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The Institute of Internal Auditors Red Flags of Fraud: Situational Pressures That Contribute To Management Fraud

The document outlines various red flags of fraud that can occur at the individual, company, and environmental levels. At the individual level, personal habits and feelings like gambling, drug use, resentment, and peer pressure can potentially lead to fraudulent behavior. Company pressures like financial difficulties, limitations, and decisions around expansion can also enable fraud. External economic conditions such as unfavorable industry conditions or heavy competition provide opportunities for fraud. The document provides numerous examples of each type of red flag.

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96 views2 pages

The Institute of Internal Auditors Red Flags of Fraud: Situational Pressures That Contribute To Management Fraud

The document outlines various red flags of fraud that can occur at the individual, company, and environmental levels. At the individual level, personal habits and feelings like gambling, drug use, resentment, and peer pressure can potentially lead to fraudulent behavior. Company pressures like financial difficulties, limitations, and decisions around expansion can also enable fraud. External economic conditions such as unfavorable industry conditions or heavy competition provide opportunities for fraud. The document provides numerous examples of each type of red flag.

Uploaded by

jam lingan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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The Institute of Internal Auditors

RED FLAGS OF FRAUD


Situational pressures that contribute to 3. Suspension or delisting from a stock
management fraud exchange. Personal habits that can lead
to fraud are:
Company financial pressures that can lead to 1. Extensive stock market or other types of
fraud are: speculation.
1. Heavy investments or losses. 2. Extensive gambling.
2. Insufficient working capital. 3. Illicit sexual involvement.
3. Unusually high debt. 4. Heavy use of alcohol or drugs.
4. Reduced ability to acquire credit 5. Routine borrowing.
5. Profit squeeze.
6. Restrictive loan agreements. Personal feelings that can lead to fraud are:
7. Progressive deterioration in quality of 1. Extreme community or social
earnings. expectations to succeed.
8. Urgent need for favorable earnings. 2. Perception of being treated unfairly or
9. Need to gloss over temporarily bad inadequately by organization.
situations. 3. Resentment of superiors.
10. Unmarketable collateral. 4. Frustration with the job.
5. Peer-group pressures within the
Company limitations that can lead to fraud are: company.
1. Dependence upon only one or two 6. Personal/family expectations that
products. cannot be met.
2. Dependence upon only one or two 7. Insatiable desire for self-enrichment or
customers. personal gain.
3. Excess capacity.
4. Severe obsolescence. Opportunities that can lead to fraud
5. Extremely long cycle.
6. Existence of revocable or imperiled Personally-created opportunities that can make
licenses. fraud easier are:
Business decisions that can lead to fraud are: 1. Familiarity with operations (including
1. Extremely rapid expansion. cover-up capabilities).
2. Publishing of overly optimistic earnings 2. Close association with suppliers and
forecasts. other key people.

External economic conditions that can lead to Firm characteristics that make it easier for an
fraud are: individual to commit fraud are:
1. Unfavorable economic conditions 1. Failure to inform employees about rules
within an industry. and disciplines of fraud perpetrators.
2. Difficulty in collecting receivables. 2. Rapid turnover of key employees.
3. Unusually heavy competition. 3. Absence of mandatory vacations.
4. Significant reduction in sales backlog. 4. Absence of periodic rotations or
5. Pressure to merge. transfers of employees.
6. Sizeable inventory increase without a 5. Inadequate personnel screening policies
comparable sales increase. for hiring new employees.
6. Absence of explicit and uniform
Legal difficulties that can lead to fraud are: personnel policies.
1. Significant tax adjustments. 7. Failure to maintain accurate personnel
2. Significant litigation, especially records for disciplinary actions.
between stockholders and management. 8. Failure to require executive disclosures.
9. Dishonest or unethical management.
2010 APIPA Conference
Contract & Procurement Fraud 1
July 21, 2010
The Institute of Internal Auditors
10. Dominant top management. 14. Lack of internal security.
11. Constantly operating under crisis 15. Too much trust is placed in key
conditions. employees.
12. Paying little attention to details. 16. Tenure on key jobs becomes too long.
13. Impersonal relationships or poor 17. Books and records are sloppy.
morale.

Note: Red flags provided are examples, and not intended to represent an exhaustive list.

2010 APIPA Conference


Contract & Procurement Fraud 2
July 21, 2010

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