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PART C: ACCOUNTING AND REPORTING SYSTEMS, CONTROLS AND COMPLIANCE 
 
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2.2.3 Business risks 
A number of factors tend to crop up frequently as 
indicators
of potential fraud situations; these can be 
categorised under business and personnel risks. 
An alert management team will always be aware of the industry or business environment in which the 
organisation operates. 
(a) 
Profit levels/margins deviating significantly from the industry norm
As a rule of thumb, if things seem too good to be true, then they generally are. If any of the 
following happen, alarm bells should start ringing. 
(i) 
The company suddenly starts to exhibit profits far above those achieved by other firms in 
the same industry. 
(ii) 
Turnover rises rapidly but costs do not rise in line. 
(iii) 
Demand for a particular product increases significantly. 
(iv) 
Investors seem to find the firm unusually attractive. 
Such patterns can indicate problems, such as the manipulation of accounting records, collusion 
with existing customers or the creation of fictitious customers. 
Similarly, results showing that the organisation is underperforming relative to competitors may be 
an indication of theft, collusion with suppliers or deliberate errors in the accounting records. 
(b) 
Market opinion
If the market has a low opinion of the firm, this might indicate something about the company's 
products, its people or its way of doing business. 
(c) 
Complex structures
(i) 
Organisations with complex group structures, including numerous domestic and overseas 
subsidiaries and branches, may be more susceptible to fraud. 
(ii) 
The sheer size of the group can offer plenty of opportunities to 'lose' transactions or to hide 
things in intercompany accounts.
(iii) 
Furthermore, vast staff numbers contribute to a certain degree of employee anonymity, 
making it easier to conceal fraudulent activities. 
2.2.4 Personnel risks 
Fraud is not usually an easy thing to hide. A person's behaviour often gives clues to the fact that they are 
engaging in fraud.
(a)