Fraud Risk Assessment Tool

Module # 2 – Management/Key Employee Assessment

The management/key employee assessment questions are designed to assess the probability of a
fraudulent event occurring within the organization based on:
 Internal controls
 Internal control environment
 Resources available to prevent, detect, and deter fraud

Questionnaire Key

1. Is the board of directors composed of mainly officers of the company or related individuals?
The board of directors should include independent board members that are not associated with or
employed by the company. In theory, independent directors are not subject to the same pressures as
management and, therefore, are more likely to act in the best interest of shareholders.

2. Is there an independent audit committee?

Independent audit committee members with financial and accounting expertise can be instrumental
in preventing and detecting financial fraud.

3. Has there been high turnover of managers and members of the board of directors?
Management should investigate the reasons for high turnover and implement measures to reduce it.

4. Have an unusually high number of key employees left the company recently?
Management should investigate the reasons for their departure and implement measures to reduce
turnover.

5. Is the company involved in any litigation?

Management should determine the reason for the litigation, monitor the filings, and take corrective
action where necessary.

6. Does the company have offshore activities or bank accounts?

Management should determine the reason for the offshore activities and accounts, ascertain
compliance with U.S. laws, and monitor activity closely.

7. Do any of the senior managers have offshore bank accounts or business interests?
The organization should require senior managers to file annual financial disclosure reports and
explain the purpose of any offshore bank accounts or business interests.

8. Are any key employees experiencing financial pressures, such as debts, gambling, medical bills,
or divorce?
Key employees who are experiencing financial pressures represent a potential fraud risk to the
company and should be monitored by management. Employee assistance programs can be made
available to help employees with alcohol, drug, and other problems.

9. Do any key employees appear to be living beyond their means?

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Management should be observant of signs of employees spending far more than they are earning. It
is common for employees who steal to use the proceeds for lifestyle improvements, including
expensive cars, extravagant vacations, or expensive clothing.

10. Do any key employees have civil judgments or bankruptcies on record?

Key employees who have civil judgments or bankruptcies on record represent a potential fraud risk
to the company and should be monitored by management.

11. Do any key employees have a criminal conviction?

Key employees with known criminal convictions should be subjected to increased review by
management for compliance with internal controls and other policies and procedures.

12. Do one or two key employees appear to dominate the company?

If control is centered in the hands of one or two key employees, then those individuals should be
under heightened scrutiny for compliance with internal controls and other policies and procedures.

13. Do any key employees have friends or relatives reporting directly to them?
Organizations should prohibit key employees from having friends or relatives report directly to
them.

14. Do any of the key employees appear to have a close association with a vendor?
Key employees who have a close association with a vendor should be monitored for potential
conflict of interest.

15. Do any key employees have outside business interests that might conflict with their duties at
the company?
Key employees should be required to provide annual financial disclosures that list outside business
interests. Interests that conflict with the organization’s interests should be prohibited.

16. Do any key employees own a portion of any company that does business with this company?
Organizations should require key employees to disclose any potential conflicts of interest and
should closely monitor any such conflicts of interest.

17. Has any key employee failed to take vacation?

Requiring key employees to take annual vacations can aid an employer in detecting an ongoing
fraud scheme because the employer is more likely to discover a perpetrator running such a scheme
when the perpetrator is removed from the scene.

18. Do any key employees have a significant amount of their net worth invested in the company?
Management should subject key employees with a significant amount of their net worth invested in
the company to increased review for compliance with internal controls, especially those controls
related to financial reporting.

19. Does the company have unusually high debts?

Management should determine the reason for debt levels and monitor internal controls for financial
reporting.

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20. Is key employee compensation primarily based on company performance?

Organizations should monitor employees whose compensation is based primarily on company
performance for compliance with internal controls, especially controls related to financial
reporting.

21. Is there an incentive to use inappropriate means to minimize earnings for tax reasons?
Companies should remove any incentive to use inappropriate means to manipulate financial
information.

22. Is there excessive pressure to increase the company’s stock price?

Excessive pressure to increase the company’s stock price can result in management manipulating
financial results in order to meet expectations.

23. Has the company recently experienced large operating or investment losses?
Large operating or investment losses can place undue pressure on management to manipulate
results in order to cover up the losses.

24. Does the organization have sufficient working capital?

Insufficient working capital can place undue pressure on management to manipulate financial
results.

25. Does the organization have sufficient credit?

A lack of sufficient credit can place undue pressure on management to manipulate financial results
in order to obtain credit.

26. Is the organization under pressure to report favorable earnings?

Excessive pressure to report favorable earnings can result in management committing fraudulent
acts in order to meet expectations.

27. Does the company depend heavily on only a limited number of products or customers?
Dependence on only a limited number of products or customers places a company at greater risk
for fraudulent acts to occur.

28. Has the company experienced difficulty in collecting receivables?

Cash flow problems, which are a warning sign of possible fraud, can arise when a company
experiences difficulty in collecting receivables.

29. Has the company recently expanded rapidly into new business or product lines?
Rapid expansion into new business or product lines can place tremendous financial pressure on a
company.

30. Has the company experienced a reduction in sales volume?

A reduction in sales volume can place undue pressure on management to manipulate financial
results.

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31. Does the company have strong competitors that are outperforming?
Strong competition can place a company at greater risk for fraudulent acts to occur.

32. Is the company under pressure to sell or merge with another company?
Situational pressures that may lead to fraudulent acts can arise when a company is under pressure
to sell or merge with another company.

33. Does the company change auditors often?

A frequent change in auditors is a red flag of fraud.

34. Does the company delay or avoid supplying auditors with the information necessary to
complete the audits?
Delaying or avoiding supplying auditors with the information necessary to complete audits is an
indicator of fraudulent activity.

35. Does the company have problems with regulatory agencies?

The company should determine the reasons for the problems with regulatory agencies and
implement measures to encourage compliance with regulations.

36. Does the company have poor accounting records?

The company should implement proper accounting records.

37. Does the accounting department appear to be inadequately staffed?

The accounting department should be adequately staffed to allow for proper segregation of duties.

38. Does the organization fail to disclose questionable or unusual accounting practices?
Questionable or unusual accounting practices should be disclosed.

39. Does the company have a number of large year-end or unusual transactions?
Large year-end or unusual transactions should be investigated.

40. Does the organization lack an adequate internal audit staff?

The internal audit department should be adequately staffed.

41. Does the organization lack an internal control system, or does it fail to enforce the existing
internal controls?
Organizations should establish and enforce an internal control system.

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Module 2- Management/Key Employee Assessment

Not
Yes No Applicable

Is the board of directors composed of mainly officers of the

company or related individuals?
Comments:

Is there and independent audit committee?

Comments:

Has there been high turnover of managers and members of the

board of directors?
Comments:

Have an unusually high number of key employees left the

company recently?
Comments:

Is the company involved in any litigation?

Comments:

Does the company have offshore activities or bank accounts?

Comments:

Do any of the senior managers have offshore bank accounts or

business interests?
Comments:

Are any key employees experiencing financial pressures, such

as debts, gambling, medical bills, or divorce?
Comments:

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Fraud Risk Assessment Tool

Module 2- Management/Key Employee Assessment

Not
Yes No Applicable

Do any key employees appear to be living beyond their means?

Comments:

Do any key employees have civil judgments or bankruptcies on

record?
Comments:

Do any key employees have a criminal conviction?

Comments:

Do one or two key employees appear to dominate the

company?
Comments:

Do any key employees have friends or relatives reporting

directly to them?
Comments:

Do any of the key employees appear to have a close association

with a vendor?
Comments:

Do any key employees have outside business interests that

might conflict with their duties at the company?
Comments:

Do any key employees own a portion of any company that does

business with this company?
Comments:

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Fraud Risk Assessment Tool

Module 2- Management/Key Employee Assessment

Not
Yes No Applicable

Has any key employee failed to take vacation?

Comments:

Do any key employees have a significant amount of their net

worth invested in the company?
Comments:

Does the company have unusually high debts?

Comments:

Is key employee compensation primarily based on company

performance?
Comments:

Is there an incentive to use inappropriate means to minimize

earnings for tax reasons?
Comments:

Is there excessive pressure to increase the company’s stock

price?
Comments:

Has the company recently experienced large operating or

investment losses?
Comments:

Does the organization have sufficient working capital?

Comments:

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Fraud Risk Assessment Tool

Module 2- Management/Key Employee Assessment

Not
Yes No Applicable

Does the organization have sufficient credit?

Comments:

Is the organization under pressure to report favorable earnings?

Comments:

Does the company depend heavily on only a limited number of

products or customers?
Comments:

Has the company experienced difficulty in collecting

receivables?
Comments:

Has the company recently expanded rapidly into new business

or product lines?
Comments:

Has the company experienced a reduction in sales volume?

Comments:

Does the company have strong competitors that are

outperforming?
Comments:

Is the company under pressure to sell or merge with another

company?
Comments:

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Fraud Risk Assessment Tool

Module 2- Management/Key Employee Assessment

Not
Yes No Applicable

Does the company change auditors often?

Comments:

Does the company delay or avoid supplying auditors with the

information necessary to complete the audits?
Comments:

Does the company have problems with regulatory agencies?

Comments:

Does the company have poor accounting records?

Comments:

Does the accounting department appear to be inadequately

staffed?
Comments:

Does the organization fail to disclose questionable or unusual

accounting practices?
Comments:

Does the company have a number of large year-end or unusual

transactions?
Comments:

Does the organization lack an adequate internal audit staff?

Comments:

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Does the organization lack an internal control system or does it

fail to enforce the existing internal controls?
Comments:

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