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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!

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Fraud+Indicators(1)

  • 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!