SITUATIONAL PRESSURE RED FLAGS

I. PERSONAL

A. Financial pressures

1. High personal debts
2. Severe illnesses in family
3. Inadequate income and/or living beyond means
4. Extensive stock market speculation that creates indebtedness
5. Loan shark involvement.
6. Excessive gambling
7. Heavy expenses incurred from involvement with other women/men
8. Undue family, peer, company, or community expectations
9. Excessive use of alcohol or drugs causing indebtedness

B. Revenge motives

1. Perceived inequities (for example, underpaid, poor job assignment)
2. Resentment of superiors
3. Frustration, usually with the job

II. COMPANY

A. Financial Pressures

1. Unfavorable economic conditions within the industry
2. Heavy investments or losses
3. Lack of sufficient working capital
4. Success of company dependent on one or two products, customers, or transactions
5. Excess capacity
6. Severe obsolescence
7. Extremely high debt
8. Extremely rapid expansion through new business or product lines
9. Tight credit, high interest rates, and reduced ability to acquire credit
10. Pressure to finance expansion through current earnings rather than through debt or equity
11. Profit squeeze (costs and expenses rising higher and faster than sales and revenues)
12. Difficulty in collecting receivables
13. Unusually heavy competition (including low-priced imports)
14. Existing loan agreements with little flexibility and tough restrictions
15. Progressive deterioration in quality of earnings
16. Significant tax adjustments by the IRS
17. Long-term financial losses
18. Unusually high profits with a cash shortage
19. Urgent need for favorable earnings to support high price of stock, meet earnings forecasts, and so forth
20. Need to gloss over a temporary bad situation and maintain management position and prestige
21. Significant litigation, especially between stockholders and management
22. Unmarketable collateral
23. Significant reduction in sales backlog indicating future sales decline
24. Long business cycle
25. Existence of revocable and possibly imperiled licenses necessary for the continuation of business
26. Suspension or delisting from a stock exchange
27. Fear of a merger

Source: Adapted from Robert K. Elliott and John J. Willingham, Management Fraud: Detection and Deterrence (Princeton, N.J.: Petiocelli Books. 1980)