What are 'red flags' in the context of fraud detection?

In the context of fraud detection, 'red flags' are indicators that suggest potential fraudulent activity. These signs can serve as warning signals that warrant further investigation to determine whether fraudulent actions are occurring. Red flags can take many forms, including unusual transactions, inconsistent documentation, or sudden changes in behavior by employees or executives. Recognizing these indicators is critical for fraud detection and prevention, as they prompt auditors, investigators, or financial analysts to probe deeper into the circumstances around them.

The other options do not align with the definition of red flags. For instance, signs indicating a strong financial position do not pertain to identifying potential fraud. Similarly, positive confirmations from auditors reflect a verification of accurate financial reporting, not concerns over possible fraudulent behavior. Standards for corporate governance help establish ethical practices and accountability within organizations but are unrelated to the specific indicators that highlight potential fraud.