A number of researchers and professional fraud examiners have emphasized the need for early detection of frauds. Though there are many ways in which frauds can be detected, a particularly effective and inexpensive way is to identify fraudsters by scrutinizing personnel behaviour for peculiarities typical of fraudsters. Towards this end, the present study compiles a checklist of behavioural red flags of fraud based on data collected with the help of 41 semi-structured interviews. The interviewees constitute people who have personally investigated or closely observed a fraud in the last 3 years. A mixed methods triangulation approach is used to quantify the qualitative data collected from the interviews. Data analysis reveals 16 different behavioural red flags exhibited by fraudsters. An examination of frequencies indicates that strong ambition, extended working hours, social aloofness, dissatisfaction with current job and living standard disproportionate to current means are the most frequently displayed behavioural red flags of fraud. The study also shows that fraudsters exhibit three or four behavioural red flags in a majority of cases. Implications for anti-fraud practitioners are discussed.
AlbrechtW. S.AlbrechtC. O.AlbrechtC. C. (2008). Current trends in fraud and its detection. Information Security Journal: A Global Perspective, 17(1), 1–32.
AnandV.DacinM. T.MurphyP. R. (2015). The continued need for diversity in fraud research. Journal of Business Ethics, 131(4), 751–755.
4.
Association of Certified Fraud Examiners (ACFE). (2006). Report to the nations on occupational fraud & abuse. Austin, TX: Author.
5.
Association of Certified Fraud Examiners (ACFE). (2012). Report to the nations on occupational fraud & abuse. Austin, TX: Author.
6.
Association of Certified Fraud Examiners (ACFE). (2014). Report to the nations on occupational fraud and abuse. Austin, TX: Author.
7.
Association of Certified Fraud Examiners (ACFE). (2016). Report to the nations on occupational fraud and abuse. Austin, TX: Author.
8.
BowerJ.GilsonS. (2003). The social cost of fraud and bankruptcy. Boston, MA: Harvard Business Publishing.
9.
BrazelJ. F.JonesK. L.ThayerJ.WarneR. C. (2015). Understanding investor perceptions of financial statement fraud and their use of red flags: Evidence from the field. Review of Accounting Studies, 20(4), 1373–1406.
10.
BrennanN. M.McGrathM. (2007). Financial statement fraud: Some lessons from US and European case studies. Australian Accounting Review, 17(2), 49–61.
11.
ChenK. Y.ElderR. J. (2007). Fraud risk factors and the likelihood of fraudulent financial reporting: Evidence from statement on auditing standards no. 43 in Taiwan. Retrieved from https://www.researchgate.net/profile/Randal_Elder/publication/228945894_Fraud_risk_factors_and_the_likelihood_of_fraudulent_financial_reporting_Evidence_from_statement_on_Auditing_Standards_No._43_in_Taiwan/links/0fcfd510817b9b182a000000.pdf
12.
CoenenT. L. (2008). Essentials of corporate fraud. Hoboken, NJ: John Wiley & Sons Inc.
13.
CohenJ. R.DingY.LesageC.StolowyH. (2010). Corporate fraud and managers’ behavior. Journal of Business Ethics, 95(2), 271–315.
14.
CresseyD. R. (1953). Other people’s money: A study in the social psychology of embezzlement. Glencoe, IL: The Free Press.
15.
CreswellJ. W.MillerD. L. (2000). Determining validity in qualitative inquiry. Theory into Practice, 39(3), 124–131.
CroweH. (2011 June 22). Putting the Freud in fraud: Why the fraud triangle is no longer enough (Webinar). Retrieved from http://www.crowehorwath.com/freud_fraud/
18.
D’EliaE. (2005). Using the results of qualitative surveys in quantitative analysis. Retrieved from http://ec.europa.eu/economy_finance/db_indicators/surveys/documents/working_papers/wp2005_09_isae_56.pdf
19.
Deloitte. (2008). Ten things about financial statement fraud. Retrieved from http://www.corporatecompliance.org/Portals/1/Users/169/29/60329/10%20Things%20about%20financial%20statement%20fraud.pdf
20.
DormineyJ. W.FlemingA. S.KranacherM.RileyR. A. (2010). Beyond the fraud triangle: Enhancing deterrence of economic crimes. The CPA Journal, 80(7), 17–24.
21.
DriscollD. L.Appiah-YeboahA.SalibP.RupertD. J. (2007). Merging qualitative and quantitative data in mixed methods research: How to and why not. Ecological and Environmental Anthropology, 3(1), 19–28.
22.
DyckA.MorseA.ZingalesL. (2010). Who blows the whistle on corporate fraud?Journal of Finance, 65(6), 2213–2253.
23.
FarberD. (2005). Restoring trust after fraud: Does corporate governance matter?The Accounting Review, 80(2), 539–561.
24.
GolafshaniN. (2003). Understanding reliability and validity in qualitative research. The Qualitative Report, 8(4), 597–606.
25.
GoyalP.DhamijaS. (2010). Financial system security: Harshad Mehta and the billion-dollar scam. Hong Kong: Harvard Business Publishing.
26.
Heiman-HoffmanV.MorganK. P. (1996). The warning signs of fraudulent financial reporting. Journal of Accountancy, 182(4), 75–77.
27.
JhaS.WestlandC. (2013). A descriptive study of credit card fraud pattern. Global Business Review, 14(3), 373–384.
28.
JohnsonR. B.OnwuegbuzieA. J. (2004). Mixed methods research: A research paradigm whose time has come. Educational Researcher, 33(7), 14–26.
29.
JonesM. J.ShoemakerP. A. (1994). Accounting narratives: A review of empirical studies of content and readability. Journal of Accounting Literature, 13(1), 142–184.
30.
KaplanS. E.ReckersP. M. J. (1995). Auditors’ reporting decisions for accounting estimates: The effect of assessments of the risk of fraudulent financial reporting. Managerial Auditing Journal, 11(6), 18–30.
31.
KaplanS. E.PopeK. R.SamuelsJ. A. (2010). The effect of social confrontation on individuals’ intentions to internally report fraud. Behavioral Research in Accounting, 22(2), 51–67.
32.
KoornhofC.du PlessisD. (2000). Red flagging as an indicator of financial statement fraud: The perspective of investors and lenders. Meditari Accountancy Research, 8(1), 69–93.
33.
KPMG. (2014). Fraud risk management: Developing a strategy for prevention, detection, and response. Retrieved from https://assets.kpmg.com/content/dam/kpmg/pdf/2014/05/fraud-risk-management-strategy-prevention-detection-response-O-201405.pdf
MayhewB. W.MurphyP. R. (2014). The impact of authority on reporting behavior, rationalization and affect. Contemporary Accounting Research, 31(2), 420–443.
36.
McFaddenA. M. (2016). Avoiding the blind eye: Building a culture of integrity to detect and prevent financial loss and reputational damage. The Corporate Governance Advisor, 24(5), 8–16.
37.
MoberlyR. E. (2006). Sarbanes-Oxley’s structural model to encourage corporate whistle blowers. Brigham Young University Law Review, 5(1), 1107–1180.
38.
MohamedY. K.KhairK. A. H.JonS. (2015). Fraudulent financial reporting: An application of fraud models to Malaysian public listed companies. The Macrotheme Review, 4(3), 126–145.
39.
MoralesJ.GendronY.Guenin-ParaciniH. (2014). The construction of the risky individual and vigilant organization: A genealogy of the fraud triangle. Accounting, Organizations and Society, 39(3), 170–194.
40.
MurphyP. R. (2012). Attitude, Machiavellianism and the rationalization of misreporting. Accounting, Organizations and Society, 37(4), 242–259.
41.
MurphyP. R.FreeC. (2016). Broadening the fraud triangle: Instrumental climate and fraud. Behavioural Research in Accounting, 28(1), 41–56.
42.
OnwuegbuzieA. J.TeddlieC. (2003). A framework for analyzing data in mixed methods research. In TashakkoriA.TeddlieC. (Eds.), Handbook of mixed methods in social and behavioral research (pp. 351–383). Thousand Oaks, CA: SAGE Publications.
43.
PerreaultW. D.LeighL. E. (1989). Reliability of nominal data based on qualitative judgments. Journal of Marketing Research, 26(2), 135–148.
44.
RaoS.PerryC. (2003). Convergent interviewing to build a theory in under-researched areas: Principles and an example investigation of Internet usage in inter-firm relationships. International Journal of Qualitative Market Research, 6(4), 236–247.
45.
RossL. M.SquiresG. D. (2011). The personal costs of subprime lending and the foreclosure crisis: A matter of trust, insecurity, and institutional deception. Social Science Quarterly, 92(1), 141–163.
46.
RossmanG.WilsonB. (1991). Numbers and words revisited: Being ‘shamelessly eclectic’. Evaluation Review, 9(5), 627–643.
47.
RuankaewT. (2016). Beyond the fraud diamond. International Journal of Business Management and Economic Research, 7(1), 474–476.
48.
SandhuN. (2016). Behavioural red flags of fraud—A qualitative assessment. Journal of Human Values, 22(3), 221–237.
49.
SchapiroC. M. (2012). Speech by SEC chairman: Remarks at the meeting of the investor advisory committee. Retrieved from https://www.sec.gov/news/speech/2012-spch061212mlshtm
50.
SchrandC. M.ZechmanS. L. C. (2007). Executive overconfidence and the slippery road to fraud. Retrieved from https://pdfs.semanticscholar.org/c300/0dc0f7c9acbec2cdf0445093fb328843b51f.pdf
51.
SealeC. (1999). Quality in qualitative research. Qualitative Inquiry, 5(4), 465–478.
52.
SilverS. E.FlemingA. S.RileyR. A. (2008). Preventing and detecting collusive management fraud. The CPA Journal, 78(10), 46–48.
53.
SingletonT. W.SingletonA. J. (2010). Fraud auditing and forensic accounting (4th ed.). Hoboken, NJ: John Wiley & Sons.
54.
SutherlandE. H. (1949). White collar crime. New York, NY: Dryden Press.
55.
TenbrunselM. H. (2011). Blind spots. Princeton, NJ: Princeton University Press.
56.
VohraA. V. (2016). Materialism, impulse buying and conspicuous consumption: A qualitative research. Global Business Review, 17(1), 51–67.
57.
VonaL. W. (2008). Fraud risk assessment: Building a fraud audit program. Hoboken, NJ: John Wiley and Sons.
58.
WeisenbornD.NorrisD.M. (1997). Red flags of management fraud. The National Public Accountant, 42(2), 33–56.
59.
WilksJ.ZimbelmanM. (2004). Using game theory and strategic reasoning concepts to prevent and detect fraud. Accounting Horizons, 18(3), 173–184.
60.
WolfeD.HermansonD. R. (2004). The fraud diamond: Considering four elements of fraud. The CPA Journal, 74(12), 38–42.
61.
YangW.MoyesG. D.HamedianH.RahdarianA. (2009). Professional demographic factors that influence Iranian auditors’ perceptions of the fraud-detecting effectiveness of red flags. International Business & Economics Research Journal, 9(1), 83–102.
62.
ZikmundP. E. (2008). Reducing the expectation gap. The CPA Journal, 78(6), 20–25.
63.
ZweigJ. (2009 June). About time: Regulation based on human nature. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/SB124545477468032915
