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Red Flags of Fraud and Fraud Prevention

By Sandra F. Fowler, CFT, Accountant

The new world we live in brought an increase in global fraud, which creates victims whether in a small business or a mega company. To protect yourself, be aware of what to look for, and how to prevent it from happening. Business owners must be vigilant, and understand red flags that point out weaknesses in their accounting system.

Red flags are warning signals that fraudulent activity is possibly taking place, for personal gain by the perpetrator, or corporate gain, which would benefit the organization.

The Association of Certified Fraud Examiners states six common behavioural red flags displayed by employees, regardless of position or gender

- living beyond one’s means

- financial difficulties

- unusually close association with a vendor, or a customer

- excessive control issues, or unwillingness to share duties

- recent divorce, or family problems

- general “wheeler-dealer” attitude involving shrewd, or unscrupulous, behaviour

The presence of these red flags does not necessarily imply fraud is being committed. Understanding, and recognizing, behavioural red flags can help organizations detect fraud, and mitigate losses.

Fraud comes in many forms. A limited list of symptoms include

- incomplete accounting records

- altered documents

- gaps in numerical sequenced documents

- unbalanced general ledger

- numerous adjusting entries

- duplicate invoices

- falsified wages

- cash skimming

- accounts receivable adjustments

- write-offs

According to fraud theory, an employee requires motive, means, and opportunity. Opportunity is provided when controls are weak. An employee with financial pressures, working in an organization where they have authority, and a means to commit fraud, may curb their behaviour when the organization implements additional measures, or strengthens current controls.

Segregation of duties in any work environment will prevent employees who would seek to steal from their employer. For example, it would not be wise to have the person who handles the mail also enter accounts receivable payments, do deposits, and reconcile the bank account. In smaller organizations, where staff is limited, it is more challenging to separate duties.

Every organization must create an environment in which fraud is not tolerated. Presented as company policy, and provided to all employees, this would act as a deterrent and help prevent fraud. Employees, depending on their work ethic, morals, and values, will accept company policy, or find fault with it and become frustrated.

Employees understand an employer is serious about fraud prevention when a policy is in place. The reality of jail, job loss, and a criminal record will deter a percentage of employees from considering stealing. Encouraging an employee code of ethics, outlining acceptable behaviour and the ramifications of unacceptable behaviour, will deter employees who would otherwise consider defrauding the company.

Providing employees with a means to report fraud, or suspicious activity, will ensure illegal activity is discovered, and dealt with. Employees will be inclined to report fraud, or wrongdoing, if they are not concerned with retribution or disclosure. It’s important to have a policy in place to prevent employees from losing their job, having co-worker relationships destroyed, or careers ruined.

Deterrence through policy and transparency will have a positive impact. Employees, upset that opportunity has been removed, would change their behaviour, or move on from the organization.

No internal control, or fraud prevention, is foolproof. People in authority, with ample signing power, control, and manipulative skills, can make internal controls only as strong as they need them. The larger the organization, the stronger, and more detailed, the internal controls required.

Other preventative measures include

- background checks on prospective employees

- regular audits of accounting records

- management setting organizational tone

Communication and vigilance set the atmosphere needed to support staff, and secure an organization financially. If something is not right in your organization’s finances, follow your instinct, do your due diligence, and confirm your suspicions. Consult a professional if an investigation is required. The website provides resources to help.


Sandra Fowler

Sandra Fowler holds a Certificate in Forensic Accounting and Fraud Investigations (Algonquin College). Passing the national exam of the ACFI (Association of Certified Forensic Investigators) earned her the designation of CFT (Certified Forensic Technician). She also has a Certificate in Private Investigation with Honours (Humber College). She is an Associate Member with the ACFE (Association of Certified Fraud Examiners), as well as a Chapter Member of the Nova Scotia Chapter (ACFE). Sandra is an accountant with 38 years of experience (Sandra Fowler Accounting & Fraud Investigation Services) and provides exceptional accounting services.

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