BoardAndFraud

The Use of Red Flags to Detect Misconduct or Fraud

What is a Red Flag?

A Red Flag is an unusual circumstance or a pattern of anomalies that should alert a reasonable person of possible misconduct. In each such instance, further inquiry and due diligence might be necessary to determine if the anomalies are explainable and if not, an investigation should be considered.

Not every red flag means there is fraud!  Like I mentioned above, you need to seek to understand.

Below are some common Red Flags to consider.

Senior Leadership

Transactions

  1. Does the transaction and its reflection in the books and records make sense?
  2. Does the person who recorded the transaction seem odd?
  3. Was there an apparent or perceived override of internal controls in order to record the transaction?
  4. Does the transaction make sense in light of the company’s operations, goals, and objectives?
  5. Does the totality of this and similar transactions make sense analytically when evaluated in comparison to the economy, the industry, key competitors, and other related accounting data within the organization?
  6. Does the transaction have proper approval and the proper authority levels?
  7. Does anything else about the transaction or its nature make it appear suspicious?

Data

Documents

Controls

Behavior

FCPA (Bribery) Red Flags

Closing

I welcome your comments, suggestions, and wish everyone well!

Jonathan T. Marks, CPA, CFE