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Fraud Indicators
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.
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
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 from others with regard to at least two of the three elements of fraud are essential
taking the assets, but nobody is usually around when the theft occurs - any embezzlement activity will usually cease during audit periods
employees who are present that are usually in the best position to detect fraud when it occurs
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.
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
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.