Fraud Detection

There are a range of fraud indicators – both warning signs and fraud alerts – which can provide early warning that something is not quite right and increase the likelihood that the fraudster will be discovered.

Business risks

  • Cultural issues
  • Management issues
  • Employee issues
  • Process issues
  • Transaction issues

Financial risks

  • Management compensation highly dependent on meeting aggressive performance targets.
  • Significant pressures on management to obtain additional finance.
  • Extensive use of tax havens without clear business justification.
  • Complex transactions.
  • Use of complex financial products.
  • Complex legal ownership and/or organisational structures.
  • Rapid changes in profitability.
  • Existence of personal or corporate guarantees.

External risks

  • Introduction of new accounting or other regulatory requirements, including health and safety or environmental legislation, which could alter reported results significantly.
  • Highly competitive market conditions and decreasing profitability levels within the organisation.
  • The organisation is operating in a declining business sector and/or facing prospects of business failure.
  • Rapid technological changes which may increase potential for product obsolescence.
  • Significant changes in customer demand.

IT and data risks

  • Major information threats include: mobile devices, malicious insiders, remote access and social media. 
  • Unauthorised access to systems by employees or external attackers.
  • The wealth of malicious codes and tools available to attackers.
  • Rapid changes in information technology.
  • Users not adopting good computer security practices eg sharing or displaying passwords.
  • Unauthorised electronic transfer of funds or other assets.
  • Manipulation of programs or computer records to disguise the details of a transaction.
  • Compromised business information.
  • Breaches in data security and privacy.
  • Sensitive data being stolen, leaked or lost.

Fraud alerts

  • Anonymous emails/letters/telephone calls.
  • Emails sent at unusual times, with unnecessary attachments or to unusual destinations.
  • Discrepancy between earnings and lifestyle.
  • Unusual, irrational or inconsistent behaviour.
  • Alteration of documents and records.
  • Extensive use of correction fluid and unusual erasures.
  • Photocopies of documents in place of originals.
  • Rubber stamp signatures instead of originals.
  • Signature or handwriting discrepancies.
  • Missing approvals or authorisation signatures.
  • Transactions initiated without the appropriate authority.
  • Unexplained fluctuations in stock account balances, inventory variances and turnover rates.
  • Inventory adjustments.
  • Subsidiary ledgers, which do not reconcile with control accounts.
  • Extensive use of ‘suspense’ accounts.
  • Inappropriate or unusual journal entries.
  • Confirmation letters not returned.
  • Supplies purchased in excess of need.
  • Higher than average number of failed login attempts.
  • Systems being accessed outside of normal work hours or from outside the normal work area.
  • Controls or audit logs being switched off.

Key tools for detecting fraud

There are also two key tools for detecting fraud: 

  • Training and experience – the training received by a management accountant is a very good basis for implementing an anti-fraud programme. 
  • The mindset that fraud is always a possibility – A healthy dose of professional scepticism should be maintained when considering the potential for fraud.

These can be supplemented by a range of techniques for identifying and analysing anomalies to help determine whether fraud investigation or review are required.

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