The opinion of investors and lenders on red flags

Abstract

Red flags are events, conditions, situational pressures, opportunities or personal characteristics that may cause management to commit fraud for company benefit or for personal gain. Lenders and investors require red flags that are appropriate to their particular interests and their access to information on the enterprise and its management. A questionnaire was developed to survey the opinions of investors and lenders in South Africa regarding red flags. Although the response to the survey was disappointing, 46 questionnaires were returned, of which 29 were from lenders and 17 from investors. Both lenders and investors identified the red flag "dishonest or unethical management" as the most important. What is interesting about the three least important red flags is that they are all related to the operating characteristics of the business. The most important red flags focused on management characteristics and influence over the control environment. This seems to support prior research that the best predictive red flags are those on the attitudes and situational pressures on management.