Symptoms of Fraud – 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 items or detect them on time after occurrence managers can effectively monitor compliance.
Specific internal control issues 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, overriding the system in place, and appropriate documentation.
2. Analytical Irregularities:
These symptoms of fraud 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. Typical 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. To balance the accounting equation they must expend 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/suppliers 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 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 of fraud to detect. Although looking at bank records, investment records, and tax return information are difficult to access; property records, UCC filings, and other documents 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 expression 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 of fraud instead of evidence because often they turn out to be unjustified. Despite their failure, they can be beneficial 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 an anonymous fraud hotline. Detection and communication offer the best protection from fraud.