6 Main indicators of fraud. Accounting anomaliesInternal control symptomsAnalytical symptomsLifestyle symptomsBehavioural symptomsTips 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. .
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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.
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
Fictitious journal entries
Alterations on vouchers
5. Accounting Anomalies Duplicate payments
Out of sequence entries
Unusual items on reports
Entries with no documentary support
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
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”
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
20. Behavioural Symptoms Obsessive contemplation of possible consequences
Constant development of excuses
Identification of scapegoats
Tendency to work standing up
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,
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.
Altering financial records
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!