuse and in
smoking habits
 Unusual irritability and suspiciousness
 Inability to relax
 Lack of pleasure in things usually
enjoyed
Behavioural Symptoms

 Inability to look people in the eye

 Visible embarrassment around friends
and others
 Defensiveness or argumentativeness
 Unusual belligerence in stating opinions
 Unsolicited confessions
Behavioural Symptoms

 Obsessive contemplation of possible

consequences
 Constant development of excuses
 Identification of scapegoats
 Tendency to work standing up
 Increased perspiration
Behavioural Symptoms

 Being a “too conscious” employee?

 Never takes a holiday or is only away for
short periods
 Does not allow any other employee to
undertake their work
 Maintains sole control over systems or
processes
 Starts work early and/or finishes late
Tips and Complaints

Every fraud consists of three elements,

 the actual theft act,
 subsequent concealment,
 and conversion.

Tips and complaints from others with

regard to at least two of the three
elements of fraud are essential
Tips and Complaints
 Theft involves taking cash or other assets
manually, by computer, or by telephone.

 Fraud can be detected by witnessing someone

taking the assets, but nobody is usually around
when the theft occurs - any embezzlement
activity will usually cease during audit periods

 It is the co-workers, managers, and other

employees who are present that are usually in
the best position to detect fraud when it occurs
Tips and Complaints
 Concealment involves the steps taken by the
perpetrator to hide the fraud from others.
 This includes:
 Altering financial records
 Miscounting assets
 Destroying evidence
 Fraud can be detected at this stage by
recognising altered records or the miscounting of
cash or stock in their audit samples. It is,
however, other employees who are still probably
in a better position to detect fraud at this stage.
Tips and Complaints
 Conversion involves selling or converting stolen
assets into cash and then spending the cash.
 If the asset taken is cash, conversion simply
involves spending the stolen funds.
 Fraud can be detected by focusing on lifestyle
changes perpetrators almost inevitably make
when they convert their embezzled funds.
 Unfortunately, there is no way that auditors can
recognize lifestyle changes – they have no
“start point” upon which to found suspicions
 Other employees are often the best way of
identifying such symptoms………
Combining Fraud Symptoms
 Each of these six categories of fraud symptoms
holds keys that can be of immense value in
fraud detection.
 When the information inherent in all six
categories is combined, tremendous detection
power can result….
Call foul on fraud:
blow the whistle!