Red Flags for Fraud in Government

Warning: The presence of one or even many red flags is not in and of itself a conclusive indication that fraud exists, but rather is meant to heighten awareness. The following categories list behaviors that might indicate fraud.

1. General Red Flags

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  • Employee lifestyle changes: expensive cars, jewelry, homes, boats
  • Refusal to take vacation or sick leave
  • Poorly defined duties without adequate monitoring
  • Behavioral changes that may indicate substance abuse or gambling problems, or just fear of losing job
  • High employee turnover, especially in areas more vulnerable to fraud
  • Reluctance to provide information to investigators
  • Management decisions dominated by an individual or small group
  • Disrespect for regulatory bodies
  • Excessive or unauthorized voided receipts
  • Lax or inexperienced accounting personnel
  • Inordinant number of manual checks
  • Excessive number of checking accounts
  • Frequent changes in banking accounts
  • Frequent changes in external auditors
  • Under-market-value sales of company assets
  • Significant downsizing in a healthy market
  • Continuous rollover of loans
  • Excessive number of year-end transactions
  • Unsupported transactions or adjusted journal entries
  • Unexpected overdrafts or declines in cash balances
  • Any financial transaction that doesn’t make
  • Service contracts for which there is no product
  • Photocopied or missing documents
  • Altered records
  • Refusal by company to use serial-numbered documents
  • Compensation program that is out of proportion

2. Purchasing, Inventory

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  • Abnormal number of expenses, supplies or reimbursements
  • Purchases that bypass normal procedures
  • Handwritten or typed invoices vs. computer-generated invoices
  • Increased complaints about products or service
  • Increase in purchasing without increase in sales
  • Acceptance of gratuities or significant “promotional” items
  • Handwritten check endorsements vs. stamped endorsements
  • Abnormal inventory shrinkage
  • Prepayment of goods or services
  • Frequent use of sole-source contracts
  • Pressure to expedite payments
  • Lack of physical security over assets/inventory
  • Charges without shipping documents
  • Payments to unapproved vendors
  • High volume of purchases from new vendors
  • Vendors without physical addresses
  • Vendor addresses that match employee addresses
  • Inventory that is slow to turn over
  • Lack of defined duties
  • “Consulting” contracts for which there is no end product
  • Deviation from specifications on delivered goods or services
  • Numerous duplicate payments, then pocketing the refund
  • Prepayment of goods or services
  • Purchasing agents who pick up vendor payments rather than having them mailed

3. Corporate Credit Cards

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  • Minimal or no supporting documentation for charges (for example, summary charge slips vs. detailed receipts)
  • No or minimal policies regarding access and use of credit cards
  • No or unreasonably high limits
  • No restrictions on types of purchases
  • Inappropriate charges noted on statements

4. Portable Assets

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  • Poor physical safeguards of property
  • Unauthorized transfer or disposal of assets
  • Missing records such as canceled checks or vendor invoices
  • Inadequate record-keeping
  • Unexplained increase in property loss
  • Unexplained increase in particular purchases

5. Accounts Receivable

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  • Excessive number of voided receipts, customer discounts and returns
  • Customers complaining they are receiving non-payment notices
  • Unauthorized bank accounts
  • Unauthorized voided receipts, customer discounts, or returns
  • Unauthorized account adjustments or write-offs
  • Untimely deposits
  • Sudden activity in a dormant bank account
  • Unjustified cash transactions
  • Large number of account write-offs
  • Unreconciled bank accounts
  • Cash register shortages or overages
  • Increase in past-due accounts
  • No collection efforts on past-due or written-off accounts
  • Cash payments when checks are expected
  • Unexplained drop in revenue despite same level of sales
  • Discrepancies between bank deposits and posting

6. Payroll

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  • Overtime charged during a slack period
  • Employees with duplicate Social Security numbers, names or addresses
  • Overtime charged for those who normally would not have overtime wages
  • Inconsistent overtime hours for a cost center
  • Budget variations for payroll by cost center
  • Employees with few or no payroll deductions

7. Behavior Changes

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  • Borrowing money from co-workers
  • Easily annoyed at reasonable questions
  • Bragging about significant new purchases
  • Creditors or collectors appearing at the workplace
  • Excessive drinking or gambling beyond the ability to stand the loss
  • Providing unreasonable responses to questions
  • Refusing vacations or promotions for fear of detection
  • Carrying unusually large sums of money
  • Rewriting records under the guise of neatness in presentation

The Association of Certified Fraud Examiners is the world’s largest anti-fraud organization and the premiere provider of anti-fraud training and education.

For more information and resources to combat fraud, visit www.acfe.com