Fraud Examination, 4E
Chapter 5: Recognizing the
Symptoms of Fraud
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
Understand how symptoms help in the detection
of fraud.
Identify and understand accounting symptoms of
fraud.
Describe internal controls that help detect fraud.
Identify and understand analytical symptoms of
fraud.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives
Explain how lifestyle changes help detect fraud.
Discuss how behavioral symptoms help detect
fraud.
Recognize the importance of tips and complaints
as fraud symptoms.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Symptoms of Fraud
Can be separated into six groups:
1. Accounting anomalies
2. Internal control weaknesses
3. Analytical anomalies
4. Extravagant lifestyle
5. Unusual behavior
6. Tips and complaints
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Accounting Anomalies
result from unusual processes or procedures in the
accounting system
Example:
the 22 phony doctors
checks were sent to the same two common addresses
Why?
managers trusted the perpetrator completely
auditors merely matched claim forms with canceled checks
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Internal Control Weaknesses
Example:
Manager had not taken a vacation in 10 years
Employees never received payment confirmations
Payments to new doctors were never investigated or
cleared
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Analytical Anomalies
relationships in financial or
nonfinancial data that do not
make sense
$12 million be paid to only
22 doctors over a period of
four years
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Lifestyle Symptoms
The manager…
took the employees to lunch in a limousine
lived in a very expensive house
drove luxury cars
wore expensive clothes and jewelry
was “independently wealthy”
inherited a large sum of money
yet never took a vacation!
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Elgin Aircraft Case
Behavioral Symptoms
The manager had a “Dr. Jekyll and Mrs. Hyde”
personality
Her highs and lows had become more intense and
more frequent in recent months
The Eligin Aircraft fraud was discovered because an
observant auditor noticed a fraud symptom.
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounting Anomalies
Common anomaly frauds
involve:
Irregularities in source
documents
Faulty journal entries
Inaccuracies in ledgers
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounting Anomalies
Irregularities in Source Documents
Include the following:
Missing documents
Stale items on bank reconciliations
Excessive voids or credits
Common names or addresses of payees or customers
Increased past-due accounts
Increased reconciling items
Alterations on documents
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounting Anomalies
Irregularities in Source Documents
Include the following (cont.):
Duplicate payments
Second endorsements on checks
Document sequences that do not make sense
Questionable handwriting on documents
Photocopied documents
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Faulty Journal Entries
Fraud is hidden by using accounting language
Legal Expense .....................5,000
Cash ...................……………5,000
English:
“An attorney was paid $5,000 in cash”
Accounting:
“Debit Legal Expense; Credit Cash”
Was the attorney really paid $5,000?
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Faulty Journal Entries
Do embezzlers leave the accounting
equation in balance??????
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Faulty Journal Entries
An embezzler steals assets, such as cash or inventory
Embezzler must decrease either liabilities or equities
Decreasing liabilities is not a good concealment method
Reasons not to change dividends, stock accounts, or
revenues
Embezzler usually increases expenses
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Faulty Journal Entries
Common journal entry fraud symptoms:
Journal entries without documentary support
Unexplained adjustments to receivables,
payables, revenues, or expenses
Journal entries that do not balance
Journal entries made by individuals who would
not normally make such entries
Journal entries made near the end of an
accounting period
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Inaccuracies in Ledgers
Fraud symptoms relating to ledgers:
Ledger that does not balance
the total of all debit balances does not equal the total of
all credit balances
Master (control) account balances do not equal
the sum of the individual customer or vendor
balances
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Internal Control Weaknesses
Internal control fraud symptoms include :
Lack of segregation of duties
Lack of physical safeguards
Lack of independent checks
Lack of proper authorization
Lack of proper documents and records
Overriding of existing controls (most common)
Inadequate accounting system
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Internal Control Weaknesses
Three simple procedures to prevent small business
fraud
1. Owners should open and reconcile bank statements
2. Pay everything by check so there is a record
3. Owners should sign every check themselves
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analytical Fraud Symptoms
Analytical Fraud symptoms include:
Unexplained inventory shortages or adjustments
Deviations from specifications
Increased scrap
Excess purchases
Too many debit or credit memos
Significant increases or decreases in account
balances, ratios, or relationships
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analytical Fraud Symptoms
Physical abnormalities
Cash shortages or overages
Excessive late charges
Unreasonable expenses or reimbursements
Excessive turnover of executives
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analytical Fraud Symptoms
Strange financial statement relationships, such as
Increased revenues with decreased inventory
Increased revenues with decreased receivables
Increased revenues with decreased cash flows
Increased inventory with decreased payables
Increased volume with increased cost per unit
Increased volume with decreased scrap
Increased inventory with decreased warehousing costs
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Extravagant Lifestyles
Example
Kay…
Embezzled $3 million from her employer
Bought a $500,000 or more home
Bought five luxury cars
Filled home with artwork and glass
Bought a boat
Paid cash to have yard landscaped
Served lobster flown in from the east coast
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Unusual Behaviors
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Tips and Complaints
Elements of fraud
Theft act
Concealment
Conversion
Company employees are
in the best position to
detect fraud
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Tips and Complaints
Why are tips and complaints just symptoms?
Many tips and complaints turn out to be unjustified
Difficult to know what motivates a person to complain or
provide a tip
Customers may feel taken advantage of
Employee may have malice, personal problems, or
jealousy
Spouses and friends may be motivated by anger,
divorce, or blackmail
Individuals should always be considered innocent until
proved guilt
Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Tips and Complaints
Why people are hesitant to come forward:
Impossible to know for sure that a fraud is taking place
Fear of being the whistle-blower
Intimidation by the perpetrator
Feel that squealing on someone is wrong
Not easy to come forward
Three frauds that were detected by tips and complaints or
that involved whistle-blowers are the GE fraud, the
Revere Amored Car Company fraud, and the fraud at
Enron. Albrecht, Albrecht, Albrecht, Zimbelman
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website for classroom use.
