After many dramatic fraud cases were identified, a list of red flags associated with these examples of fraud
were developed. Had these red flags been noticed, then the organization’s management or employees might not have
committed fraud or it might have been caught sooner. The red flags include the following: Lack of independence
between the organization’s management, external auditors, audit committees and internal auditors; Lack of competence,
oversight or diligence in or by the organization’s audit committee and internal auditors; Weak internal control processes;
Management style that pressured employees to take actions beyond financial statement management to manipulation to
outright misrepresentation which is fraud.
Personnel-related practices allowing financial statement misrepresentation include low employee morale that is
possibly due to inadequate compensation, high turnover and inexperienced managers. This tends to result when there is
inadequate screening of potential employees and managers. Accounting practices indicating that someone has committed
fraud include frequent external auditor firm changes, restatements of prior year reports due in part to large and frequent
accounting errors.
An organization that loses financial records may have lost their financial records on purpose to hide fraud.
Fraud is easier to commit when there is no strong accounting information system. Company’s financial conditions that
can indicate possible fraud include insider trading and inventory manipulation as has already been presented.
