The Warning Signs of Fraud

• Prof. Dr. Klaus Henselmann
• Dr. Stefan Hofmann

In almost all of the cases described in this book the signs of impending doom have been apparent for some time – for those who wished to see them. According to numerous fraud surveys, the most frequent reason why frauds were not detected earlier was insensitivity to the warning signs. Most of the reported frauds could have been detected more quickly had the warning signs not been ignored. These warning signs are often being referred to as fraud risk factors, fraud risk indicators, or red flags. Red flags are cues that should be picked up by external or internal auditors. They may alert auditors (i.e., make them more watchful and suspicious) to the possibility that someone in the company might be engaged in some form of fraudulent or improper conduct. The presence of red flags does not necessarily indicate that fraud is occurring within the organization. Their presence, however, either individually or in combination, could indicate the occurrence of fraud or an increased likelihood thereof. Red flags should therefore, when encountered, trigger a higher level of professional scepticism.

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