The importance of red flags in economic crime prevention

Abstract

In recent years, fraudulent financial reporting has been a major issue especially among the accounting profession. Financial scandals around the world have produced several international and national regulation concerning the roles and responsibilities of auditors and internal auditors in fraud detection and prevention. The effects and results of the reforming of those professions can already be seen in their strict role casting related to fraud.

The main purpose of this study is to examine the most remarkable fraud indicative red flags in the Finnish business environment. These red flags are examined from the perspective of internal auditors, auditors and economic crime inspectors. The second purpose of this study is to examine alternative internal audit sourcing arrangements related to fraud and reliability of financial statements. The data for this survey were collected using an e-mail survey. The statistical method used in this study is factor analysis and the non parametric tests are the Kruskal-Wallis test and the Mann-Whitney test.

The results of the study indicate statistically significant differences between the groups examined concerning the importance of fraud indicative red flags, which confirmed the hypothesis 1. The biggest differences were found between internal auditors and economic crime inspectors. Statistically significant differences between the groups were also found concerning their internal audit sourcing arrangements. This result confirmed the hypothesis 2 of the study. Thus, this study concludes that the different roles of the respondent groups with respect to fraudulent activity are a major explanation for the differences indicated by the results. However, the difference in perceptions was minor between auditors and economic crime inspectors.