Fraud diamond risk indicator: An assessment of its importance and usage

Abstract

Recent fraud surveys published by large accounting professional firms in Malaysia (e.g. KPMG 2009, PriceWaterHouseCooper 2009) indicated that preceding actual financial fraud cases, red flags or indicators have always been detected by auditors. Nevertheless such red flags are often ignored or “pushed under the carpet” by companies who are victims of such frauds. The reasons for ignoring the indicators vary from “an effort towards face-saving” to “the amount is too small to affect the company's performance”. Using the fraud diamond model, the current study is undertaken to identify what fraud risk indicators are considered as important and whether they are ultimately used by companies to prevent or to detect financial fraud. The study uses a questionnaire survey on three groups of accounting professionals: external auditors, internal auditors and government auditors who are often involved in financial fraud detection and investigation. A total of 135 professionals responded. The results provide basic understanding as to why fraud indicators are often ignored and not taken seriously. Moving forward, the study provides important “what to do list” for accounting professionals in their effort to mitigate financial fraud cases in the future.

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