Red Flags and Behavioural Symptoms

According to Albrecht et al., red flags and behavioural indicators are crucial elements in detecting fraud. They refer to visible alerts or indicators that may indicate a higher risk of dishonest behaviour. Red flags alert auditors, managers, and investigators to circumstances that warrant further investigation, even when they do not necessarily indicate that fraud has occurred. Financial records, operational issues, internal control flaws, or the actions of individuals with access to critical procedures can all exhibit these indicators. Early detection of these signs enables businesses to take action before possible wrongdoing worsens.

Because individuals who commit fraud often exhibit noticeable changes in their attitude, habits, or lifestyle, behavioural red flags are particularly crucial. Living beyond their means, feeling serious financial strain, refusing to take time off, becoming defensive when questioned, or excessively controlling procedures are a few examples. These actions are consistent with the psychological and motivational elements included in fraud theories such as the Fraud Scale and the Fraud Triangle. These patterns provide valuable insights into potential weaknesses within the company, although they are not definitive on their own.

Red flags related to internal control and finances are also very important in identifying fraud. Examples include unexpected journal entries, overridden controls, a lack of role segregation, unexplained discrepancies in financial accounts, and missing documentation. Fraudsters frequently leave behind a trail of irregularities that can be found using analytical techniques, ratio analysis, or regular observation. Organisations can enhance internal controls, cultivate a culture of awareness and accountability, and improve their ability to identify anomalies early by being mindful of and actively seeking out these warning signs.

References

Albrecht, W. S., Albrecht, C. C., Albrecht, C. O., & Zimbelman, M. F. (2019). Fraud Examination (6th ed.). Cengage Learning.