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 prevent these elements or detect them in a timely manner after they occur, managers can monitor compliance effectively.
Specific internal control problems stem from the structure of the organization. Examples of symptoms of control deficiencies include a lack of the following: segregation of duties, independent verification, adequate authorization, physical safeguards, override of the established system, and adequate documentation.
2. Analytical irregularities
These symptoms are unusual ratios of current financial statement ratios 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 account 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 many times they are supplier invoices that can be manipulated by people with direct access. It is important to keep all original copies and verify with clients/suppliers by using confirmations. Lastly, general ledger problems arise when there is a discrepancy of general ledger balances that do not match the master file or each individual general ledger balance is not reconciled. Either way, it’s 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 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 behavioral changes.
5. Tips and Complaints
These are considered symptoms rather than evidence because they are often unwarranted. 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 detect cover-up fraud
-co-workers, friends and managers are also in a better position to spot conversion fraud
Since this is the case, it is important for companies to maintain a whistleblower protection program or keep an anonymous fraud hotline open. Detection and communication offer the best protection against fraud.