Recognizing the Red Flags of Fraud: Chapter 5

Detecting Fraud Through Accounting and Internal Controls

David Miller: Hey, welcome back to Fraud Examination. I'm David Miller here with Maya Collins—how you doing, Maya?

Maya Collins: Hey, David, I'm good! Ready to dig into the red flags of fraud. I always like these episodes—super practical, lots people can apply right away.

David Miller: Yeah, exactly. Y'know, I think a lot of folks believe fraud is something you catch red-handed, but honestly, it’s more like reading tea leaves in accounting records and internal controls. Most fraud isn’t directly observed. It’s about symptoms—little inconsistencies that add up.

Maya Collins: Absolutely. Let's talk about those accounting anomalies first. Like, we’re talking missing documents, entries that just don’t reconcile, ledgers that are kinda... off somehow. And sometimes, it’s obvious stuff like duplicate payments, or random alterations on invoices—which almost always makes me suspicious.

David Miller: I’ll give you a real example from a Midwest manufacturer I worked with. We were reviewing expense reports, and something just didn’t sit right. There were duplicate vendor addresses—two vendors, supposedly unrelated, showing up with the same mailing info. Weird, right? Turned out to be a bogus vendor set up so an employee could funnel money out. They even tried to sneak in journal entries with no backup documentation—classic move.

Maya Collins: Wow, see, that’s the kind of thing that might just look like a typo to someone not paying close attention. And sometimes the numbers balance, but the pieces don’t make sense. Like, journal entries made by someone who never usually touches that part of the books, or made at the last hour before close? That’s suspicious territory.

David Miller: Yep, or ledgers that just...don’t add up right. Maybe the total assets don’t match up with liabilities and equity. That’s the kind of stuff that’ll trigger me to look deeper. But these things aren’t always obvious unless you’ve got strong internal controls. Which, frankly, not every company does. If you skip on segregation of duties, or there are overrides without real checks, it’s like leaving the keys in the car with the engine running.

Maya Collins: Right! The FTX collapse—total lack of proper controls, so massive related-party transactions and wild payments flew under the radar. Or that bank case where a cashier’s check got signed by two people, but they weren’t actually independent? Just going through the motions, not actually catching anything.

David Miller: Exactly. Controls only work if people follow them—and don’t game the system. That said, even the best systems rely on people watching for accounting clues. That’s why I tell folks: if you spot a new vendor with a suspicious address, or someone not taking vacation—that’s a classic by the way, not wanting someone else to sit at their desk? You need to look, not just shrug it off. Sometimes a question as simple as 'Why does this bill come from the same address as another vendor?' can open up a whole can of worms.

Maya Collins: Totally. And I’ll add: analytical symptoms matter too—relationships in the data that just don’t fit the business flow. You always gotta be suspicious of things that are out of proportion, or like, account balances moving in ways that just don’t make sense. But, that kind of connects to the next big set of clues people overlook... how people behave.

Behavioral Clues and Lifestyle Red Flags

Maya Collins: There’s this idea that fraud leaves fingerprints, not just in the accounts, but all over a person’s lifestyle and behavior. Some of the most memorable cases I’ve looked at started with a rumor—like, ‘Hey, did you see what so-and-so pulled up in this week?’ And yeah, lifestyle symptoms are circumstantial, but when someone with a modest salary suddenly has a brand new sports car or takes the whole team out in a limo for lunch—that’s more than just treating yourself. You know the case I mean, right, from the textbook?

David Miller: Yeah, the claims department manager. Auditor walks by, sees everyone piling into a chauffeured limousine—that’s not a normal Tuesday. Turns out, the manager had setup dummy doctors and embezzled over $12 million. It’s almost always true: people rarely save embezzled funds, they wanna spend it, and usually they spend big and public.

Maya Collins: I remember my very first fraud case—okay, I was brand new, maybe a little too eager. Noticed a coworker with this wild, like, bright yellow convertible parked outside for weeks. It just didn’t match their position or salary. Turns out it was leased under a fake vendor account tied to company funds. I mean, sometimes it’s blatant, but lots of folks just avert their eyes, or assume, ‘oh, maybe they hit the lottery.’

David Miller: Or, as we discussed in the last episode, sometimes it’s not just what people buy—but how they act. People under pressure can’t help showing it. Mood swings, stress, insomnia, acting jumpy or defensively, even bizarrely nice if they’re usually grumpy—or vice versa. Sometimes the guilty can’t even look you in the eye, right?

Maya Collins: Exactly. Almost like, the pressure cooker is too much, and it leaks out as weird behavior. But here’s the catch: there’s not one perfect symptom. It could be outbursts, mood swings, or just someone seeming way more argumentative. Or maybe they suddenly work a ton of overtime for no reason. Of course, you gotta watch for actual stresses in people’s lives too and not just assume fraud—but patterns matter.

David Miller: And we should say, sociopaths and narcissists are outliers. Most people who commit fraud feel guilt, fear of getting caught, and those behaviors show up as red flags. But it’s only part of the picture. Behavioral or lifestyle clues don’t prove a thing, but they point you to where you might need to look closer. Which, honestly, brings us to the number one way fraud is really exposed—and that’s people speaking up.

Tips, Whistleblowers, and Why Speaking Up Matters

David Miller: Let’s get into tips and whistleblowers. Statistically, forty-two percent of all fraud is uncovered through tips, and over half of those tips come from coworkers. That’s way higher than from any audit. Usually, auditors aren’t even around when fraud happens—folks will put everything on pause during an audit anyway. So, it’s peers and managers who spot the theft, the weird concealment tricks, or the sudden lifestyle changes.

Maya Collins: And yet, I feel like—well, people hesitate so much to actually report it. Fear of retaliation, not wanting to be labeled, or they’re just unsure if it’s real fraud. And sometimes, organizations don’t make it easy. But, new laws do help a lot! Sarbanes-Oxley made punishing whistleblowers illegal, and Dodd-Frank even lets you get a chunk—like, ten to thirty percent—of any government penalty over a million bucks if you tip off the SEC. Not bad, honestly.

David Miller: Yeah, the reward can make a difference, but for lots of people, they’re just scared. And sometimes tips come in and don’t amount to anything—maybe someone’s jealous or upset over a contract. That’s why every tip has to be checked out carefully, with the assumption of innocence first. But the point is: if you see something, there’s clear value in speaking up.

Maya Collins: The Enron case is probably the best-known example—Sherron Watkins wrote that anonymous letter to Enron’s CEO and basically kicked off the entire investigation. She was just one person, but her actions changed everything. At my company, we try to really encourage reporting, even little suspicions. We keep hotlines totally anonymous and even have quarterly rewards for folks who help flag potential issues. I mean, half the time it’s nothing, but, when it’s something, early detection saves the company and people’s jobs. That’s the real win.

David Miller: And circling back—like we said last episode—building a culture where people feel safe speaking up, having easy ways to report, and taking every tip seriously, that stuff goes hand in hand with all the controls and proactive fraud measures we talk about every week. Sometimes all it takes is one person with the courage to say, ‘Hey, something doesn’t look right here’ to stop a disaster.

Maya Collins: Couldn’t agree more, David. Alright, that’s it for recognizing the red flags of fraud. Next time, we’ll dive into what to do when you spot symptoms—so don’t miss it! Thanks for hanging out, David!

David Miller: Thanks, Maya, this was a good one. Thanks everyone for tuning in—keep your eyes open and keep asking questions. Until next time!