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Fraud How to conduct an Investigation – PowerPoint PPT presentation

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Title: Fraud

  • How to conduct an Investigation

Famous Last Words
  • It wont happen here. Were careful about who
    we hire
  • But hes in-charge. He had no motive
  • NO WAY it was Tom. He is over 60 years old
  • Ellen would not have done that, she is a mom
  • It would never happen in our company

Fraud-Just a Myth
Fraud is Universal
FraudWhat it is and What it isnt
  • What it is
  • Intentional
  • Trick or Deceive someone out of their assets
  • Theft
  • A crime
  • What it isnt
  • Taken by physical force
  • A mistake or error
  • Victimless
  • Insignificant because no one got hurt
  • Acceptable or Justifiable

Fraud Personal Experience
  • Shell Company
  • Fictitious Invoices
  • Extortion
  • Conflict of Interest
  • Collusion/External Provider
  • Falsifying Financial Statements
  • Travel and Entertainment

How Does Fraud Occur?
  • Poor internal controls
  • Lack of proper authorization
  • No separation of authorization, custody, record
  • No independent checks on performance
  • Lack of clear lines of authority
  • Inadequate documentation
  • Management override of internal controls
  • Collusion between employees and 3rd parties
  • Collusion between employees and management
  • Poor or non-existent ethics policy
  • Limited, unclear or no policies and procedures to
    direct department/division processes

What Every Auditor Should Know About Fraud
  • If a fraud is being perpetrated, the fraudster is
    working hard to keep it hidden, including extra
    efforts to fool the auditor
  • Fraud violates the perpetrators fiduciary duties
    to the victims organization
  • Fraud is committed for purpose of direct or
    indirect financial benefit
  • Fraud always cost the victim organization
    assets, revenue and resources

Internal Audit Role
  • Prevention
  • Assessment of controls
  • Perform a Fraud Risk Assessment
  • Detection
  • Process built into every audit.
  • Investigation
  • Involved along with Legal, HR, Business

People who commit fraud!
  • Look exactly like us
  • Normal Citizens
  • Fraud Perpetrators
  • Bank Robbers

Who Are The White-collar Criminals?
  • Employees
  • Managers
  • Colleagues
  • Friends
  • Suppliers/Customers
  • Contractors
  • Neighbors

Why do good people go bad?
  • Financial Needs
  • Revenge
  • Child Support/Alimony
  • Drugs
  • Power
  • Significant Personnel Event

Sarbanes-Oxley and Fraud?
  • It recognizes the value of having a system for
    employees and others to report wrong doing
  • Establish Fraud, Waste and Abuse Hotlines
  • Section 307 requires a whistle-blower system to
    be in place
  • Section 806 prohibits retaliation against
    whistle-blowers or others

What is a Fraud Investigation?
  • According to the Association of Certified
    Examiners it is,
  • A methodology for resolving fraud allegations,
  • which involves obtaining and analyzing
  • evidence, taking statements, writing reports,
  • testifying to findings, and detecting and
  • preventing fraud

  • Investigation Role

Fraud Skills
  • Accounting and Auditing
  • Investigation
  • Law
  • Criminology

What Happens If We Get it Wrong?
  • Unfair Dismissal Court Cost, Reputation
  • Unable to recover funds or seize assets
  • Extra Cost to Investigate Further
  • Poor Employee morale

Should an Investigation Be Conducted?
  • Sound business and legal judgments supports
    conducting an investigation, but with skill,
    caution, and confidentiality.
  • Investigation should be conducted if for no
    reason than to stop the fraud or send a message
    throughout the company that fraud will not be

Traditional Auditing vs. Fraud Examinations
Issue Auditing Fraud Examination
Timing Recurring Non recurring
Scope General Specific
Relationship Non Adversarial Adversarial
Objective Opinion Resolve Allegation
Methodology Audit Techniques Fraud examination techniques
Materiality Limits Established No Limits
Fraud Warning Signals
  • Accounting Anomalies
  • 2. Internal Control Weaknesses
  • 3. Analytical Symptoms
  • 4. Lifestyle Symptoms
  • 5. Behavioral Symptoms
  • 6. Tips Complaints

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The Negative Affects of Fraud.
Legal Conviction
Lost Assets
Taxes Restitution Payments
Lost Time
Negative Publicity
Legal Fees
Basic Investigative Steps
  1. Undertake to Establish the Truth of the Matter
    Under Consideration
  2. Dont Jump to Conclusions - Auditor Needs
    Experience Objectivity
  3. Keep Information to Yourself, Keep Speculation to
  4. Keep Those Who Need to Know Informed

Basic Investigative Steps
  1. Independently Corroborate Information
  2. Employ Experts and Consultants if needed
  3. Use Investigative Techniques that Are Legally
    Sound Fair
  4. Report All the Facts Fairly Objectively- Point
    to the Guilty Exonerate the Innocent

Jeopardizing a Fraud Investigation
  1. Mishandling Evidence
  2. Altering Originals
  3. Lack of Predication
  4. Accusing the Suspect
  5. Failure to Maintain Confidentiality
  6. Inexperienced Auditors

Stages of Fraud Investigation
  1. Preliminary/Evaluation /Determine Predication
  2. Assemble the Team
  3. Investigative Fieldwork
  4. Reporting
  5. Remediation

Step One Preliminary Evaluation /Determine
  • Predication refers to the circumstances that,
  • taken as a whole would lead a reasonable,
  • prudent professional to believe a fraud has
  • Occurred, is occurring , or will occur
  • One could analogize it to a police officer making
  • An arrest without probable cause.
  • Without some of cause (predication), the auditor
    is not
  • Advised to begin reviewing employee records, as
    it would
  • Create the appearance of a Witch Hunt

Step Two Assemble Team
  • The greatest asset to the auditor is the team he
    or she assembles to assist with the
  • We can not be completely competent in all areas
    of fraud investigations and should rely on the
    competency of others to assist us when necessary
  • Launching an investigation without a competent
    team is like performing an operation without
    nurses, anesthesiologist, and other medical

Fraud Response Team
  • Core CFO
  • - Company Controller
  • - Auditor/Investigator
  • - Business Unit Lead
  • Other IT
  • - Human Resources
  • - Legal

Step 3 Investigative Fieldwork
  • Helps to establish the validity of the allegation
  • Involves examination of documents, analytical
    procedures, evidence collection and interviews
  • Most time consuming step
  • Each investigation should be conducted with the
    intent of proving beyond a reasonable doubt as
    required by criminal courts
  • If substantiated, the results of the
    investigation may possibly conclude in a civil
    and/or criminal proceeding.

Conducting Interviews
  • Must maintain confidentiality
  • Remain neutral
  • Complainant is first to talk with
  • The Accused is likely to be next
  • Other Witnesses Follows
  • Listen Intently
  • He Said/She Said - Truth is in the

1. Gathered from Individuals, Includes
Interviewing, Interrogation Honesty Tests 2.
Gathered from Papers, Computers Written
Printed Sources 3. Fingerprints, Weapons, Stolen
Property Often Involves Forensic Analysis 4.
Collected by the Investigator, Includes,
Surveillance and Covert Operations
  • Original documents retained
  • Maintain a log
  • Secure Log

Types of Evidence
  • Corroborating Evidence Evidence that differs
    from, but strengthens or confirms other evidence
  • Credible Evidence Evidence that is worthy of
    belief trustworthy evidence
  • Demonstrative Evidence Evidence that one can
    see and inspect usually offered to clarify
    testimony. Often termed illustrative, real or
    tangible evidence

Types of Evidence
  • Forensic Evidence Evidence arrived at by
    scientific means
  • Expert Evidence Evidence about a scientific,
    technical or professional issue presented by a
    qualified expert witness
  • Photographic Evidence Photographs taken by
    competent authority which can be attested to as
    being true and unchanged

Key Focus
  • Bank Statements
  • Cancelled Checks
  • Vendor Invoices
  • Payroll/Personnel Records
  • Accounting Reports
  • E-Mail
  • Computer Records

Step 4 - Reporting
  • The report should include what, where, when, who,
    and how of the fraud.
  • It is advised to include control recommendations
    to avoid future occurrences
  • The report should not contain recommendations for
    disciplinary actions or opinions on whether the
    employee is guilty
  • State the results of the investigation and avoid
    conclusions of guilt or innocence.

Step 4 - Reporting
  • The auditor should use language similar to below
  • As their conclusions
  • The investigation uncovered sufficient evidence
    to support the allegations,
  • The findings disclosed during our examination
    support the allegations raised by the company
  • Internal Auditors must be able to clearly
    communicate their findings via the written

Report Distribution
  • CFO
  • CEO
  • Controller
  • Business Unit Lead
  • Human Resources
  • Legal
  • Audit Committee (Qtrly. Meeting)

What Action Do Most Businesses Take After
Discovering a Fraud?
  1. Pursue No Legal Action
  2. Pursue Civil or Administrative Remedies
  3. Pursue Criminal Remedies

Step 5 - Remediation
  • The auditor can play multiple roles during the
    remediation stage including but not limited to
    the following
  • Root cause analysis
  • Future Fraud Prevention
  • Recovery of assets
  • Liaison with law enforcement

Activities Fundamental to Fraud Prevention?
Spending Fraud Dollars
  • Fraud prevention..Highest return
  • Fraud detection.Important to be proactive
  • Fraud InvestigationMost expensive and lowest
  • Prosecuting fraud..In the end, only

  • Be Proactive
  • Never Disregard the Obvious
  • Take Action quickly to Stop Fraudulent Activities
  • Conduct thorough Audits/Investigations
  • Dont limit the scope of your activities
  • Take Affirmative Action
  • Publicize the Findings and Action Taken