Financial Fraud Examination.



                     “RED FLAGS”
  [POSSIBLE INDICATORS OF FRAUD]
  This document is unsym...
RED FLAGS
WARNINGS OF FRAUD


l   Red flags by definition are certain state of affairs or
    symptoms that may indicate e...
RED FLAGS
WARNINGS FOR FAUD


l   While the presence of the conditions or symptoms
    indicated below does not guarantee ...
RED FLAGS
PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT
MAY LEAD TO FRAUD


PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS T...
RED FLAGS                PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS
THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’
 ...
RED FLAGS                PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS
THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’
 ...
RED FLAGS                PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS
THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’
 ...
RED FLAGS                PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS
THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’
 ...
RED FLAGS
PERSONAL FINANCIAL FACTORS THAT CAN LEAD TO FRAUD ARE:



l   High personal debt
l   Significant personal losses...
RED FLAGS
PERSONAL HABITS THAT CAN LEAD TO FRAUD ARE:




l   Extensive stock market or other types of
    investment spec...
RED FLAGS
PERSONAL FEELINGS THAT CAN LEAD TO FRAUD:


l   Extreme community, family, personal or social
    expectations t...
RED FLAGS
OPPORTUNITIES THAT CAN LEAD TO FRAUD:

Personally created opportunities that can make fraud easier are:
l Famili...
RED FLAGS
INCENTIVES TO FRAUD


These are technically defined as the likely or perceived
  benefits, accruable from a frau...
RED FLAGS
BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD



l   Increase in scrap materials and re-orders for
    th...
RED FLAGS
BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD
cont’
    d



l   No separation of custody of assets from ...
RED FLAGS
BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD
cont’
    d



l   Overages or shortages in cash drawers
l ...
RED FLAGS
BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD
cont’
    d



l   Unrecorded transactions
l   Unusual and ...
RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD ARE:



l   Failures to inform empl...
RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
                             ...
RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
                             ...
RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
                             ...
RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
                             ...
RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
                             ...
RED FLAGS
SITUATIONAL PRESSURE THAT CONTRIBUTE TO MANAGEMENT FRAUD:



l   Heavy investments or losses
l   Insufficient wo...
RED FLAGS
SITUATIONAL PRESSURE THAT CONTRIBUTE TO MANAGEMENT FRAUD
cont’
    d



l   Progressive deterioration in quality...
RED FLAGS
AGENCY LIMITATIONS THAT CAN LEAD TO FRAUD:



l   Dependence upon only one or two products
l   Dependence upon o...
RED FLAGS
Business Decisions That Can Lead To Fraud:


l   Extremely projected rapid expansion
l   Publishing of overly op...
RED FLAGS
EXTERNAL ECONOMIC CONDITIONS THAT CAN LEAD TO FRAUD:



l   Unfavorable economic conditions within government
l ...
RED FLAGS
LEGAL DIFFICULTIES THAT CAN LEAD TO FRAUD:


l   Significant tax adjustments
l   Significant litigations, especi...
RED FLAGS
OPPORTUNITIES THAT ALLOW OR ENCOURAGE MANAGEMENT FRAUD



l   Related-party transactions
l   Multiplicity and us...
RED FLAGS
ORGANIZATIONAL STRUCTURES THAT MAKE FRAUD EASIER:


l   Ambiguous and multifarious business structures
l   Ineff...
RED FLAGS
AN ECONOMIC ENVIRONMENT THAT MAKE FRAUD EASIER TO COMMIT IS:



l   An agency with oversight of: large budgets,
...
RED FLAGS
ACCOUNTING PRACTICES THAT MAKE FRAUD EASIER TO COMMIT:



l   Large year-end or unusual transactions, use it or
...
RED FLAGS
UNUSUAL BUSINESS RELATED AND QUESTIONABLE ADMINISTRATIVE ACTIONS :




l   Activation of a dormant accounts, fol...
RED FLAGS
UNUSUAL BUSINESS RELATED AND QUESTIONABLE ADMINISTRATIVE ACTIONS :




l   Accounts that only receives huge depo...
RED FLAGS
CAUTIONS:

l   The symptoms may be present, when fraud
    actually isn’ Hence the need for meticulous
         ...
RED FLAGS
POSSIBLE INDICATORS OF FRAUD




              THE END
 THANK YOU FOR YOUR ESTEEMED ATTENTIVENESS


            ...
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Inspector General 2.Ppt2

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Managing and monitoring procurement fraud in public and private sector establishment.

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Inspector General 2.Ppt2

  1. 1. Financial Fraud Examination. “RED FLAGS” [POSSIBLE INDICATORS OF FRAUD] This document is unsympathetically clandestine and classified as such it is prohibited from unrestricted exhibition. For licensed users only. prepared by AJIE EKPERE REUBEN-DENZEL For economic and financial crime examination.
  2. 2. RED FLAGS WARNINGS OF FRAUD l Red flags by definition are certain state of affairs or symptoms that may indicate either an elevated potential for fraud or the actual presence of fraudulent activities. l Becoming sentient of these state of affairs or symptoms (i.e. red flags) can be a very useful tool, if carefully deployed in any given society or establishment.
  3. 3. RED FLAGS WARNINGS FOR FAUD l While the presence of the conditions or symptoms indicated below does not guarantee that fraud exists, they do indicate a higher likelihood of occurrence. l In this line of submission, governments, companies, agencies and institutions, individuals etc, should learn to identify the red flags as they form the basis for every fraud investigation, and where achievable seek to purge the causes. For the economic and financial crime examination
  4. 4. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT MAY LEAD TO FRAUD PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD ARE: l Low moral character l Rationalization of contradictory behavior l A lack of strong code of ethics l Wheeler-dealer attitude l Lack of stability (associated with promotional stagnation, career plateauing, aging, or domestic incompatibility) l A strong desire to beat the system
  5. 5. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’ d: l Employee believes that job is in jeopardy l Employee has a criminal trace l Employee has an outside business interest l Employee is overly defensive of fraudulent acts l Employee is overly secretive and reticent l Employee living beyond his or her means l Employee refuses to take a vacation
  6. 6. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’ d: l Employee turns down promotions or transfers l Excessive family and peer pressure to succeed l Excessive overtime partaking l Feelings of being over utilized but underpaid l Feelings of being unappreciated and insufficient recognition for job performance For the economic and financial crime examination.
  7. 7. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’ d: l Feelings of grandeur or superiority, i.e. personal challenge to beat the system l Gambling mind-set and inordinate desires for wealth l Lack of personal stability, such as frequent job changes, residence changes, etc l Large personal financial losses l Unprecedented change in employee’ personality s
  8. 8. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’ d: l Marked changes in employee’ spending habits s l Poor credit rating and unusually high personal debt l Pressures exacerbated by family illness l Unemployment of other family members l Unreliable communication and reports l Overtime during slack periods
  9. 9. RED FLAGS PERSONAL FINANCIAL FACTORS THAT CAN LEAD TO FRAUD ARE: l High personal debt l Significant personal losses l Inadequate income l Living beyond one’ means s l Illness / extensive medical needs
  10. 10. RED FLAGS PERSONAL HABITS THAT CAN LEAD TO FRAUD ARE: l Extensive stock market or other types of investment speculation l Extensive gambling and routine borrowing l Illicit sexual involvement l Drug dependence and intense use of alcohol
  11. 11. RED FLAGS PERSONAL FEELINGS THAT CAN LEAD TO FRAUD: l Extreme community, family, personal or social expectations to succeed that can not be met l Perception of unfair treatments by organization or employer l Resentment of superiors and frustration with the job l Insatiable desire for self-enrichment or personal gain l Peer group pressures within the company
  12. 12. RED FLAGS OPPORTUNITIES THAT CAN LEAD TO FRAUD: Personally created opportunities that can make fraud easier are: l Familiarity with operations (including but not limited to cover-up capabilities) l Close association with suppliers and other key trade allies l Close association with customers l Multiplicity of inconsistent documents l Monopoly of operational knowledge and skills
  13. 13. RED FLAGS INCENTIVES TO FRAUD These are technically defined as the likely or perceived benefits, accruable from a fraudulent action. In general terms they are seen as enabling factors which provide motives for a particular cause of a fraudulent action. These includes but not limited to: l Confirmed weakness in the systems / institutions l Constitutional loopholes and legal explications l Governments restrictions and regulations l Poor accounting system, and the Nigerian factor syndrome etc.
  14. 14. RED FLAGS BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD l Increase in scrap materials and re-orders for the same items l Presence of duplicates and photocopies of invoices, as a replacement for original l Large number material write-offs l Disappearance and re-emergence of files and transactional documents l Disappearance of supporting documentation
  15. 15. RED FLAGS BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD cont’ d l No separation of custody of assets from transaction authority l No separation of the custody of assets from the accounting of those assets l Reluctance to provide information to auditors l Unjustifiable sharp increase in departmental expenses l Shortages in inventory
  16. 16. RED FLAGS BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD cont’ d l Overages or shortages in cash drawers l Employees and others complaining that, “ didn’ I t receive my cheque” l Employees and others complaining that, “ paid this, I without documentation l Sudden activity in a dormant bank account l Unauthorized bank accounts in the agencies name
  17. 17. RED FLAGS BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD cont’ d l Unrecorded transactions l Unusual and unauthorized transaction on behalf of the agencies l Continuous patronage of vendors with fictitious telephone numbers, websites, email-addresses and without physical contact address listed
  18. 18. RED FLAGS AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN INDIVIDUAL TO COMMIT FRAUD ARE: l Failures to inform employees about rules and disciplines of fraud perpetrators l Rapid turn over of key employees l Absence of mandatory vacations l Absence of periodic rotations, reshufflement or transfers of employees l Inadequate personnel screening policies for hiring new employees l Absence of explicit and uniform personnel policies
  19. 19. RED FLAGS AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN INDIVIDUAL TO COMMIT FRAUD cont’ d l Failure to maintain accurate personnel records for disciplinary actions l Failure to call for executive disclosures l Dishonest or unethical management l Dominant and overbearing top management l Constantly operating under crises conditions l Paying little or no attention to details
  20. 20. RED FLAGS AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN INDIVIDUAL TO COMMIT FRAUD cont’ d l Uncongenial relationships or poor morale l Lack of internal controls, risk evaluation and fraud monitoring measures l Inadequate physical security l Too much trust / confidence placed in key employees l Too much control in the hands of a few key employees l Elongated tenure on key jobs
  21. 21. RED FLAGS AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN INDIVIDUAL TO COMMIT FRAUD cont’ d l Sloppy books and record keeping l An agency that does not enforce clear lines of authority and responsibility l An agency that does not enforce proper procedures for authorization of transactions l An agency that is not frequently reviewed by external auditors l An agency that is not frequently reviewed by internal auditors
  22. 22. RED FLAGS AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN INDIVIDUAL TO COMMIT FRAUD cont’ d l An agency that lacks adequate documentations l An agency that lacks competent and practiced personnel l Loosely restricted computer usage and archiving l Failure to discipline violators of organizational policies, i.e. violator holding fraud over the perpetrator’ head s
  23. 23. RED FLAGS AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN INDIVIDUAL TO COMMIT FRAUD cont’ d l Failure to take action on the results of internal and external audits or reviews l Frequent changes in checking accounts l Purchase of goods in excess of organization’ need s l Ignored employee complaints concerning fraud l Inadequate staffing
  24. 24. RED FLAGS SITUATIONAL PRESSURE THAT CONTRIBUTE TO MANAGEMENT FRAUD: l Heavy investments or losses l Insufficient working capital l Unusually high debt l Reduced ability to acquire credit l Profit squeeze l Restrictive load agreements
  25. 25. RED FLAGS SITUATIONAL PRESSURE THAT CONTRIBUTE TO MANAGEMENT FRAUD cont’ d l Progressive deterioration in quality of earning l Urgent need for favorable earning l Need to gloss over temporarily bad situations l Unmarketable collateral
  26. 26. RED FLAGS AGENCY LIMITATIONS THAT CAN LEAD TO FRAUD: l Dependence upon only one or two products l Dependence upon only one or two customers l Excess capacity and severe obsolescence l Extremely long circle times l Existence of revocable or imperiled licenses
  27. 27. RED FLAGS Business Decisions That Can Lead To Fraud: l Extremely projected rapid expansion l Publishing of overly optimistic earnings / accomplishments forecasts l Misplacement of priorities l Poor resource evaluation and allocation l Investing in unfamiliar product lines, markets, and projects
  28. 28. RED FLAGS EXTERNAL ECONOMIC CONDITIONS THAT CAN LEAD TO FRAUD: l Unfavorable economic conditions within government l Difficulty in collecting receivables l Unusually heavy and unfair competition l Significant reduction in sales backlog l Pressure to merge / consolidate l Sizable inventory increase without a comparable sales increase
  29. 29. RED FLAGS LEGAL DIFFICULTIES THAT CAN LEAD TO FRAUD: l Significant tax adjustments l Significant litigations, especially between customers, employees, competitors and management l Potential suspension of activities
  30. 30. RED FLAGS OPPORTUNITIES THAT ALLOW OR ENCOURAGE MANAGEMENT FRAUD l Related-party transactions l Multiplicity and use of dissimilar auditing firms / agencies l Reluctance to give auditors needed information l Frequent changing of legal counsels l Frequent changing of bankers / accounts l Continuous problems with regulatory agencies
  31. 31. RED FLAGS ORGANIZATIONAL STRUCTURES THAT MAKE FRAUD EASIER: l Ambiguous and multifarious business structures l Ineffective or nonexistent internal auditing staff l High level of computerization in an agency l Inadequate internal controls l Existence of a cartel of specialized skilled employees l Rapid turnover of a league of employees
  32. 32. RED FLAGS AN ECONOMIC ENVIRONMENT THAT MAKE FRAUD EASIER TO COMMIT IS: l An agency with oversight of: large budgets, licensing, cash mobilization and allocations, grant money, cash money, contract awards, and extensive purchasing authority l Excessive number of checking accounts l An agency vested with the power to enforce and collect toll, taxes, duty etc
  33. 33. RED FLAGS ACCOUNTING PRACTICES THAT MAKE FRAUD EASIER TO COMMIT: l Large year-end or unusual transactions, use it or lose it purchases l Unduly liberal accounting practices l Poor accounting records, excessive voids or refunds, and excessive miscellaneous cash appropriation l Inadequate staffing in the accounting department l Insufficient disclosure of questionable or unusual accounting practices
  34. 34. RED FLAGS UNUSUAL BUSINESS RELATED AND QUESTIONABLE ADMINISTRATIVE ACTIONS : l Activation of a dormant accounts, followed by a lodgment of huge cash l Address changes followed by a request for payment l Adjustments of financial entries that lack formal approval l Alteration of financial documents
  35. 35. RED FLAGS UNUSUAL BUSINESS RELATED AND QUESTIONABLE ADMINISTRATIVE ACTIONS : l Accounts that only receives huge deposits followed by huge withdrawals only l Bank statements not reconciled or done so in an untimely manner l Changes in logs, payroll certification documents, etc l Checks that have second endorsements
  36. 36. RED FLAGS CAUTIONS: l The symptoms may be present, when fraud actually isn’ Hence the need for meticulous t. investigation and grilling l Lastly avoid jumping to conclusions NOTE: THE DEVIL IS IN THE DETAILS! Prepared for the economic and financial crime examinations.
  37. 37. RED FLAGS POSSIBLE INDICATORS OF FRAUD THE END THANK YOU FOR YOUR ESTEEMED ATTENTIVENESS FROM REUBEN-DENZEL Prepared for the economic and financial crime examination
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