Red Flags

Introduction

Red Flags are warning signs that emerge in the routine operation of business process which by themselves may not constitute cases of fraud or corruption but indicate an area where management oversight is required to safeguard against fraud and corruption.

Accounts

1.    Missing vouchers (e.g. receipts, invoices) or vouchers are not issued in sequential order.

[Potential malpractice: A staff member may have pocketed the cash received or made unauthorised payments for his personal gain.]

2.    There are many ambiguous transactions (e.g. other expense, miscellaneous) in the accounts.

[Potential malpractice: A staff member may have embezzled the funds of the company and falsified transactions to cover up.]

3.    Staff members always barely meet the performance indicators (e.g. a sales target) which are used for assessing the bonuses to be awarded.

[Potential malpractice: Colluded staff members may accept/offer bribes in return for referral of business among themselves to meet the performance indicators for bonuses.]

4.    Always unable to provide original receipts for payment claims or reimbursement of expenses.

[Potential malpractice: A staff member may have made fraudulent claims for non-existent or inflated expenses.]

5.    Same amount of payments are made to the same company/supplier repeatedly.

[Potential malpractice: A compromised staff member may collude with the company/supplier to claim payments for same services/items repeatedly.]

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Inventory Management

1.    Exceptionally high consumption rate of an inventory item.

[Potential malpractice: A staff member may have exaggerated the quantity required and pocketed the spare for personal gain.]

2.    Frequent loss of inventory items (especially those expensive items) against the inventory record.

[Potential malpractice: A staff member may have stolen or improperly disposed of the inventory items.]

3.    Frequent delay in updating the inventory movement records by a particular staff member.

[Potential malpractice: A staff member may buy time to cover up stolen items.]

4.    Increase in the number of customer complaints on the quality of goods delivered.

[Potential malpractice: A compromised staff member and/or outsourced transport worker may have substituted the goods with substandard ones in the midway.]

5.    Consumption rate of raw materials used in a production line does not tally with the product output.

[Potential malpractice: A staff member may have pilfered the raw materials.]

6.    Quantity of items issued by a particular warehouse staff member is higher than normal.

[Potential malpractice: A warehouse staff member may have falsified the issue record to cover up misappropriation of items.]

7.    Users complain about the poor quality of goods received from a supplier.

[Potential malpractice: A staff member may turn a blind eye to substandard goods for a bribe.]


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Sales Operation
  1. Frequent use of the same membership card for earning bonus points within a short period of time (e.g. within the same day).
  2. [Potential malpractice: A staff member may use his/her own membership card or that of his/her relatives or friends to earn bonus points when a customer makes purchase without membership card.]

  3. Frequent use of the same credit card to make purchases within a short period of time (e.g. within the same day).
  4. [Potential malpractice: When a customer pays by cash, a staff member may settle the payment by his/her credit card to earn bonus points. He/she may also pocket the difference if the credit card holder of a particular bank can enjoy a certain discount.]

  5. Exceptionally high refund cases at one store, or handled by one particular staff, when compared with the other stores/branches of the same operator.
  6. [Potential malpractice: A compromised staff member may ignore the company’s refund policy (e.g. by giving full refund for used or damaged items).]

  7. Although the store offers no special commission for sales of any products, a staff member keeps promoting to customers a particular product.
  8. [Potential malpractice: The sales staff member may have accepted illegal rebate for promoting that particular product.]

  9. The promotional period of a particular product is unreasonably short.
  10. [Potential malpractice: A compromised staff may favour a limited number of customers to enjoy the discount.]

  11. Popular items not replenished from the store’s warehouse in time.
  12. [Potential malpractice: A staff may hoard the items for personal gain or sell the items to colluded customers.]

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Procurement – Bidding and Contract Award
  1. User department or technical staff insisting on using a particular brand or supplier despite there being a lack of objective justifications, and in particular, becoming irrational or irritated when queried or challenged.

  2. Use of the same supplier(s), or repeated extensions of contract with the same contractor(s), over years without any record of quotation exercise or price comparison, and the supplier(s)/contractor(s) are apparently not competitive in the market in terms of quality and price.

  3. Unfamiliar names of suppliers never/seldom heard of in the trade and whose reputation and reliability is unknown or in doubt, but either always winning bids or always on the quotation invitation list but never having any business awarded.

  4. Winning bids often just slightly below the next lowest bids, and/or always submitted in the last minute or late, etc.

  5. Staff frequently using exceptions or overrides to bypass normal procedures and controls, e.g. frequent use of the single quotation / direct purchase method claiming urgency.

  6. Purchases show pattern of being intentionally pooled together and approved while the normal approving authority is away from office (e.g. on long business trip or vacation), or repeated purchases of the same goods/services from the same supplier(s) often just below the value requiring a higher approving authority, etc. – showing signs of avoiding normal approval process.

  7. Where a contractor/supplier has been engaged under a term contract (often with highly competitive rates stated in the contract), staff frequently issue variation orders to the contractor/supplier for goods/services not covered by the contract (with different prices or specifications), resulting in increased payments to the contractor/supplier or substitution with lower quality goods.

  8. Unexplained/unusual increase in cost of goods sold to sales ratio, materials cost, etc. which does not compare with the industry norm or other branches of the same business operator.

  9. Suspicious signs on quotations or quotation invitation list, e.g. vendor which does not appear to be in the relevant business being invited, vendor name very similar to another more well-known one or not on the approved suppliers list, vendors’ addresses / phone numbers / formats of quotations identical or very similar with each other, vendor’s contact information matches that of an employee or with no information except a mobile phone number, etc.
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Procurement – Payment and Receipt of Goods / Services
  1. Frequent payments just under a certain authorization level.

  2. Multiple invoices on the same date.

  3. A supervisor frequently allowing disbursements to vendors with insufficient supporting documents with various excuses. 

  4. Frequent short delivery or provision of substandard goods.

  5. Increase in number of complaints about products or service procured.

  6. Replacement or repair after unreasonably short period of time.

  7. Unreasonably high cut of materials compared with industry norm or other branches within the company.
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