FRAUD
INDICATER FLAGS
·
INTRODUCTION:
Three conditions must be present
for fraud to occur. There needs to be a need,
a rationalization, and an opportunity. The need can be real or
imagined. The rationalization can be as creative as people are different. KPMG,
Peat Marwick's extensive research in fraud resulted in the guidelines contained
in this procedure. Keep in mind that their client base is large and usually
publicly owned corporations, therefore, some of the controls they mention are
not available to the small business. Some of the same principles and controls
do however apply to small businesses and should be considered and implemented
if possible and practical.
·
HOW
EMPLOYEES RATIONALIZE FRAUD:
·
Possible rationalization:
·
"I'm just borrowing the funds"
·
"I deserve it; I'm under-paid /
under-promoted"
·
"I'm not hurting anyone"
"Others
are doing it, either the boss or other employees”
·
SITUATIONAL
PRESSURE RED FLAGS:
·
PERSONAL:
·
Financial Pressure
·
High personal debts
·
Severe illness in family
·
Inadequate income and/or living beyond means
·
Extensive stock market speculation creating
indebtedness
·
Loan shark involvement
·
Excessive gambling
·
Heavy expenses incurred by involvement with other
women/men
·
Undue family, peer, company, or community
expectations
·
Excessive use of alcohol or drugs causing
indebtedness
·
Revenge Motive
·
Perceived inequities (e.g., underpaid, poor job
assignment)
·
Resentment of superiors
·
Frustration, usually with job
·
COMPANY:
·
Financial Pressures
·
Unfavorable economic conditions within the industry
·
Heavy investments or losses
·
Lack of sufficient working capital
·
Success of the company dependent on one or two
products, customers, or transactions.
·
Excess capacity
·
Severe obsolescence
·
Extremely high debt
·
Extremely rapid expansion through new business or product
lines
·
Tight credit, high interest rates, and reduced
ability to acquire credit
·
Pressure to finance expansion through current
earnings rather than through debt or equity
·
Profit squeeze (costs and expenses rising higher and
faster than sales and revenue)
·
Difficulty in collecting receivables
·
Unusually heavy competition (including low-cost
imports)
·
Existing loan agreements with little flexibility and
tough restrictions
·
Progressive deterioration in quality of earnings
·
Significant tax adjustments by the IRS
·
Long-term financial losses
·
Unusually high profits with a cash shortage
·
Urgent need for favorable earnings to support high
price of stock, meet earnings forecast, etc.
·
Need to gloss over a temporary bad situation and
maintain management position and prestige
·
Significant litigation, especially between
stockholders and management
·
Unmarketable collateral
·
Significant reduction in sales backlog, indicating
future sales decline
·
Long business cycle
·
Existence of revocable and possibly imperiled
licenses necessary for the continuation of the business
·
Suspension or “delisting” from a stock exchange
·
Fear of a merger or acquisition
·
·
PERSONAL:
·
Personally developed opportunities
·
Very familiar with operations (including cover-up
capabilities)
·
In a position of trust
·
Close association with cohorts, suppliers, and other
key people
·
Firm environments that foster and/or create
opportunity
·
A firm that doesn't inform employees of rules and
discipline for fraud perpetrators
·
A firm in which there is rapid turnover of key
employees, quit or fired
·
A firm in which there are no annual vacations of
executives or managers
·
A firm in which there are no rotations or transfers
of key employees
·
A firm that does not use adequate personnel
·
A firm in which there is an absence of explicit and
uniform personnel policies
·
A firm that does not maintain accurate personnel
records of dishonest acts or disciplinary actions for such things as alcoholism
and/or drug abuse
·
A firm that has no documented code of ethics
·
A firm that does not require executive disclosures
and examinations
·
A firm that has weak leadership
·
A firm that has a dishonest management and/or
environment.
·
A firm that has a dominant top management (one or two
individuals)
·
A firm in which there are relatively few interpersonal
relationships
·
A firm that is always operating in a crisis
·
A firm that pays no attention to details
·
A firm in which there is too much trust in key
employees
·
A firm that does not have viable dissatisfaction and
grievance outlets
·
A firm that lacks personnel evaluations
·
A firm that does not have operational productivity
measurements and evaluations
·
COMPANY:
·
Nature of firm
·
A firm that has related-party transactions
·
A firm that has a very complex business structure
·
A firm that does not have an effective internal
auditing staff
·
An extremely large and decentralized firm
·
A highly computerized firm
·
A firm that has inexperienced people in key positions
·
Relationships with outside parties
·
A firm that uses several different auditing firms
·
A firm that is reluctant to give auditors needed data
·
A firm that changes auditors often
·
A firm that hires an auditor who lacks expertise
·
A firm that persistently brings unexpected
information to the auditor's attention
·
A firm that changes legal counsel often
·
A firm that is reluctant to give accounting
information to it's legal counsel
·
A firm that has several different legal counsels
·
A firm that uses several different banks, none of
which can see the entire picture
·
A firm that has continuous problems with various
regulatory agencies
·
Accounting practices
·
A firm that has large year-end and unusual
transactions
·
A firm in which many adjusting entries are required
at the time of the audit
·
A firm that supplies information to auditors at the
last minute
·
A firm that has a poor internal control system or
does not enforce internal control procedures
·
A firm that has unduly liberal accounting records
·
A firm that has poor accounting records
·
A firm that has inadequate staffing in the accounting
department.
Ken Roys, CEO
BTF Management Consultants Inc
866-385-1900 Toll Free 713-983-7904 Fax
Ken.Roys@btfmanagement.com
www.btfmanagement.com