Fraud IndicatorsOnly the symptoms of fraud, the redflags or indicators, exist to alertmanagement of wrongdoing.Unfortunately, many such fraudsymptoms go unnoticed and, in somecases, signals that are recognised arenot 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 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 wouldnt 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!