Fraud Symptom Categories
1. Internal control issues – 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 prevent these items or detect them in a timely manner after they occur, managers can effectively monitor compliance.
Specific internal control problems stem from the organization’s structure. Examples of symptoms of control deficiencies include a lack of the following: segregation of duties, independent verification, proper authorization, physical safeguards, override of established system, and proper documentation.
2. Analytical irregularities
These symptoms are unusual ratios of current financial statements compared to prior 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 to accounts receivable, or the existence of new suppliers.
3. Accounting Anomalies
Symptoms of accounting problems include problems with faulty journal entries, missing or fraudulent source documents, and incorrect ledger balances. The journal entries that are manipulated by clever scammers tend to be the 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 vendor invoices that can be manipulated by people with direct access. It is important to retain all original copies and verify with customers/suppliers through the use of confirmations. Finally, general ledger issues arise when there is a mismatch of general ledger balances that do not match the master file or each individual general ledger balance does not reconcile. Either way, it’s a sign of a sketchy 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 tax return information; Property records, UCC filings, and other records are easy to check for assets that have been purchased or liens that have been removed. Unusual behavior is seen through an individual’s recognizable behavior pattern in attempting to cope with stress. Your guilt leads to fear, fear leads to stress, and stress leads to behavior changes.
5. Tips and Complaints
These are considered symptoms rather than tests because they are often unexplained. Despite their failure, they can be extremely useful when those in the best position to detect fraud step forward.
-Co-workers, managers and other employees are often in the best position to detect fraud at the stage of the act of theft.
-company accountants and even co-workers are probably in the best position to spot fraud in disguise
-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.