Fraud

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Fraud

• How to conduct an Investigation

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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

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Fraud-Just a Myth
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Fraud is Universal
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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

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Fraud Personal Experience

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

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How Does Fraud Occur?

• Poor internal controls
• Lack of proper authorization
• No separation of authorization, custody, record
  keeping
• 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

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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

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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

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People who commit fraud!

• Look exactly like us
• Normal Citizens
• Fraud Perpetrators
• Bank Robbers

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Who Are The White-collar Criminals?

• Employees
• Managers
• Colleagues
• Friends
• Suppliers/Customers
• Contractors
• Neighbors

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Why do good people go bad?

• Financial Needs
• Revenge
• Child Support/Alimony
• Drugs
• Power
• Significant Personnel Event

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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

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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

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INTERNAL AUDIT

• Investigation Role

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Fraud Skills

• Accounting and Auditing
• Investigation
• Law
• Criminology

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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

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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
  tolerated.

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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
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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
Humiliation
Lost Assets
Taxes Restitution Payments
Lost Time
Negative Publicity
Legal Fees
Embarassment
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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
   Yourself
4. Keep Those Who Need to Know Informed

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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

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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

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Stages of Fraud Investigation

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

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Step One Preliminary Evaluation /Determine
Predication

• 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

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Step Two Assemble Team

• The greatest asset to the auditor is the team he
  or she assembles to assist with the
  investigation.
• 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
  staff.

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Fraud Response Team

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

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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.

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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
  documentation

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Evidence
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
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EVIDENCE

• Original documents retained
• Maintain a log
• Secure Log

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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

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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

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Key Focus

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

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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.

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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.

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Report Distribution

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

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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

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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

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Activities Fundamental to Fraud Prevention?
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Spending Fraud Dollars

• Fraud prevention..Highest return
• Fraud detection.Important to be proactive
• Fraud InvestigationMost expensive and lowest
  return
• Prosecuting fraud..In the end, only

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Summary

• 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

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QUESTIONS