Red flag behaviors in financial services frauds: a mixed-methods study
| DOI | https://doi.org/10.1108/JFRC-01-2021-0005 |
| Published date | 27 October 2021 |
| Date | 27 October 2021 |
| Pages | 167-195 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Namrata Sandhu |
Red flag behaviors in
financial services frauds:
a mixed-methods study
Namrata Sandhu
Chitkara Business School, Chitkara University, Rajpura, India
Abstract
Purpose –This studyaims to enlist the red flag behaviors exhibitedin financial services frauds.
Design/methodology/approach –A pluralistic mixed methodology was adopted in this study. Data
collected via semi-structured interviews were coded, quantified and subjected to descriptive analysis to
identify the most frequently exhibited red flag behaviors in financial services frauds. The relative risk of
exhibition of the identified red flag behaviorswas assessed by intuitively comparing the red flag behaviors
identified in financial servicesfrauds (experimental group, n= 24) with the red flag behaviors identified in a
heterogeneouscontrol sample of non-financial services frauds(control group, n= 28).
Findings –This study identifies six red flag behaviors likely to be morefrequently exhibited in financial
servicesfrauds than in non-financial services frauds.
Practical implications –Results of this study can be used to develop a typical behavioral profile of a
financial services fraud perpetrator. Active communication of this profile in fraud awareness training can
help make fraud conspicuousin the financial services industry.
Originality/value –This study is unique because human behavior as a possible fraud indicator is an
under-researchedarea. Further, this study examines first level of evidenceand attempts an ex-post analysis of
actual red flag behaviors exhibited in acknowledgedfraud cases in which the perpetrator/perpetrators has/
have been clearlyidentified.
Keywords Fraud, Mixed-methods research, Financial services, Fraud detection, Fraud perpetrator,
Red flag behaviors
Paper type Research paper
1. Introduction
Fraud is a human problem (McNeal, 2012). It is an unfortunate consequence of multiple
behavioral factors and constructs, which are, by and large, beyond the scope of law
(Ramamoorti and Olsen, 2007). As such, behavioral science insights are of utmost importance
in fraud comprehension and control (Ramamoortiand Olsen, 2007;Tiwari and Debnath, 2017).
Experts believe that an understanding of human behavior that focuses on how people behave
while perpetrating and rationalizing a fraud is a key skill of a fraud-fighting professional
(Albrecht et al.,2011). Identification of behavioral risk factors that indicate involvement in
fraud can significantly reduce the incidence of organizational fraud (Sandhu, 2016).
The propensity to commit fraud has been examined with the help of psychological,
sociological, moral and ethical variables (Zandstra, 2002;Choo and Tan, 2007;Schrand
and Zechman, 2012). Use of behavioral variables in fraud likelihood assessment is an
The author is extremely grateful to the editor and the reviewers for their helpful suggestions.
Funding: This research received no specific grant from any funding agency in the public,
commercial, or not-for-profit sectors.
Red flag
behaviors
167
Received11 January 2021
Revised28 June 2021
5 October2021
Accepted7 October 2021
Journalof Financial Regulation
andCompliance
Vol.30 No. 2, 2022
pp. 167-195
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-01-2021-0005
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
under-researched topic (Cohen et al., 2010), and experts encourage research in th is area
(Hopwood, 2009;Cohen et al., 2010). Further, although the behavior of fraud perpetrators is an
under-researched area, the author came across some studies that enumerate and examine
behavioral red flags of fraud (Sandhu, 2016). Literature is also available that reports red flag
behaviors based on the fraud type and demographic profile (gender, department and position)
of the fraud perpetrator [Association of Certified Fraud Examiners (ACFE), 2008,2012,2014,
2016, 2020]. The author also found one study that depicts data on behavioral red flags of fraud
by region/geography [Association of Certified Fraud Examiners (ACFE), 2010]. However, the
author could not find any study that categorically inspects red flag behaviors by industry. The
lack of research on behavioral red flags of fraud by industry and the high incidence of fraud in
the financial services industry provide motivation for the present study.
This study enlists red flag behaviors exhibited in financial services frauds. It also
compares the types and frequencies of these red flag behaviors with the types and
frequencies of red flag behaviors exhibited in a control sample of heterogeneous non-
financial servicesfrauds.
The topic and methodology of this study are unique. From the perspective of the topic, this
study examines a phenomenon that has not been categorically explor ed in previous studies.
Methodologically, examination of intended behaviors is the norm in existing research on
deviant behaviors (Carpenter and Reimers, 2005;Gillett and Uddin, 2005;Sandhu, 2020a). This
research overcomes this limitation of previous studies and documents actual behaviors
displayed by fraud perpetrators. Also, the results of this study are based on data collecte d
from people who have personally investigated or closely observed a fraud. Such people
constitute “involved personnel,”and data collected from them are considered the “firstlevel of
evidence”(Cohen et al., 2010). This further adds value to the methodology of this study.
This paper is divided into six sections. Section 2 highlights the existingrelevant research.
Section 3 provides details related to financial services frauds to build a case for the present
study. Sections4 and 5 present the methodology andfindings of the study, respectively.The
study endswith Section 6, which underscoresthe implications of the study.
2. Literature review
2.1 Definition and popular theories of fraud
Fraud is defined as a willful misrepresentation of a material statement, which harms the
victim (Coenen, 2008). In the corporate context, fraud is defined as a criminal violation of
delegated financial trust to further the interest of certain stakeholders, in a way that is
detrimental to the interests ofothers (Cressey, 1953). Fraud involves the use of deception to
gain an unfair and often illegal economic advantage(Desai, 2020).
Scholars have attempted to explain the concept of fraud with the help of various
theoretical models. Cressey(1950,1953) made an early attempt when he developed the fraud
triangle based on data collected from white collar criminals. The fraud triangle identifies
three prerequisites of fraud –a perceived non-shareable financial pressure that acts as an
incentive to engage in fraud, opportunity to violate delegated trust and an ability to
rationalize the fraudulent behavior (Cressey, 1950). Subsequent investigators added their
own ideas to the fraud triangle; however,it remains the most recognized framework of fraud
and has attained institutionalrecognition (Lederman, 2021).
Basedonthefraudtriangle,Albrecht et al. (1984) proposed a model of fraud –the fraud
scale. The authors retained the first two components of the fraud triangle and swapped the
third component –rationalization, with personal integrity (Vousinas, 2019). The authors
contended that from a practical viewpoint, the fraud scale was superior to the fraud triangle
because rationalization was difficult to operationalize, whereas personal integrity could be
JFRC
30,2
168
To continue reading
Request your trial