Fraud Examination, 4E
Chapter 5: Recognizing the
Symptoms of Fraud
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
Understand how symptoms help in the detection
of fraud.
Identify and understand accounting symptoms of
fraud.
Describe internal controls that help detect fraud.
Identify and understand analytical symptoms of
fraud.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
Explain how lifestyle changes help detect fraud.
Discuss how behavioral symptoms help detect
fraud.
Recognize the importance of tips and complaints
as fraud symptoms.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Symptoms of Fraud
Can be separated into six groups:
1.
2.
3.
4.
5.
6.
Accounting anomalies
Internal control weaknesses
Analytical anomalies
Extravagant lifestyle
Unusual behavior
Tips and complaints
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Accounting Anomalies
 result from unusual processes or procedures in the
accounting system
Example:
 the 22 phony doctors
 checks were sent to the same two common addresses
Why?
 managers trusted the perpetrator completely
 auditors merely matched claim forms with canceled checks
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Internal Control Weaknesses
Example:
 Manager had not taken a vacation in 10 years
 Employees never received payment confirmations
 Payments to new doctors were never investigated or
cleared
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Analytical Anomalies
 relationships in financial or
nonfinancial data that do not
make sense
$12 million be paid to only
22 doctors over a period
of four years
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Lifestyle Symptoms
The manager…
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took the employees to lunch in a limousine
lived in a very expensive house
drove luxury cars
wore expensive clothes and jewelry
was “independently wealthy”
inherited a large sum of money
yet never took a vacation!
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Behavioral Symptoms
 The manager had a “Dr. Jekyll and Mrs. Hyde”
personality
 Her highs and lows had become more intense and
more frequent in recent months
The Eligin Aircraft fraud was discovered because an
observant auditor noticed a fraud symptom.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounting Anomalies
Common anomaly frauds
involve:
 Irregularities in source
documents
 Faulty journal entries
 Inaccuracies in ledgers
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounting Anomalies
Irregularities in Source Documents
Include the following:
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Missing documents
Stale items on bank reconciliations
Excessive voids or credits
Common names or addresses of payees or customers
Increased past-due accounts
Increased reconciling items
Alterations on documents
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounting Anomalies
Irregularities in Source Documents
Include the following (cont.):
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Duplicate payments
Second endorsements on checks
Document sequences that do not make sense
Questionable handwriting on documents
Photocopied documents
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Faulty Journal Entries
Fraud is hidden by using accounting language
Legal Expense .....................5,000
Cash ...................……………5,000
English:
 “An attorney was paid $5,000 in cash”
Accounting:
 “Debit Legal Expense; Credit Cash”
Was the attorney really paid $5,000?
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Faulty Journal Entries
Do embezzlers leave the accounting
equation in balance??????
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Faulty Journal Entries
 An embezzler steals assets, such as cash or inventory
 Embezzler must decrease either liabilities or equities
 Decreasing liabilities is not a good concealment method
 Reasons not to change dividends, stock accounts, or
revenues
 Embezzler usually increases expenses
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Faulty Journal Entries
Common journal entry fraud symptoms:
Journal entries without documentary support
Unexplained adjustments to receivables,
payables, revenues, or expenses
Journal entries that do not balance
Journal entries made by individuals who would
not normally make such entries
Journal entries made near the end of an
accounting period
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Inaccuracies in Ledgers
Fraud symptoms relating to ledgers:
Ledger that does not balance
 the total of all debit balances does not equal the total of
all credit balances
Master (control) account balances do not equal
the sum of the individual customer or vendor
balances
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Internal Control Weaknesses
Internal control fraud symptoms include :
Lack of segregation of duties
Lack of physical safeguards
Lack of independent checks
Lack of proper authorization
Lack of proper documents and records
Overriding of existing controls (most common)
Inadequate accounting system
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Internal Control Weaknesses
 Three simple procedures to prevent small business
fraud
1. Owners should open and reconcile bank statements
2. Pay everything by check so there is a record
3. Owners should sign every check themselves
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analytical Fraud Symptoms
Analytical Fraud symptoms include:
Unexplained inventory shortages or adjustments
Deviations from specifications
Increased scrap
Excess purchases
Too many debit or credit memos
Significant increases or decreases in account
balances, ratios, or relationships
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analytical Fraud Symptoms
Physical abnormalities
Cash shortages or overages
Excessive late charges
Unreasonable expenses or reimbursements
Excessive turnover of executives
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analytical Fraud Symptoms
 Strange financial statement relationships, such as
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Increased revenues with decreased inventory
Increased revenues with decreased receivables
Increased revenues with decreased cash flows
Increased inventory with decreased payables
Increased volume with increased cost per unit
Increased volume with decreased scrap
Increased inventory with decreased warehousing costs
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Extravagant Lifestyles
Example
Kay…
Embezzled $3 million from her employer
Bought a $500,000 or more home
Bought five luxury cars
Filled home with artwork and glass
Bought a boat
Paid cash to have yard landscaped
Served lobster flown in from the east coast
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Unusual Behaviors
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Tips and Complaints
 Elements of fraud
 Theft act
 Concealment
 Conversion
 Company employees are
in the best position to
detect fraud
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Tips and Complaints
Why are tips and complaints just symptoms?
 Many tips and complaints turn out to be unjustified
 Difficult to know what motivates a person to complain or
provide a tip
 Customers may feel taken advantage of
 Employee may have malice, personal problems, or
jealousy
 Spouses and friends may be motivated by anger,
divorce, or blackmail
 Individuals should always be considered innocent until
proved guilt
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Tips and Complaints
Why people are hesitant to come forward:
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Impossible to know for sure that a fraud is taking place
Fear of being the whistle-blower
Intimidation by the perpetrator
Feel that squealing on someone is wrong
Not easy to come forward
Three frauds that were detected by tips and complaints or
that involved whistle-blowers are the GE fraud, the
Revere Amored Car Company fraud, and the fraud at
Enron.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.