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Red Alert! Accounting Fraud Red Flags

Reduce employee theft in your organization by Increasing oversight, dividing tasks and punishing those who violate policies.

Posted by Joe Gerard on April 19th, 2011

How do you know if accounting fraud is occurring in your organization? When you’re monitoring the workplace and accounting processes, what should you be looking for? What activities stick out like a sore thumb and serve as warning signs that something isn’t right?

All of these questions can be answered by identifying the “red flags” of accounting fraud. Keep in mind that you can’t jump to conclusions just because you suspect something’s fishy. You need to investigate first and find evidence to support the claims before you can sound the alarm.

What to Look For

Employees who are the first ones into the office, the last ones to go home and never miss a day could be model employees, but they also could be fraudsters, protective of their schemes.
The presence of certain activities, such as an employee spending beyond his or her means, is a signal that there may be fraudulent activity taking place. Employees who are the first ones into the office, the last ones to go home and never miss a day could be model employees, but they also could be fraudsters, protective of their schemes. Here are some of the red flags identified by forensic accountant and Deloitte partner, Peter Dent, in the Deloitte article “Fighting Business Corruption with Computers”:

  • Unusual payment patterns or financial arrangements
  • History of corruption in the foreign country
  • Refusal to provide an anti-corruption, FCPA certification, or audit/inspection rights
  • Unusually high commissions, management fees, gifts and entertainment
  • Lack of qualifications, resources or business history
  • Decentralized operations or history of acquisition without due diligence

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You’ll also want to be on the lookout for a reason or motive for accounting fraud to occur. Whether someone inflates sales or revenues to make their performance look better or documents are falsified so that money can be pocketed, accounting fraud usually boils down to greed.


If employees see an opportunity to get away with accounting fraud, they just might jump on it. Many of them justify their actions by claiming that they feel the company owes them something, or they figured they would only fudge the numbers once…not 50 times. If management and executives fail to monitor the workplace, employees can push the limits to find out what they can get away with. If an employee sees that their peers are getting away with creating false expense reports or misappropriating funds, they’ll likely expect that they can get away with it too. This is why it’s important to consistently monitor the workplace and set the tone from the beginning.

The Knowledge Leader article “Fraud Detection: Red Flags,” outlines some of the “opportunistic red flags” that make it easier for an employee to commit accounting fraud against the company:

  • Familiarity with operations (including cover-up capabilities and in a position of trust)
  • Close association with suppliers and other key people
  • A firm that does not inform employees about the rules or the action taken to combat fraud
  • Rapid turnover of key employees either by quitting or firing
  • No mandatory vacations, periodic rotations, or transfers of key employees
  • Inadequate personnel-screening policies when hiring new employees to fill positions of trust
  • An absence of explicit and uniform personnel policies
  • No maintenance of accurate personnel records of dishonest acts or disciplinary actions
  • Executive disclosures and examinations not required
  • A dishonest or overly dominant management
  • Operating on a crisis basis
  • No attention paid to details
  • Unrealistic productivity measurements
  • Poor compensation practices
  • A lack of internal security
  • Inadequate training programs

The main point:  reduce the opportunity for accounting fraud. Increase oversight, consistently monitor employee activities, divide tasks and punish those who violate anti-fraud policies. There are a ton of other red flags broken down into different categories that are worth looking into. Take fraud prevention seriously and your employees will follow.

Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

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