Mr. Madoff is one of the masters of the New York Stock Exchange.
—Wall Street Journal, 1992
In this chapter we begin the part of the book that tries to identify warning signs that help prevent or uncover accounting frauds before it's too late. A warning sign is a red flag that warns you should go with precaution. Depending on the importance of the warning sign or the number or warnings detected, we could consider it a sign that a company has to be investigated more in depth due to the high probability that an accounting manipulation will occur or has already occurred.
The clearest warnings signs regarding manipulations are in the accounts, as will be discussed later. However, there are also warning signs related to the people, to the company, or to nonfinancial indicators that are very useful to detect accounting frauds.
Without a doubt, auditors are the ones who have access to more of the companies' information that can provide warning signs. Anyway, let's not forget that most companies aren't audited. In any case, anyone interested (investors, bank analysts, etc.) must pay attention to the signs that indicate fraud or the probability of a fraud occurring (Du Plessis and Koornhof 2000).
The problem is that in many cases no one pays attention to the warning signs. According to KPMG (2013a), in 21% of the frauds, there were very clear warning signs that a fraud could occur or that it had already occurred and were ignored.