Behavioral red flags of fraud: a gender-based ex post analysis
| Published date | 18 May 2020 |
| DOI | https://doi.org/10.1108/JFC-04-2020-0048 |
| Pages | 1307-1322 |
| Date | 18 May 2020 |
| Author | Namrata Sandhu |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Behavioral red flags of fraud: a
gender-based ex post analysis
Namrata Sandhu
Chitkara Business School, Chitkara University, Rajpura, India
Abstract
Purpose –This study aims to attempt a gender-basedex post examination of behavioral red flags of fraud
exhibitedby fraud perpetrators.
Design/methodology/approach –Qualitative data collected from semi-structured interviews were
triangulated, quantified and subjected to statistical analysis to calculate the relative risk of exhibition of a
behavioralred flag of fraud by a male/female fraud perpetrator.
Findings –This study reports the percentage of fraud cases in which male and femalefraud perpetrators
display particular behavioral red flags. The study also enlists the behavioral red flags likely to be more
frequentlyexhibited by female fraud perpetrators relativeto male fraud perpetrators and vice-versa.
Practical implications –Use of the results of this study in anti-fraud training is likely to make
organizationalfraud more susceptible to observation.
Originality/value –This study is uniquebecause it is one of the very few studies that examine employee
behavior as a potential fraudsignal, establish gender distinction in behavioral redflags of fraud, and assess
this phenomenonin a country other than a Western country.
Keywords Behavioral red flags, Fraud, Gender, Relative risk, Fraud detection, Fraud perpetrator,
Fraudster, Unethical behavior, Triangulation, Qualitative data, Semi-structured interviews,
Anti-fraud effort
Paper type Research paper
1. Introduction
It is estimated that a typical organization loses 5% of its total revenue to fraud (ACFE,
2014). This expense is considerable enough to merit attention. Understandably, fraud
detection is increasingly becoming a priority for all stakeholders (Brink et al., 2013).
However, despite tightening regulations and escalating anti-fraud corporate budgets,
frauds remain difficult to detect. This is primarily because concealment is a principle
element of most frauds. As such, many frauds remain hidden and are never detected
(Coenen, 2008). However, in spite of the inherent challenges involved in fraud detection,
practitioners and scholars continue to look for ways to detect, deter and prevent frauds.
There exists a range of researchers who content that an inexpensive way to detect frauds is
to keep a close watch on employee behavior for cues symptomatic of fraudulent intentions
(Sandhu, 2016). These behavioral cues, commonly called “behavioralred flags of fraud”can h elp
victim organizations in early fraud detection (McFadden, 2016). Despite this understanding, the
behavior of fraud perpetrators remains under-researched (Cohen et al., 2010) and many frauds
fail to come to light because of lack of information onthe profile of fraud perpetrators (Dorminey
et al., 2010). Further, some research also suggests that data on behavioral red flags exhibited by
the fraudsters based on key demographic factors such as age, gender, education level, authority
level and tenure with victim organization can significantly aid the efforts of anti-fraud
professionals (ACFE, 2014). Keeping the above arguments in mind, this study attempts a
gender-based analysis of the behavioral red flags of fraud exhibited by fraud perpetrators.
A gender-
based ex post
analysis
1307
Journalof Financial Crime
Vol.27 No. 4, 2020
pp. 1307-1322
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-04-2020-0048
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
From a methodological perspective this study is unique. First, the results of this study are
basedonanex post analysis of actual behaviors exhibited by fraud perpetrators. Most previous
studies that assess behavior of fraud perpetrators examine intended behaviors (Cohen et al.,
2010). Second, this study uses a heterogeneous sample of frauds, which covers numerous fraud
types and victim industries. Third, this study was conducted in India. Most available fraud
research has been conducted in the Western countries (Sandhu, 2020a). Fourth, the ratio of
male:female fraud perpetrators, whose behavior is examined in this research is 14:27. In total,
34% of the fraud perpetrators are female and the rest 66% are male. This gender distribution is
consistent with distributions encountered in previous studies (ACFE,2016, 2018). Men are
responsible for 65 to 70% of the total frauds committed (ACFE,2016, 2018).
The rest of this paper is organized as follows.Section 2 presents a survey of the relevant
literature on behavioral red flags of fraud and gender research related to frauds. Section 3
outlines details regarding the methods used for data collection and analysis. Section 4
exhibits the results of the study. Finally, Section 5 highlights the implications and
limitations of thework and provides scopes for future study.
2. Literature review
2.1 Behavioral red flags of fraud
Behavioral red flags of fraud are common behavioral peculiarities exhibited by fraud
perpetrators (McFadden,2016). Exhibition of these behavioral patterns or traits are warning
signs that suggest that the person in question might be committing a fraud (Coenen, 2008).
Professionals recommend personnel red-flagging to identify potential problem employees
and situations in organizations(Coenen, 2008).
Available literature on behavioral red flags of fraud indicates that 92% fraud perpetrators
exhibit at least one behavioral red flag and 57% fraud perpetrators exhibit at least two red
flags (ACFE, 2016). The number of behavioral red flags most frequently displayed by fraud
perpetrators is three (in 36.6% cases) or four (in 24.4% cases) (Sandhu, 2020a). It may be noted
that exhibition of one or even two behavioral red flags by an individual may not indicate the
individual’s involvement in fraud. However exhibition of multiple behavioral red flags by an
individual calls for investigation (Coenen, 2008). Further, extant research on types of behavioral
red flags suggests that the behavioral red flags exhibited by fraud perpetrators remain fairly
consistent irrespective of the scheme type or the type of victim organization (ACFE,2014, 2018).
Early research on behavioral red flags of fraud identified ego (Sutherland, 1949),
financial shortfalls, personal problems (such as extramarital affairs, gambling, family
pressures and legal problems.) (Cressey,1953) and dominant Chief Executive Officer (CEO)
behavior (Vance, 1983) as behavioralred flags of fraud. Afterward, researchers documented
sudden lifestyle changes (Kaplan and Reckers, 1995), greed (Wisenborn and Norris, 1997),
extraordinary intelligence, ability to lie with conviction, handle acute stress (Wolfe and
Hermanson, 2004), tendency to rationalize unethical behavior (Farber, 2005), unusual
interpersonal collusions (Silver et al., 2008), poor performance, long working hours, legal
problems, job dissatisfaction(Coenen, 2008), ineffective interpersonal communication (Yang
et al.,2009) and self claims regarding previous undetected fraudulent conduct and praise
stories in press (Cohen et al.,2010) as behavioral red flags of fraud. Singleton and Singleton
(2010) enumerated aggression, micromanagement, suspiciousness, self-consciousness and
inability to maintain eye contact as behavioral peculiarities symptomatic of fraud. Recent
work on behavioral red flags of fraud enlists ignorance, determination, overconfidence
(Mohamed et al.,2015), reputational anxiety and obsession to outperform others (Murphy
and Free, 2016) as possible fraud risk factors. Prabowo (2016) exclusively listed behavioral
red flags of corrupt leader candidates based on secondary data. The list prepared by the
JFC
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