The Flags Are Red for a Reason

The flags are red for a reason Volume 3, Issue 9 – September 28, 2011  Employees Why is she the only person that Fraud case studies consistently show should vendor will ever talk to about their that red flags were present, but either always be account? Why is he so reluctant to not recognized or were recognized on alert for provide me with information? How but not acted upon. These ignored irregulariti is it that company XYZ always wins warnings present a license for es or “red the bid/contract? Why doesn’t she perpetrators to carry on illegal flags.” ever take a vacation or stay home activities and represent missed from work when she’s sick? How opportunities for organizations to  Unusual can he afford another new sports detect and possibly prevent fraud. circumstan car? Where is she getting the money ces or a Establishing an organization culture to take another trip to Hawaii? Why variance in which employees are encouraged was I told not to say anything about from the to be alert to irregularities and red that to the auditors? norm are flags, and feel empowered to raise red flags The answers to these questions concerns is one of the most effective that could might be legitimate and reasonable. strategies an organization can use to indicate However, the answers might also reduce fraud. It is equally important that fraud indicate that something that employees, particularly is present. inappropriate, possibly fraudulent, is supervisors and senior management, going on. The events that caused the receive regular fraud training—what  When red questions to be asked are actually common fraud indicators are, what flags are warnings or “red flags.” to look for, how to respond, and how detected, A red flag is a set of circumstances to follow-up. It is through additional appropriate response to warning inquiry that is unusual in nature or a variance from normal activity. It is a signs that fraud can be detected and sooner, or prevented altogether, and investigati warning to the presence of risk— something that could be amiss and losses reduced and associated costs on should minimized. be in need of further inquiry or completed. investigation. Red flags are not Suggested action steps: Ensure absolute indicators of guilt or fraud-related training is provided to defalcation but merely out-of-the- all employees (give consideration to ordinary warning signs that fraud inclusion in employee Individual might be present. Development Plans). Training should:

a o Distributed by Minnesota Management & Budget 658 Cedar Street | Centennial Office Building St. Paul, Minnesota 55155 1. Instruct for unusual events and changes reporting red flags and employees to from the norm; suspicious activities. pay attention 2. Identify, define, and discuss If you have questions, please contact to their common red flags, fraudster Mike Thone, Internal Control surroundings profiles, and fraud schemes; and, Specialist at 651-201-8132 or at and to be on [email protected] the look-out 3. Detail the reporting mechanisms for employees to use for

a o Distributed by Minnesota Management & Budget 658 Cedar Street | Centennial Office Building St. Paul, Minnesota 55155