Financial Statement Fraud Red Flags Emerge in New Zealand

Detecting and preventing financial statement fraud is crucial for organizations. A list of common red flags has been identified by investigators, which can indicate the presence of financial statement fraud. Being aware of these warning signs and taking prompt action can help detect and potentially prevent fraud from occurring.

Common Red Flags to Watch Out For

While this is not an exhaustive list, it highlights many common red flags present in fraud cases investigated to date. The mere presence of one or two of these red flags does not necessarily mean that fraud is occurring, but it would be prudent for organizations to investigate further.

Unusual Supplier Relationships: Unusually close relationship with suppliers, such as employees taking holidays with suppliers
Recurring Transactions: Recurring transactions with a particular supplier for no apparent reason
Manufactured Invoices: Unprofessional “manufactured” manual invoices
Lack of Knowledge: Insufficient knowledge of suppliers and payments made without senior staff approval
Common Contact Details: Common contact details and bank account numbers among multiple suppliers or employees
Lack of Documentation: Lack of supporting documentation, particularly for corporate credit card expenditures
Dominant Management Team: Overly dominant management team that discourages questioning or reporting suspicious activity
Employee Behavior: Employees accumulating large amounts of annual leave without taking time off; working excessive overtime with no apparent business need; significant changes in employee attitude and behavior, such as resentment towards the employer
Lifestyle Changes: Unexplained lifestyle changes, such as buying expensive assets
Unavailability of Documentation: Unavailability of original documentation, with photocopies or no documentation provided instead
Odd Transaction Patterns: Odd transaction patterns that do not align with industry norms
Weak Internal Controls: Weak internal control environment and liberal accounting practices

Prevention and Detection Methods

To avoid becoming a victim of fraud, it is essential to have adequate fraud prevention and detection methods in place. This includes:

Implementing Strong Internal Controls: Implementing and adhering to strong internal controls
Documenting Policies: Documenting and regularly communicating Code of Conduct, ethics/values, and Conflict of Interest policies
Setting a Positive Tone: Setting a positive “tone from the top” by senior management
Pre-Employment Screening: Conducting pre-employment screening
Regular Risk Assessments: Regularly assessing fraud risks and following up on control improvements

Detection Methods

In addition, having adequate detection methods in place is crucial. This includes:

Whistleblower Hotline: Establishing a whistleblower hotline
Data Analytics Programs: Implementing regular fraud detection data analytics programs
Fraud Awareness Training: Providing regular fraud awareness training to employees

The Importance of Tips

The 2014 Association of Certified Fraud Examiners Report to the Nations highlights that tips are still the most common method of fraud detection, with over 40% of cases being detected by a tip. Employees are often the first to detect fraudulent activity, and organizations with whistleblower hotlines are more likely to catch frauds.

Conclusion

If you suspect financial statement fraud or would like to discuss how to avoid becoming a victim, please contact David Seath or Lorinda Kelly. Remember, being aware of common red flags and having adequate prevention and detection methods in place can help detect and prevent financial statement fraud.