Fraud Prevention and Detection

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4

The Red Flag System

INTRODUCTION

Now that the reader has an understanding of the elements of fraud, as well

as its dynamics and root causes, this chapter introduces the key elements

of the Red Flag System, its underlying concepts, and its core process.

WHAT IS A RED FLAG?

A fraud does not happen in a vacuum, or overnight. Long before a fraud

is discovered, there are often Red Flags that something may be amiss and

should be investigated. Red Flags focus the spotlight on anomalies in

business activities and in human conduct. These anomalies provide suf-

cient reason to conclude that a heightened risk of fraud exists and justify

further inquiry.

Here are examples of two common Red Flags:

• Vendors that have no physical address or whose address ...