Profiling a Fraudster
Here is a simple checklist that you can use to help identify fraud in your business. There are
separate questions for different areas of your business depending on the department.
Categories Include:
• Employee
• Management
• Payroll
• Accounts Receivable
• Accounts Payable
• Revenue
• Procurement
• Corporate
• Other
Employee Red Flags
Unexplained employee lifestyle changes - living above their expected means
Significant personal debt and credit problems
Refusal to take annual or sick leave
Behavioural changes - i.e. drugs, alcohol, gambling or fear of losing the job.
High employee turnover, especially in those areas which are more vulnerable to fraud
Lack of segregation of duties in the vulnerable area
Complained about inadequate pay
Unusually close association with vendor/customer
Wheeler-dealer attitude
Divorce/family problems
Past employment-related problems
o
o
o
o
o
o
o
o
o
o
o
Management Red Flags
Reluctance to provide information to auditors
Managers engage in frequent disputes with auditors
Management decisions are dominated by an individual or small group
Managers display significant disrespect for regulatory bodies
There is a weak internal control environment
Accounting personnel are lax or inexperienced in their duties
Decentralisation without adequate monitoring
Excessive number of checking accounts
Frequent changes in banking accounts
Frequent changes in external auditors
Company assets sold under market value
Significant downsizing in a healthy market
Continuous rollover of loans
Excessive number of year end transactions
High employee turnover rate
Unexpected overdrafts or declines in cash balances
Refusal by company or division to use serial numbered documents (receipts)
Compensation program that is out of proportion
Any financial transaction that doesn’t make sense - either common or business
Service contracts result in no product
Photocopied or missing documents
Borrowing money from co-workers
Creditors or collectors appearing at the workplace
Gambling beyond the ability to stand the loss
Easily annoyed at reasonable questioning & providing unreasonable responses to questions
Refusing vacations or promotions for fear of detection
Bragging about significant new purchases
Carrying unusually large sums of money
Rewriting records under the guise of neatness in presentation
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Payroll Red Flags
Inconsistent overtime hours for a cost center
Overtime charged during a slack period
Overtime charged for employees who normally would not have overtime wages
Budget variations for payroll by cost center
Employees with few or no payroll deductions
A terminated employee who is still on the payroll list
Employees on the payroll register before their start date or after their termination date
o
o
o
o
o
o
o
Note: Red flags that show up in payroll are generally worth a thorough investigation. Although
payroll is usually an automated function, it is a vulnerable area, especially if collusion is involved.
Accounts Receivable Red Flags
Customer complaints
Unexplained change in uncollectable accounts and aging
Customer statements are not sent or are not sent timely
Timing differences between collections and posting to accounts
Staff not taking vacations
Credits to a customer account followed by an identical debit
Changes to customer accounts or new customers with unusual names/addresses
Shipping to customers without proper credit approval
Unusual “ship to” address is different from company address
Inventory discrepancies
Unusual collection agency activity (low recovery/high utilisation)
Changes in sales (increase or decrease) not consistent with changes in cash receipts
Unusual number of reverse transactions/voids
Unusual number of pricing overrides
Unusual number of credit overrides
Credit level increases not consistent with sales volume
Abnormal number of expense items, supplies, or reimbursement to the employee
Large number of write-offs of accounts
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Accounts Payable Red Flags
Actual costs over budget
Original documents are not available for inspection
Missing documentation
Changes to vendor master file are not approved
Payment not properly authorized or typical controls are overridden
Vendor names appear to be unusual
Vendors with multiple addresses or addresses that change frequently
Common name, address, bank account number between vendor & employee master files
Vendor address is a P. O. box
Unexplained fluctuations in payments to vendors
Changes in employee habits and lifestyle
Lack of physical security protocol over check stock and signature stamps or plates
Cancelled checks cannot be located
Bank reconciliations with long-term outstanding checks
Vendors not being paid timely or being paid sooner than other vendors
Check sequences, anomalies, or gaps
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Revenue Red Flags
Sales trends out of line with industry
Sales exactly meet budget or analysts’ expectations
Bonuses tied to sales
Excessive returns after period end
Side agreements identified in confirmations
Recurring negative cash flows from operations
Sales on tax return differs from sales reported in financial statements
Missing documentation
Commissions not paid to sales rep. when otherwise would be expected
Unusual increase in the number of days sales in receivables
Customer invoice shows extended payment terms or unusual return allowances
Credit limits exceeded
o
o
o
o
o
o
o
o
o
o
o
o
Procurement Red Flags
Frequency of purchases and amount of vendor spend sharply increase (particularly with
new vendors)
Vendor used consistently in the past suddenly is no longer used
Vague descriptions provided on invoices (e.g., materials purchased or services rendered)
Unusual number of purchases below approval threshold level – purchases broken into
smaller pieces
One payment applies discount, another pays full invoice (invoices amounts with 2%
difference, etc.)
Volume of purchases not supported by a rational need
Purchasing Cards - Unusually high spend activity at the end of the year
Purchasing Cards - Weekend purchases and holiday purchases
Purchasing Cards - Purchases from vendors not in the normal course of business
(jewellery stores, casinos, furniture stores, gentlemen’s clubs, etc.)
Excessive sole source justifications
Unusual restrictions or time limits to exclude or reduce competition
Prequalification procedures that restrict robust competition
Vague bid specifications
Specifications developed by a vendor who then submits a bid
One party represents a number of potential bidders
Unknown or unusual vendors
Acceptance of late or incomplete bids
Permitting changes after receipt of bids
Bids submitted in editable electronic formats
Selecting vendors with records of poor performance history.
Qualified vendors stop submitting bids
Vendor addresses matching employee addresses
Purchases that bypass the normal procedures
Vendors without physical addresses
Charges without shipping documents
Lack of physical security over assets/inventory
High volume of purchases from new vendors
o
o
o
o
o
o
o
o
o
o
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o
o
o
o
o
o
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o
o
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o
o
Corporate Corruption Red Flags
Operating in countries or industries notorious for fraud or corruption
Expenses over budget
Excessive consulting fees
Unauthorised payments for goods and services
Complaints from suppliers regarding bidding or relationships
Fluctuations in vendor volumes
o
o
o
o
o
o
Other Common Types of Fraud
Falsifying timesheets for a higher amount of pay
Pilfering stamps
Stealing of any kind (e.g., cash, petty cash, supplies, equipment, tools, data, records, etc.)
Forgery (not just check forgery, e.g. forging management signatures on purchase orders)
Lapping collections on customers’ accounts
Check Kiting
Pocketing payments on customers’ accounts, issuing receipts on self-designed receipt books
Not depositing all cash receipts (deposits are not “intact”)
Creating fictitious employees and collecting the paychecks (impersonation)
Paying for personal expenses with business funds
Increasing vendor invoices through collusion
Billing for services not rendered and collecting the cash
Seizing checks payable to vendors
Recording fictitious transactions on the books to cover up theft
Conflicts of Interest
Nepotism
Favoritism
If you suspect fraudulent activity in your business; why not take the red flag test? It might help
you determine if fraudulent activity is possibly occurring at your business. Alternatively, why not
join us on the 3rd March 2016 for the ‘Prevention of Fraud’ e-workshop, which will discuss the
next steps to take once you have identified fraudulent activity. However, if in the meantime you
have any other questions or wish to discuss any concerns you have, please feel free to contact
Bernard Whebell at bwhebell@ulton.net or by phoning (07) 4197 6300.
Source:
Red Flags of Fraud, DiNapoli TP, https://www.osc.state.ny.us/localgov/pubs/red_flags_fraud.pdf
Red Flags of Fraud, Chianese J, Haimoff I, McSwain J, Wiseman M, Deloitte, 2012, http://www.afci.org/sites/default/files/
document-library/redflagsoffraud-final.pdf
Disclaimer: This checklist is a general and indicative resource only. All material published on in this document is of a general
nature only and is not intended to be a substitute for or relied upon as specific professional advice. Accordingly, the information
in these materials is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or
services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your
business. Before making any decision or taking any action that might affect your personal finances or business, you should
consult a qualified professional adviser. No responsibility for loss or damage suffered by any person acting on or refraining from
action as a result of any material within this document is accepted. Although Ulton have taken reasonable steps to ensure all
material in this document is complete and accurate, no guarantees are given.