NSU | Office Of Internal Audit - Red Flags of Fraud

Northwestern State University
NSU Home Page About Internal Audit FAQ Internal Audit Charter Rules of the Board Internal Controls Control Self Assessment	Red Flags or Symptoms of Fraud	Audit Alerts! Internal Audit Related Websites Research Links Office of Legislative Auditor Internal Auditing Terms
	The presence of certain conditions or symptoms increase the potential for fraud to exist. Becoming aware of those conditions or symptoms (i.e. red flags) can be a very useful tool, if used properly. While the presence of the conditions or symptoms indicated below does not guarantee that fraud exists at the University, they do indicate a higher likelihood of occurrence. Each budget unit head should learn to identify the red flags and, where possible, seek to eliminate the causes. The current economic climate of down-sizing, decreased job security, and high unemployment increases the pressure on employees, thus resulting in more fraud. A word of caution ... the symptoms may be present, when fraud actually isn't. Therefore, one should avoid jumping to conclusions. The following conditions or symptoms (red flags) may indicate the presence of fraud: BUSINESS RELATED RED FLAGS A department that does not enforce clear lines of authority and responsibility A department that does not enforce proper procedures for authorizations of transactions A department that is not frequently reviewed by external auditors A department that is not frequently reviewed by internal auditors A department that lacks adequate documents and records A department that lacks competent personnel Activation of a dormant account, followed by a payment Address changes followed by a request for payment Adjusting entries lack formal approval Alteration of documents Bank statements not reconciled or done so untimely Changes in logs, payroll certification documents, etc. Checks that have second endorsements Computer system is accessed at unusual hours Computer usage and applications are only loosely controlled Excessive number of checking accounts Excessive voids or refunds Failure to adequately screen employees prior to hiring them Failure to discipline violators of organizational policies, i.e. violator may be holding fraud over the perpetrator's head Failure to take action on the results of internal / external audits or reviews Frequent changes in checking accounts Goods purchased in excess of need High employee turnover especially in vulnerable areas Ignored employee complaints concerning possible fraud Inadequate attention to detail Inadequate or missing personnel screening policies Inadequate physical security Inadequate staffing Increase in scrap materials and reorders for same items Invoices that are duplicates or copies Lack of cross-training or rotation of duties Lack of independent checks other than internal audit Large number of write-offs Lax management Liquid paper or erasures on time sheets / time cards Missing files Missing supporting documentation No explicit or uniform personnel policies No separation of the authorization of transactions from the custody of the related assets No separation of the custody of assets from the accounting of those assets Not adequately informing employees about rules of discipline or codes of conduct within the organization Not requiring employees to complete conflict of interest questionnaires Operating on a crisis basis Overly complex and confusing financial information Overtime during slack time Poor or poorly enforced internal controls, procedures, policies or security Refusal to use sequentially numbered documents Reluctance to provide information to auditors Rising or sharp increase in departmental expenses Shortages in inventory Shortages or overages in cash drawers Sloppy record keeping Students and others complain, "I didn't receive my check" Students and others complain, "I paid this" Subsidiary records do not agree to control account, i.e. manual or computer detail does not equal control totals Sudden activity in a dormant banking account The presence of copies where originals are expected Unauthorized bank account in the University name Unrecorded transactions Unusual transactions Vendors without physical address listed PERSONNEL RELATED RED FLAGS Alcohol problems Blind or too much trust given to employee Close association with customers Close association with suppliers Dissatisfaction or frustration with job Drug problems Employee believes that job is in jeopardy Employee has a criminal record Employee has an outside business interest Employee is overly defensive Employee is overly secretive Employee living beyond his or her means Employee refuses to take a vacation Employee turns down promotions or transfers Excessive family or peer pressure to succeed Excessive overtime Feelings of being unappreciated Feelings of being underpaid Feelings of grandeur or superiority, i.e. personal challenge to beat the system Feelings of insufficient recognition for job performance Gambling problems Greed or overwhelming desire for personal gain Lack of personal stability, such as frequent job changes, residence changes, etc. Large personal financial losses Lax management Marked change in employee's personality Marked change in employee's spending habits Poor credit rating Pressures associated with family illness Too much control in the hands of a few key employees Unemployment of other family members Unusually high personal debt Unreliable communications and reports NOTE: The above red flags came from a variety of sources, including the Institute of Internal Auditors and the Association of Certified Fraud Examiners.

Northwestern State University is a member of the University of Louisiana System