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Article

Behavioral red flags and loss sizes from asset misappropriation: Evidence from the US

Feess E., Timofeyev Y.

Auditors use behavioral red flags (BRFs) to examine which individuals are more prone to unwarranted behavior like corruption and asset misappropriation. Using a rich data set from the Association of Certified Fraud Examiners (ACFE), we analyze the impact of BRFs on loss sizes from asset misappropriation. We control for anti-fraud mechanisms established at the company level and other factors both at the individual and the firm level. Performing an exploratory factor analysis yields six factors for BRFs which capture the principal perpetrator’s situation at the private level and the workplace. A general wheeler-dealer attitude and financial distress significantly increase loss sizes. By contrast, we find no evidence that non-monetary private problems lead to higher losses.