Symptoms of fraud

Fraud Symptom Categories

1. Internal control problems: material weakness

The first thing to remember when looking at internal controls is the fraud triangle. Without the three elements of opportunity, pressure, and rationalization, fraud is less likely to occur. By creating controls that avoid these elements or detect them in a timely manner after they occur, managers can effectively monitor compliance.

Specific internal control problems arise from the structure of the organization. Examples of symptoms of control deficiencies include the lack of the following: segregation of duties, independent verification, proper authorization, physical safeguards, override of the implemented system, and adequate documentation.

2. Analytical irregularities

These symptoms are unusual ratios of current financial statements comparing to previous years. Analytical tests identify those transactions that are extreme cases and fall outside the normal distribution of values. Common examples include: inventory shortages, the use of too many credits on accounts receivable, or the existence of new suppliers.

3. Accounting abnormalities

Symptoms of accounting problems include problems with faulty journal entries, missing or fraudulent source documents, and incorrect general ledger balances. The journal entries that are manipulated by clever scammers tend to be expense accounts. To balance the accounting equation, they must spend an amount equal to what they stole. Source documents can have all kinds of problems because they are often supplier invoices that can be manipulated by those with direct access. It is important to keep all original copies and verify with customers / suppliers using confirmations. Lastly, general ledger problems arise when there is a mismatch of general ledger balances that do not match the master file or each individual ledger balance that is not reconciled. Either way, it is a sign of an incomplete fraud scheme.

4. Extravagant lifestyle and / or unusual behavior

Lifestyle changes are often the easiest symptoms to spot. Although it is difficult to access bank records, investment records, and information on tax returns; Ownership records, UCC filings, and other records are easy to check for assets that have been purchased or links that have been removed. Unusual behavior is seen through an individual’s recognizable behavior pattern in trying to cope with stress. Your guilt leads to fear, fear leads to stress, and stress leads to behavior changes.

5. Suggestions and complaints

These are considered symptoms rather than evidence because they are often unwarranted. Despite their failure, they can be extremely helpful when those in the best position to detect fraud step up.

-co-workers, managers and other employees are often in the best position to detect fraud at the theft act stage

– company accountants and even coworkers are probably in the best position to detect fraud in cover-up

-co-workers, friends, and managers are also in a better position to spot conversion fraud

Since this is the case, it is important that companies maintain a whistleblower protection program or keep an anonymous fraud hotline open. Detection and communication offer the best protection against fraud.