Indication of fraud

In this article, I provide some warning signs that may indicate the presence of fraud risk. In general, examples include:
1. Absence of an anti-fraud culture
2. Failure of management to implement a sound system of internal controls
3. Lack of financial management expertise and professionalism in key accounting principles, the review of management reports and the review of significant cost estimates
4. A history of legal or regulatory violations or claims alleging violations
5. Strained relationships between management and internal or external auditors
6. Lack of supervision of staff
7. Inadequate recruitment processes
8. Redundancies
9. Dissatisfied employees with access to desirable assets
10. Unusual staff behaviour
11. Personal financial pressures on key staff
12. Discrepancy between earnings and lifestyle/expensive lifestyle
13. Low salary levels of key staff
14. Employees working unsocial hours unsupervised
15. Employees not taking annual leave entitlements
16. Lack of job segregation and independent checking of key transactions
17. Lack of identification of assets
18. Poor management accountability and reporting
19. Alteration of documents and records
20. Photocopies of documents replacing originals
21. Missing authorisations
22. Poor physical security of assets
23. Poor access controls to physical assets and IT security systems
24. Inadequacy of internal controls
25. Poor documentation of internal controls
26. Poor documentary support for transactions, especially credit notes
27. Large cash transactions
28. Management compensation highly dependent on meeting aggressive performance targets
29. Significant pressure on management to obtain additional finance
30. Extensive use of tax havens without clear business justification
31. Complex transactions
32. Complex legal ownership and/or organisational structure
33. Rapid changes in profitability
34. Existence of personal or corporate guarantees
35. Highly competitive market conditions and decreasing profitability levels within the organisation
36. The organisation operating in a declining business sector and facing possible business failures
37. Rapid technological change which may increase potential for product obsolescence
38. New accounting or regulatory requirements which could significantly alter reported results.

To be more specific, I will now focus on purchasing and selling process.
Examples of indicators of purchasing/ordering fraud include:
1. Disqualification of suitable tenderer
2. Unchanging list of preferred suppliers
3. Constant use of single source contracts
4. Contracts that include specifications that only one supplier can satisfy
5. Personal relationships between staff and suppliers
6. Withdrawal of lower bid without explanation
7. Acceptance of late bids
8. Changes to specifications after bids have been opened
9. Poor documentation of contract award process
10. Consistent favouring of one firm over another
11. Unexplained changes to contract after its award
12. Contract awarded to supplier with poor performance record

Examples of indicators of fraud in the selling process include:
1. Overcharging from an approved price list
2. Short-changing by not delivering the correct quantity or quality
3. Diversion of orders to a competitor or associate
4. Bribery of a customer by sales representative
5. Bribery of customer by a competitor
6. Insider information by knowing competitor's prices
7. Warranty claims that are false
8. Over-selling of goods or services that are not necessary
9. Free samples that are not necessary

Any of the above happen would mean a possibility of fraud. Internal control system should be set with keeping the above issues in mind.