RED FLAGS OF
OCCUPATIONAL FRAUD
Caroline Burnell, CFE, CGFM
CAROLINE BURNELL
Fraud Investigator
25 years experience in auditing
and fraud investigations

SOURCES:
State of New York, Office of State
Comptroller, Red Flags for Fraud
http://www.osc.state.ny.us/localgov/pu
bs/red_flags_fraud.pdf
Accessed January 8, 2014.
Wells, Joseph T; Corporate Fraud
Handbook Prevention and Detection,
3rd Edition. 2011
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RED FLAGS
Defined
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RED FLAGS
A set of circumstances that
are unusual in nature or vary
from the normal activity.
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RED FLAGS
Do not ignore a red flag!
Studies of fraud cases consistently
show that red flags were present,
but either weren’t recognized or
were recognized but not acted upon
by anyone.
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RED FLAGS
The investigation should be
done by a responsible person
who is unlikely to be
committing the fraud if one is
occurring.
Sometimes an error is just an
error.
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FRAUD
And Its
Perpetrators
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Required
Conditions:
KEY POINTS
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ANYONE within the
organization can
commit fraud.
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Highly trusted
employees are NOT
always honest.
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PERPETRATORS
 Past Employment-Related Problems
 Unusually Close Association with
Vendor/Customer
 Wheeler-Dealer Attitude
 Irritability, Suspiciousness or Defensiveness
 Control Issues, Unwillingness to Share Duties
 Refusal to Take Vacations
 Complained About Inadequate Pay
 Complained About Lack of Authority
PERPETRATORS
 Excessive Pressure from Within Organization
 Excessive Family/Peer Pressure for Success
 Financial Difficulties
 Addiction Problems
 Divorce/Family Problems
 Past Legal Problems
Source: ACFE 2012 Report to the Nations
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WAR STORY
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WAR STORY
RED FLAGS
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 Legal Pressure
 Past Theft
 Financial Pressure
 Similar looking
invoices
 Sequentially
numbered invoices
 Same address /
telephone number
 Executive Directive
submitted an invoice
from one of his
companies for payment
of an item that was never
delivered.
 Checks payable to
companies endorsed by
Executive Director
and/or his family
 No email or web
address
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SHELL COMPANIES
Shell companies are fictitious entities
created for the sole purpose of
committing fraud by shielding identities
of the perpetrator and/or hiding money.
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SHELL COMPANIES
No phone number
No e-mail or web address
No physical address
No company logo
No contact information
No federal identification
number
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FALSE INVOICES
Running unsanctioned invoices
through the accounts payable
system.
May be done with vendor
collusion.
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FALSE INVOICES
 Invoices cannot be traced to shipments.
 Multiple payments to single vendor on
the same date.
 Pattern of purchases just below review
level.
 Unusually quick turnaround of invoices.
 Payment to multiple vendors for same
product.
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FALSE INVOICES
 Expenses increase dramatically.
 Unexplained rise in cost of goods sold.
 Unexplained decrease in gross/net
profits.
 Excessive materials orders.
 Goods not purchased at optimal point.
 High level approval of a low level
transaction
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CHECK TAMPERING
Preparing a check for one’s
own benefit
Intercepting a check
intended for a third party
and converting the check for
one’s own benefit.
Check
Tampering:
• Forged Maker
Schemes
• Authorized
Maker Schemes
• Concealed
Check
Schemes
• Intercepted
Check
Schemes
Payee
Maker
Endorsemen
t
CHECK TAMPERING
 Missing checks.
 Voided checks
 Bank accounts that are not reconciled on
a timely basis.
 Sudden activity in dormant bank
accounts
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CHECK TAMPERING
 Significant increase in payments to one
vendor
 Duplicate payments
 Payments without supporting
documentation
 Accounting records that disagree with
the supporting documentation
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CHECK TAMPERING
 Checks to employees, in excess of the #
and $ amount of normal payroll checks.
 Vendor & customer complaints regarding
nonpayment.
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t
QUESTIONS
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