Managing and monitoring procurement fraud in public and private sector establishment.

1. Financial Fraud Examination.
“RED FLAGS”
[POSSIBLE INDICATORS OF FRAUD]
This document is unsympathetically clandestine and classified as such it is prohibited
from unrestricted exhibition. For licensed users only.
prepared by AJIE EKPERE REUBEN-DENZEL
For economic and financial crime examination.

2. RED FLAGS
WARNINGS OF FRAUD
l Red flags by definition are certain state of affairs or
symptoms that may indicate either an elevated
potential for fraud or the actual presence of
fraudulent activities.
l Becoming sentient of these state of affairs or
symptoms (i.e. red flags) can be a very useful tool, if
carefully deployed in any given society or
establishment.

3. RED FLAGS
WARNINGS FOR FAUD
l While the presence of the conditions or symptoms
indicated below does not guarantee that fraud exists,
they do indicate a higher likelihood of occurrence.
l In this line of submission, governments, companies,
agencies and institutions, individuals etc, should
learn to identify the red flags as they form the basis
for every fraud investigation, and where achievable
seek to purge the causes.
For the economic and financial crime examination

4. RED FLAGS
PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT
MAY LEAD TO FRAUD
PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS THAT
SUGGEST AN INCREASED POTENTIAL FOR FRAUD ARE:
l Low moral character
l Rationalization of contradictory behavior
l A lack of strong code of ethics
l Wheeler-dealer attitude
l Lack of stability (associated with promotional stagnation, career
plateauing, aging, or domestic incompatibility)
l A strong desire to beat the system

5. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS
THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’
d:
l Employee believes that job is in jeopardy
l Employee has a criminal trace
l Employee has an outside business interest
l Employee is overly defensive of fraudulent acts
l Employee is overly secretive and reticent
l Employee living beyond his or her means
l Employee refuses to take a vacation

6. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS
THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’
d:
l Employee turns down promotions or transfers
l Excessive family and peer pressure to succeed
l Excessive overtime partaking
l Feelings of being over utilized but underpaid
l Feelings of being unappreciated and insufficient
recognition for job performance
For the economic and financial crime examination.

7. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS
THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’
d:
l Feelings of grandeur or superiority, i.e. personal
challenge to beat the system
l Gambling mind-set and inordinate desires for wealth
l Lack of personal stability, such as frequent job
changes, residence changes, etc
l Large personal financial losses
l Unprecedented change in employee’ personality
s

8. RED FLAGS PERSONAL AND PSYCHOLOGICAL CHARACTERISTICS
THAT SUGGEST AN INCREASED POTENTIAL FOR FRAUD Cont ’
d:
l Marked changes in employee’ spending habits
s
l Poor credit rating and unusually high personal debt
l Pressures exacerbated by family illness
l Unemployment of other family members
l Unreliable communication and reports
l Overtime during slack periods

9. RED FLAGS
PERSONAL FINANCIAL FACTORS THAT CAN LEAD TO FRAUD ARE:
l High personal debt
l Significant personal losses
l Inadequate income
l Living beyond one’ means
s
l Illness / extensive medical needs

10. RED FLAGS
PERSONAL HABITS THAT CAN LEAD TO FRAUD ARE:
l Extensive stock market or other types of
investment speculation
l Extensive gambling and routine borrowing
l Illicit sexual involvement
l Drug dependence and intense use of alcohol

11. RED FLAGS
PERSONAL FEELINGS THAT CAN LEAD TO FRAUD:
l Extreme community, family, personal or social
expectations to succeed that can not be met
l Perception of unfair treatments by organization or
employer
l Resentment of superiors and frustration with the job
l Insatiable desire for self-enrichment or personal gain
l Peer group pressures within the company

12. RED FLAGS
OPPORTUNITIES THAT CAN LEAD TO FRAUD:
Personally created opportunities that can make fraud easier are:
l Familiarity with operations (including but not limited to cover-up
capabilities)
l Close association with suppliers and other key trade allies
l Close association with customers
l Multiplicity of inconsistent documents
l Monopoly of operational knowledge and skills

13. RED FLAGS
INCENTIVES TO FRAUD
These are technically defined as the likely or perceived
benefits, accruable from a fraudulent action. In
general terms they are seen as enabling factors
which provide motives for a particular cause of a
fraudulent action. These includes but not limited to:
l Confirmed weakness in the systems / institutions
l Constitutional loopholes and legal explications
l Governments restrictions and regulations
l Poor accounting system, and the Nigerian factor
syndrome etc.

14. RED FLAGS
BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD
l Increase in scrap materials and re-orders for
the same items
l Presence of duplicates and photocopies of
invoices, as a replacement for original
l Large number material write-offs
l Disappearance and re-emergence of files
and transactional documents
l Disappearance of supporting documentation

15. RED FLAGS
BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD
cont’
d
l No separation of custody of assets from transaction
authority
l No separation of the custody of assets from the
accounting of those assets
l Reluctance to provide information to auditors
l Unjustifiable sharp increase in departmental
expenses
l Shortages in inventory

16. RED FLAGS
BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD
cont’
d
l Overages or shortages in cash drawers
l Employees and others complaining that, “ didn’
I t
receive my cheque”
l Employees and others complaining that, “ paid this,
I
without documentation
l Sudden activity in a dormant bank account
l Unauthorized bank accounts in the agencies name

17. RED FLAGS
BUSINESS CONDITIONS THAT MAY INDICATE POSSIBLE FRAUD
cont’
d
l Unrecorded transactions
l Unusual and unauthorized transaction on
behalf of the agencies
l Continuous patronage of vendors with
fictitious telephone numbers, websites,
email-addresses and without physical
contact address listed

18. RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD ARE:
l Failures to inform employees about rules and
disciplines of fraud perpetrators
l Rapid turn over of key employees
l Absence of mandatory vacations
l Absence of periodic rotations, reshufflement or
transfers of employees
l Inadequate personnel screening policies for hiring
new employees
l Absence of explicit and uniform personnel policies

19. RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
d
l Failure to maintain accurate personnel
records for disciplinary actions
l Failure to call for executive disclosures
l Dishonest or unethical management
l Dominant and overbearing top management
l Constantly operating under crises conditions
l Paying little or no attention to details

20. RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
d
l Uncongenial relationships or poor morale
l Lack of internal controls, risk evaluation and fraud
monitoring measures
l Inadequate physical security
l Too much trust / confidence placed in key
employees
l Too much control in the hands of a few key
employees
l Elongated tenure on key jobs

21. RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
d
l Sloppy books and record keeping
l An agency that does not enforce clear lines of
authority and responsibility
l An agency that does not enforce proper procedures
for authorization of transactions
l An agency that is not frequently reviewed by external
auditors
l An agency that is not frequently reviewed by internal
auditors

22. RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
d
l An agency that lacks adequate documentations
l An agency that lacks competent and practiced
personnel
l Loosely restricted computer usage and archiving
l Failure to discipline violators of organizational
policies, i.e. violator holding fraud over the
perpetrator’ head
s

23. RED FLAGS
AGENCY CHARACTERISTICS THAT MAKE IT EASIER FOR AN
INDIVIDUAL TO COMMIT FRAUD cont’
d
l Failure to take action on the results of internal and
external audits or reviews
l Frequent changes in checking accounts
l Purchase of goods in excess of organization’ need
s
l Ignored employee complaints concerning fraud
l Inadequate staffing

24. RED FLAGS
SITUATIONAL PRESSURE THAT CONTRIBUTE TO MANAGEMENT FRAUD:
l Heavy investments or losses
l Insufficient working capital
l Unusually high debt
l Reduced ability to acquire credit
l Profit squeeze
l Restrictive load agreements

25. RED FLAGS
SITUATIONAL PRESSURE THAT CONTRIBUTE TO MANAGEMENT FRAUD
cont’
d
l Progressive deterioration in quality of earning
l Urgent need for favorable earning
l Need to gloss over temporarily bad situations
l Unmarketable collateral

26. RED FLAGS
AGENCY LIMITATIONS THAT CAN LEAD TO FRAUD:
l Dependence upon only one or two products
l Dependence upon only one or two
customers
l Excess capacity and severe obsolescence
l Extremely long circle times
l Existence of revocable or imperiled licenses

27. RED FLAGS
Business Decisions That Can Lead To Fraud:
l Extremely projected rapid expansion
l Publishing of overly optimistic earnings /
accomplishments forecasts
l Misplacement of priorities
l Poor resource evaluation and allocation
l Investing in unfamiliar product lines, markets, and
projects

28. RED FLAGS
EXTERNAL ECONOMIC CONDITIONS THAT CAN LEAD TO FRAUD:
l Unfavorable economic conditions within government
l Difficulty in collecting receivables
l Unusually heavy and unfair competition
l Significant reduction in sales backlog
l Pressure to merge / consolidate
l Sizable inventory increase without a comparable
sales increase

29. RED FLAGS
LEGAL DIFFICULTIES THAT CAN LEAD TO FRAUD:
l Significant tax adjustments
l Significant litigations, especially between
customers, employees, competitors and
management
l Potential suspension of activities

30. RED FLAGS
OPPORTUNITIES THAT ALLOW OR ENCOURAGE MANAGEMENT FRAUD
l Related-party transactions
l Multiplicity and use of dissimilar auditing firms /
agencies
l Reluctance to give auditors needed information
l Frequent changing of legal counsels
l Frequent changing of bankers / accounts
l Continuous problems with regulatory agencies

31. RED FLAGS
ORGANIZATIONAL STRUCTURES THAT MAKE FRAUD EASIER:
l Ambiguous and multifarious business structures
l Ineffective or nonexistent internal auditing staff
l High level of computerization in an agency
l Inadequate internal controls
l Existence of a cartel of specialized skilled
employees
l Rapid turnover of a league of employees

32. RED FLAGS
AN ECONOMIC ENVIRONMENT THAT MAKE FRAUD EASIER TO COMMIT IS:
l An agency with oversight of: large budgets,
licensing, cash mobilization and allocations,
grant money, cash money, contract awards,
and extensive purchasing authority
l Excessive number of checking accounts
l An agency vested with the power to enforce
and collect toll, taxes, duty etc

33. RED FLAGS
ACCOUNTING PRACTICES THAT MAKE FRAUD EASIER TO COMMIT:
l Large year-end or unusual transactions, use it or
lose it purchases
l Unduly liberal accounting practices
l Poor accounting records, excessive voids or refunds,
and excessive miscellaneous cash appropriation
l Inadequate staffing in the accounting department
l Insufficient disclosure of questionable or unusual
accounting practices

34. RED FLAGS
UNUSUAL BUSINESS RELATED AND QUESTIONABLE ADMINISTRATIVE ACTIONS :
l Activation of a dormant accounts, followed by
a lodgment of huge cash
l Address changes followed by a request for
payment
l Adjustments of financial entries that lack
formal approval
l Alteration of financial documents

35. RED FLAGS
UNUSUAL BUSINESS RELATED AND QUESTIONABLE ADMINISTRATIVE ACTIONS :
l Accounts that only receives huge deposits followed
by huge withdrawals only
l Bank statements not reconciled or done so in an
untimely manner
l Changes in logs, payroll certification documents, etc
l Checks that have second endorsements

36. RED FLAGS
CAUTIONS:
l The symptoms may be present, when fraud
actually isn’ Hence the need for meticulous
t.
investigation and grilling
l Lastly avoid jumping to conclusions
NOTE: THE DEVIL IS IN THE DETAILS!
Prepared for the economic and financial crime examinations.

37. RED FLAGS
POSSIBLE INDICATORS OF FRAUD
THE END
THANK YOU FOR YOUR ESTEEMED ATTENTIVENESS
FROM REUBEN-DENZEL
Prepared for the economic and financial crime examination