Red Flags of Occupational Fraud


When attempting to prevent corporate fraud, management must be aware of the warning signs and be willing to identify operational risk factors and implement effective solutions to the problems.

Operational red flags are among the most important red flags of fraud to be aware of. These are ways that the company’s operations may make it easier for someone to commit fraud and get away with it. Operational red flags of fraud can include some of the following:

  • Operating in “crisis mode” or “fire drill mode”: When companies don’t establish “normal” operations because there is always a crisis, it becomes next to impossible for employees to determine when something out of the ordinary is going on. A constant state of chaos means that it’s hard to pay attention to details, and things that might otherwise be considered unusual won’t be flagged.
  • No clear lines of authority: Employees must understand the pecking order within a company. If they do not, they will be unclear about who receives complaints, and they may be less likely to report suspicious behavior. Even in companies that utilize the “team” concept throughout, there is still a chain of authority that should be clear in case of trouble.

  • Lack of segregation of duties: This is one of the most basic internal control concepts in the accounting function. The idea is that no one person is allowed to have too much control over or access to an area. For example, the person depositing money to the bank account should not be responsible for updating customer accounts or for reconciling the bank statement. Either of those two duties would give the employee an opportunity to cover up a theft from the bank deposit. Companies without effective segregation of duties are more susceptible to internal fraud.
  • Lack of authorization controls: Employees should have predetermined levels of authority, and well-defined levels that require additional authorization. In addition to just requiring authorization for transactions above a certain amount, management must also monitor employees to ensure that they are abiding by these authorization controls.
  • General lack of internal controls: One of the biggest operational red flags a company can exhibit is the lack of internal controls. Companies must have policies and procedures in place to protect the integrity of the accounting and finance function. When there are little or no controls in place, employees are free to engage in behavior that harms the company, and it may go completely unnoticed.

The following are more red flags of fraud that every company should be on the lookout for:

  • Personal red flags: Characteristics or actions of an employee that raise suspicions about fraud
  • Structural red flags: Deficiencies in a company’s setup that make the company more susceptible to fraud
  • Personnel red flags: Problems with the employment screening and hiring process that make it more likely that a company will hire dishonest employees
  • Accounting red flags: Transactional irregularities that might suggest fraud is occurring
  • Financial performance red flags: Pressure to meet certain financial targets that may increase the likelihood of fraud

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