Fraud Risk Management and Investigation techniques

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The few slides explores the subject of fraud and provide ba


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Fraud Investigation:

Fraud Investigation Tips and Techniques Compiled by: Sako Mayrick Elsam Management Consultants (EMAC) EMAC 1

What is fraud?:

What is fraud? Fraud are all multifarious means which human ingenuity can devise, and which are resorted to be by one individual to get an advantage over the other by false suggestions or suppression of the truth, and includes all surprise, trick, cunning or dissembling, and any unfair way by which another is cheated (Black Law Dictionary) Fraud is any illegal acts characterized by deceit, concealment, or violation of trust. These acts are not dependent upon the application to obtain money, property, or services; to avoid payments or loss of services; or to secure personal or business advantage ( IAA) Elements to fraud: A false representation or willful omission regarding material fact The fraudster knew the representation was false The target relied on this misappropriation The victim suffered damages or incurred a loss EMAC 2

Fraud and Forensic Accounting :

Fraud and Forensic Accounting Forensic accounting focuses on the past, although it may do so in order to look forward ( e.g. damages) The purpose of forensic accounting is performed for a specific legal forum or in anticipation of presentation before a legal forum Finding fraud is like using a metal detector at a city dump to find rare coins. You're e going to have a lot of false hits” Fraud can best be prevented by good people asking the right questions at the right time. EMAC 3

Fraud detection:

Fraud detection Finding fraud is like trying to load frogs on a wheelbarrow Finding fraud is like trying to head cats and chickens. There is a chicken catching machine but there is no perfect fraud catching machine To be a good fraud auditor, you have to be a good detective EMAC 4

Forensic Accounting Areas:

Forensic Accounting Areas Investigative Auditing Litigation support Forensic is a Latin word for FORUM referring to a public place or court Forensic Auditor is someone who can look behind the façade- not accept the records at their face value – someone who has a suspicious mind that the documents he or she is looking at may not be what they purport to be and someone who has the expertise to go out and conduct very detailed interviews of individuals to develop the truth especially if some are presumed to be laying. EMAC 5

Types of fraud:

Types of fraud Types of fraud Corruptions (e.g. kickbacks) Conflict of interest (e.g. part-time work) Theft of assets False reporting or falsifying performance (e.g. false accounts, manipulating financial results) Technological abuse Fraud can happen to anyone at anytime (Comer’s Rule) Most common way of detecting occupational fraud is by tips from employees, customers, vendors, or anonymous sources The most common detection is accident Most targeted asset is cash EMAC 6

Types of fraud:

Types of fraud Asset misappropriation accounted for more than four out of five offenses (80%) Bribery and corruption constitute about 13% of offenses Fraudulent statements were smallest category of offense (most costly ) Fraud Schemes are much like derivate. They spring up, die out and new ones are started each week EMAC 7

Types of Fraud:

Types of Fraud EMAC 8 Internal Fraud External Employee Management Check Forgery Stock theft Misappropriation of cash/assets Lapping Check forgery Expense account Petty cash Kickbacks Loans/investments Lapping Expense accounts False financial statements Misappropriation of cash/assets Unnecessary purchase Check forgery Kickbacks Ghost vendors Diversion of sales False insurance claims Credit card fraud False invoices Product substitution Bribes/secret commission Bid rigging/price fixing False representation of funds Shoplifting

How to prevent fraud:

How to prevent fraud Improve the tone at the top (e.g. a fish rots from the top). Robust Codes of Conduct. Training on Ethics/Internal Controls Holistic approach to Risk Assessment / Internal Controls Fraud Hotlines Control Self –Assessment Control repositories EMAC 9

Measures helpful in Preventing Fraud:

Measures helpful in Preventing Fraud Strong Internal Controls Background checks of new employees Regular fraud audit Established fraud policies Willingness of companies to prosecute Ethical training for employees Anonymous fraud reporting mechanism Workplace surveillance The arrangement is by order of effectiveness EMAC 10

Fraud Prevention techniques:

Fraud Prevention techniques Fraud Hotline (reduce fraud losses by 50%) Suggestion boxes Make every one take vocations People at the top must set ethical tone Widely known code of conduct Check those employees references Reconcile all bank statements Count the cash twice in the same day Unannounced inventory counts Fraud risk assessment EMAC 11

Fraud Prevention techniques:

Fraud Prevention techniques Check employees references/resume Stop giving the employee/client the answer when you ask a question Zero tolerance for allowing employees/executive to get away with anything Always reconcile the bank statements Try to thing like a criminal Get inside the criminal’s mind. Be a detective Do not assume you have honest employees Bond employees EMAC 12

How to detect fraud:

How to detect fraud Tips from employees (26%) By accident (18%) Internal audit (18%) Internal controls (15%) External audits (11%) Tips from customers (8%) Anonymous tips (6.2%) Tips from vendors (5%) i.e. 46% of fraud detection are from tips EMAC 13

Types of Misappropriations:

Types of Misappropriations Embezzlement Cash and check schemes Larceny of cash Skimming Swapping checks for cash Check tampering Kiting Credit card refund and cancellation schemes Accounts receivable fraud Lapping Fictitious receivables Borrowing against accounts receivable EMAC 14 Inventory fraud Stealing inventory Short shipments with full prices Fictitious disbursements Doctored sales figures Sham payments Price manipulations: land flipping, pump and dump, and cyber smearing Money laundering Bid rigging

Who is a fraudster?:

Who is a fraudster? According to Kessler Survey 2001 13% of employees are fundamentally dishonest Employees out-steal shoplifters About 21% of employees are honest But 66% are encouraged to still if they see others doing it without repercussion Given the right pressures, opportunities, and rationalizations, many employees are capable of committing fraud. Fraudsters are nicest people in the world EMAC 15

Fraud Triangle:

Fraud Triangle EMAC 16 Incentives / pressures Attitude / Rationalization Opportunity

Fraud Triangle:

Fraud Triangle Motive Excessive spending to keep up appearances of wealth. Other, outside business financial strains. An illicit romantic relationship. Alcohol, drug or gambling abuse problems. Opportunity Lack of internal controls. Perception of detection = proactive preventative measure. Rationalization “Borrowing” money temporarily. Justifying the theft out of a sense of being underpaid .(“I was only taking what was mine”) Depersonalizing the victim of the theft. (I wasn’t stealing from my boss; I was stealing from the company.”) EMAC 17

Fraud Auditing:

Fraud Auditing Fraud Auditor is a professional especially skilled in auditing who is generally engaged in auditing with a view toward fraud discovery, documentation and prevention. Economic crimes and fraud often do not involve obvious evidence like the smoking gun. Forensic accountant look behind the deals and handshakes and probe beyond the numbers to uncover the reality of financial situation” It’s hard to predict, but everyone agrees there’s plenty of it.” The game is afoot (Sherlock Holmes) EMAC 18

Qualities of Fraud investigator:

Qualities of Fraud investigator EMAC 19 LAW Investigative auditing Accounting Criminology Forensic Investigator

Difference between Auditing and Forensic Examination:

Difference between Auditing and Forensic Examination EMAC 20 Issue Audit Forensic Examination Timing Recurring: audits are conducted on a regular basis Nonrecurring: fraud examinations are nonrecurring. They are conducted only with sufficient predication. Scope General: collection of sufficient, competent data to support the opinion rendered. Specific: the fraud examination is conducted to resolve specific allegations. Objective Opinion: express opinion on financial statements Affix blame: determine if fraud occurred and who is responsible. Adversarial in nature. Methodology Audit techniques applied primarily to financial data. Fraud examination techniques include document examination, public record searches, and interviews. Presumption Professional skepticism Proof to support or refute an allegation of fraud.

Fraud Investigation Techniques:

Fraud Investigation Techniques Public document review and background investigation (non-financial documents) Interview knowledgeable persons Confidential sources Laboratory analysis of physical and electronic evidence Physical and electronic surveillance Undercover operations Analysis of financial transactions EMAC 21

Fraud investigation techniques:

Fraud investigation techniques Public Document review Real and personal property records Corporate partnership records Civil and criminal records Stock trading activities Laboratory analysis Analyzing fingerprints Forged signatures Fictitious or altered documents Mirror imaging or copying hard drives/company servers Use clear cellophane bags for paper documents EMAC 22

Forensic Experts:

Forensic Experts Rather than combing torn clothing, forensic experts comb through corporate books, looking for oddities that could signal swindles” Investigations can be extremely complex, with crates and crates of documents and thousands of computer files. Investigators look for flags or patterns that would not normally occur EMAC 23

Forensic Expert:

Forensic Expert EMAC 24 Covert Aspects Attitudes Feelings (Fear, Anger, etc.) Values Norms Interaction Supportiveness Satisfaction Overt Aspects Hierarchy Financial Resources Goals of the Organization Skills and Abilities of Personnel Technological State Performance Measurement Behavioral Considerations Water line Structural Considerations The Iceberg Theory of Fraud Source: G.J. Bologna and R.J. Lindquist, Fraud Auditing and Forensic Accounting , 2 nd Edition, New York: John Wiley, 1995, pp. 36-37

Fraud Investigation:

Fraud Investigation End of Part I Check out part II at Trust, but verify (Ronald Reagan) Trust no one; question everything, verify” EMAC 25


References D.L.Crumbley , E.E. Heltger , G.S.Smith , Forensic and Investigative Accounting Journal of Forensic Accounting G.J. Bologna and R.J. Lindquist, Fraud Auditing and Forensic Accounting , 2 nd Edition, New York: John Wiley, Stephen Doherty, “How Can Workplace Violence Be Deterred,” Security Management , April 2002, p. 134 Jack C. Robertson, Fraud Examination for Managers and Auditors , Austin, TX: Viesca Books, 2000, pp. 213-216 Mimi Swartz and Sherron Watkins, Power Failure , New York: Doubleday, 2003, p. 269 C.R. Lundelius , Financial Reporting Fraud , AICPA, 2003, p. 129 D.L. Crumbley , J.J. O’Shaughnessy, and D.E. Ziegenfuss , 2002 U.S. Master Auditing Guide , Chicago: Commerce Clearing House, 2002, p. 592. EMAC 26

Types of forensic organizations:

Types of forensic organizations American College of Forensic Examiners (2750 E. Sunshine, Springfield, MO 65804; 800-423-9737; . DABFA and Cr.FA ; 2000) Certified Fraud Examiners (Association of CFEs, The Gregor Bldg., 716 West Avenue Austin, TX 78701; 800-245-3321; ). Forensic Accounting Society Of North America (FASNA, 8712 W. Dodge Road, Suite 200, Omaha, NE, 68114; 402-397-9433). Certified Forensic Financial Analyst (NACVA, Salt Lake City, Utah 84106; 801-486-0600). Also, Certified Fraud Deterrence (CFD) analyst. National Litigation Support Services Association (NLSSA, III East Wacker Drive, Suite 990, Chicago, IL 60601; 800-869-0491). Not-for-profit. Network of Independent Forensic Accountants ( ). English group of 16 specialist accounting practices. Canadian Institute of Chartered Accountants (CICA) – CA.IFA – Alliance for Excellence in Investigative Accounting. Certified Forensic Investigator (CFI) – Canada Early 1980’s. Certified Fraud Specialist (CFS), not-for-profit, educational anti-fraud corporation located in Sacramento, Calif., for those dealing in white-collar crime, fraud, and abuse issues. Association of Certified Fraud Specialists. EMAC 27

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