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Forensic Tools and Techniques for Internal Auditors

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Forensic Tools and Techniques for Internal Auditors Robert E Farrell, CFE Principal, White Collar Investigations Forensic Tools and Techniques for Internal Auditors ... – PowerPoint PPT presentation

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Title: Forensic Tools and Techniques for Internal Auditors


1
Forensic Tools and Techniques for Internal
Auditors
  • Robert E Farrell, CFE
  • Principal, White Collar Investigations

2
Forensic Tools and Techniques for Internal
Auditors
  • Internal Audit Responsibilities for Fraud
  • Part of the IA Charter?
  • Perform a Fraud Risk Assessment?
  • Man Hotlines?
  • Proactively search for Fraud?
  • Trained in Fraud prevention, detection, or
    investigation?

3
Forensic Tools and Techniques for Internal
Auditors
  • Public Accountants Responsibilities for
    performing Forensic Services
  • Definition of Forensic Services only defined by
    AICPA in April 2006
  • No specific standards for Forensic work
  • Follow the Consulting standards (SCSS -1)
  • Controversy over including forensic in financial
    statement audits

4
Forensic Tools and Techniques for Internal
Auditors
  • Definition of Forensic
  • used in or suitable to courts of law or public
    debate
  • (Blacks Law Dictionary, 8th Edition, 2004)

5
Forensic Tools and Techniques for Internal
Auditors
  • Forensic Specialist
  • an individual having expertise and/or training
    and experience in one or more disciplines that
    can be used in a forensic environment
  • Forensic Procedures
  • tools and/or techniques employed in the
    systematic gathering of evidentiary data that can
    be presented in a court of law

6
Forensic Tools and Techniques for Internal
Auditors
  • How is Fraud detected?
  • Tips/Whistleblowers (40)
  • Internal Audits/Internal Controls (31)
  • Accident (20)
  • External Audits (8)
  • Notified by Police (1)

7
Forensic Tools and Techniques for Internal
Auditors
  • Sources of Tips
  • Employees (57)
  • Customers (18)
  • Vendors (13)
  • Anonymous (12)

8
Forensic Tools and Techniques for Internal
Auditors
  • Red Flags
  • The so-called Indicia of Fraud
  • do not necessarily indicate the existence of
    fraud
  • exercise caution in forming an opinion before
    investigating

9
Forensic Tools and Techniques for Internal
Auditors
  • Some Indicia
  • Lack of Corporate Governance
  • no written policies and/or procedures
  • lack of Internal Controls
  • frequent or unusual Related Party transactions
  • Questionable Accounting Activities
  • Management override of Internal Controls
  • unreconciled subsidiary General Ledger accounts
  • continuous adjustments of book to physical
    inventories
  • topside Journal Entries
  • Excessive number of manual checks

10
Forensic Tools and Techniques for Internal
Auditors
  • Some Indicia (contd)
  • Behavioral Issues
  • failure to take vacations
  • living beyond ones means
  • Insider trading
  • early arrival late departure
  • Different frauds in different environments each
    have their own red flags

11
Forensic Tools and Techniques for Internal
Auditors
  • Tomorrow its there!!!
  • the red flag
  • the tip
  • the accident
  • You now have

12
Forensic Tools and Techniques for Internal
Auditors
  • Predication
  • the totality of circumstances that would lead a
    reasonable, prudent, and professionally trained
    person to believe that a fraud has occurred, is
    occurring, or will occur

13
Forensic Tools and Techniques for Internal
Auditors
  • Notification and Plan of Action
  • Who needs to know? (Boss? Audit Committee?, Board
    of Directors? General Counsel?)
  • What resources do we have to do the work?
  • Do we need help?
  • Where do we get help if we need it?

14
Forensic Tools and Techniques for Internal
Auditors
  • Audit procedures
  • Audit software
  • Develop specialized procedures/routines
  • But what else can be done?

15
Forensic Tools and Techniques for Internal
Auditors
  • The Seven Recognized Investigative
  • Tools and Techniques Used by
  • Forensic Specialists/Fraud Examiners

16
Forensic Tools and Techniques for Internal
Auditors
  • Public Document Reviews and Background
    Investigations
  • Interviews of Knowledgeable Persons
  • Confidential Sources
  • Laboratory Analysis of Physical and Electronic
    Evidence

17
Forensic Tools and Techniques for Internal
Auditors
  • (contd)
  • 5. Physical and Electronic Surveillance
  • 6. Undercover Operations
  • 7. Analysis of Financial Transactions

18
Forensic Tools and Techniques for Internal
Auditors
  • Public Document Reviews and Background
    Investigations
  • Public Databases
  • Secretary of State Websites
  • County Seat
  • Corporate Records
  • Internet
  • UYI

19
Forensic Tools and Techniques for Internal
Auditors
  • Public Databases
  • Increasing number of vendors
  • Reliability of data
  • What type of data is available?

20
Forensic Tools and Techniques for Internal
Auditors
21
Forensic Tools and Techniques for Internal
Auditors
22
Forensic Tools and Techniques for Internal
Auditors
23
Forensic Tools and Techniques for Internal
Auditors
  • Secretary of State Websites
  • Can vary by state due to laws
  • County Seat
  • Real Estate records business registrations
  • Corporate Records
  • Stock Transfer records Accounting data vendors
    competitors customers

24
Forensic Tools and Techniques for Internal
Auditors
  • Internet
  • Search Engines
  • News Sources/Newspapers
  • Telephone Numbers and Addresses
  • Maps
  • Legal Resources
  • Government Sites
  • UYI

25
Forensic Tools and Techniques for Internal
Auditors
  • Interviews of Knowledgeable Persons
  • Interview vs. Interrogation
  • Continuous process throughout an investigation
  • Gain additional information with each interview
  • Evidence from witnesses provides additional leads
  • May identify additional witnesses
  • Interview the target only after completing the
    interviews of the peripheral witnesses

26
Forensic Tools and Techniques for Internal
Auditors
  • Confidential Sources
  • Hotlines
  • E-mail
  • Letters
  • Current Employees
  • Former Employees
  • Vendors former vendors
  • Customers former customers

27
Forensic Tools and Techniques for Internal
Auditors
  • Confidential Sources (contd)
  • Cautions
  • Use professional skepticism in assessing
    information
  • Information supplied to discredit or embarrass
    the target
  • Weigh the value of the evidence provided against
    the possibility that it may be false or cannot be
    proven
  • Validate all evidentiary matter provided
  • Do not assure absolute confidentiality

28
Forensic Tools and Techniques for Internal
Auditors
  • Laboratory Analysis of Physical and Electronic
    Evidence
  • Protection/Validation of Evidence
  • Federal Rules of Evidence
  • Chain of Custody
  • The only thing worse than a bad document is a
    bad document that has disappeared!!!

29
Forensic Tools and Techniques for Internal
Auditors
  • Laboratory Analysis of Physical and Electronic
    Evidence (contd)
  • Altered Fictitious Documents
  • physical examination
  • fingerprint analysis
  • forgeries
  • ink sampling
  • document dating

30
Forensic Tools and Techniques for Internal
Auditors
  • Laboratory Analysis of Physical and Electronic
    Evidence (contd)
  • Computer Forensics
  • hard disk imaging
  • E-mail analysis
  • search for erased files
  • analyze use possible misuse
  • computer software to analyze data

31
Forensic Tools and Techniques for Internal
Auditors
  • Physical and Electronic Surveillance
  • Physical
  • usually done by law enforcement or PIs
  • surveillance cameras
  • can also be used to verify addresses for vendors,
    employees, etc.
  • Electronic
  • Internet surveillance
  • E-mail

32
Forensic Tools and Techniques for Internal
Auditors
  • Undercover Operations
  • usually a recommendation to use
  • can be done
  • best left to professionals

33
Forensic Tools and Techniques for Internal
Auditors
  • Analysis of Financial Transactions
  • Horizontal/vertical analysis
  • Authorization of new vendors employees
  • Comparison of employee vendor addresses
  • Analysis of sales returns allowance account
  • Management override of controls
  • Different reviews based on known industry fraud
    schemes

34
Forensic Tools and Techniques for Internal
Auditors
  • Summary
  • Some useful definitions (Forensic, Specialist,
    Procedures)
  • Fraud detection sources
  • Red Flags
  • Action to be taken
  • The tools techniques of the forensic specialist
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