Fraud can be extremely difficult to spot. If someone you’re used to working with and have come to trust starts fudging the numbers, you might not realize that you need to dig deeper until serious damage has already been done. In its 2014 Global Fraud Study the Association of Certified Fraud Examiners found that in 92% of all fraud cases the perpetrator exhibited one of seventeen different behavioral red flags and that perpetrators in 64% of cases exhibited multiple red flags, with living beyond their means and financial difficulties being the two most common warning signs.
Many red flags are just signs of dissatisfaction or stress
Even though the two most common red flags are directly related to a person’s finances (and the first is often a precursor of the second), the third most common warning sign is a conflict of interests – when someone has an unusually close relationship with a customer or vendor there is a higher chance of finding corruption.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
Many of the behavioral signs could be summed up as people who are stressed out or dissatisfied (irritability, complaining about pay and authority figures, divorce, social isolation), and it’s surprising how low ‘excessive pressure from within organization’ actually shows up since a high-pressure, cut throat corporate culture is often assumed to be behind fraud.
Breaking down red flags by position and type of fraud
If you break the warning signs of fraud down by position within the company the relative rankings mostly stay in place, but there are a couple of standouts worth mentioning. Fraudulent managers are more likely to be living beyond their means, while employees are more likely to be in financial dire straits. Executives who commit fraud are relatively more likely to have a ‘wheeler-dealer’ attitude and to be experiencing intense pressure than other positions.
When you look at the behavioral red flags by type of fraud, excessive corporate pressure is present more than 25% of the time when there is financial statement fraud and a close relationship with a customer/vendor is present in more than a third of corruption cases.
Different red flags for men and women
It’s always dangerous to read too much into a single study of gender differences, but there are a couple of red flags that appear to be much more common in one gender than the other. According to the ACFE study, Men who commit fraud are much more likely to form close associations with clients or vendors, to have a wheeler-dealer attitude, while women who commit fraud are more likely to be in financial difficulties or having family problems.