Indicators of the Financial Statement Fraud (Red Flags)
20 Pages Posted: 21 Nov 2017
Date Written: November 19, 2017
Abstract
Red flags are symptoms or warning signals for fraud possibility. It relates to specific financial statement fraud schemes, and raise the awareness of fraud possibility but do not prove fraud existence. The red flags were classified based on the fraud triangle model to red flags related to pressure, opportunities, and rationalization. The red flags were also categorized to red flags related to analytical anomalies, accounting anomalies, internal control weaknesses, unusual behavior, extravagant lifestyle, and tips and complaints. The management fraud is rarely observed, but fraud symptoms/indicators (red flags) are observed; therefore, it can be used as a tool to detect fraud. The current study analyzed five potential fraud indicators: financial performance indices, financial health indices, management efficiency indices, accounting practices, and corporate governance indices; and tested their efficacies in predicting the probability of FSF and differentiating the fraudulent financial reporting from the non-fraudulent one.
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