Fraud Symptom Categories
1. Internal Control Problems – material weakness
The first thing to remember when looking at internal controls is the fraud triangle. Without all three elements of opportunity, pressure and rationalization it is less likely that fraud will occur. By creating controls that prevent these elements or detect them in a timely manner after occurrence managers can effectively monitor compliance.
Specific internal control issues stem from the organizations structure. Examples of symptoms of control deficiencies include a lack of the following: segregation of duties, independent verification, proper authorization, physical safeguards, overriding the system in place, and proper documentation.
2. Analytical Irregularities
These symptoms are unusual relationships of current financial statement ratios are compared to prior years. The analytical tests identify those transactions that are extreme cases and fall outside of the normal distribution of values. Common examples include: shortages of inventory, the use of too many credits to accounts receivable, or the existence of new vendors.
3. Accounting Abnormalities
The symptoms of accounting issues involve problems with faulty journal entries, nonexistent or fraudulent source documents, and incorrect ledger balances. Journal entries that are tampered with by smart fraudsters tend to be the expense accounts. In order to balance the accounting equation they must expense an amount equal to what they stole. Source documents can have all sorts of problems because many times they are vendor invoices that can be manipulated by those with direct access. It is important to retain all original copies and to verify with customers/vendors through the use of confirmations. Lastly, ledger problems come about when there is a mismatch of ledger balances not equaling the master file or each individual ledger balance not reconciling. Either way it is a sign of an incomplete fraud scheme.
4. Extravagant Lifestyle &/or Unusual Behavior
Lifestyle changes are often the easiest of all symptoms to detect. Although looking at bank records, investment records, and tax return information are difficult to access; property records, UCC filings, and other records are easy to check to determine whether there are assets that have been purchased or liens that have been removed. Unusual behavior is seen through an individual’s recognizable behavior pattern to attempt to cope with the stress. Their guilt leads to fear, fear leads to stress, and stress leads to behavior changes.
5. Tips and Complaints
These are considered to be symptoms instead of evidence because often times they turn out to be unjustified. Despite their failure they can be extremely helpful when those in the best position to detect fraud step forward.
-coworkers, managers, and other employees are usually in the best position to detect fraud in the theft act stage
-company accountants and even coworkers are probably in the best position to detect fraud in concealment
-coworkers, friends, and managers are also in a better position to detect fraud in conversion
Since this is the case, it is important that companies maintain a whistleblower protection program or keep open a anonymous fraud hotline. Detection and communication offer the best protection from fraud.