Fraud Indicators

1
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.

2
6 Main indicators of fraud

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

3
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.

4
Accounting Anomalies

• Dummy suppliers
• False invoices
• Fictitious expenses
• Fictitious journal entries
• Missing vouchers
• Alterations on vouchers

5
Accounting Anomalies

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

6
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

7
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.

8
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

9
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.

10
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.

11
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

12
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.

13
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

14
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.

15
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

16
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

17
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.

18
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

19
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

20
Behavioural Symptoms

• Obsessive contemplation of possible consequences
• Constant development of excuses
• Identification of scapegoats
• Tendency to work standing up
• Increased perspiration

21
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

22
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

23
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

24
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.

25
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

26
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!