Fraud Investigations: Best First-Response Strategies
The initial response to a fraud allegation against your organization is the most important step in the investigation process. Unless the investigator properly assesses the allegation, an investigation may never take place, allowing the fraudster to go undetected.
Critical investigative goal: Quick assessment of complex fraud indicators and providing sufficient information to assist management in making the right decision to move forward.
HOW TO USE TIPS
According to the Association of Certified Fraud Examiners’ 2008 Report to the Nation on Occupational Fraud & Abuse, fraud is discovered by a “tip” nearly half of the time, with the majority coming from employees. Essential:
• Resist overreacting. Fraud investigators must understand that allegations of fraud and other forms of misconduct come as a shock to management. As the victimization of fraud setsin, the shock often turns to disbelief, panic and alarm.
Trap: Allowing this disbelief to press too hard and too fast for confirmation of the suspicions. This often alerts the criminals to the detection of their misdeeds, leading them to destroy potentially valuable evidence.
•Avoid making spontaneous allegations which are often inaccurate and reckless. Sometimes, managers even convene meetings with confidants who are later identified as accomplices in the scheme. In other cases, bosses may fire the fraudster before gathering vital information through interrogation.
• Make all efforts to investigate. Management may believe that doing nothing is better than doing anything. This results in the offender(s) getting away with their crimes and sends the message that crime pays.
Better: A four-phase Plan of Action for responding to tips about potential fraud:
• Pre-investigation
• Investigation planning
• Investigation
• Post-investigation.
Caution: Just because someone has a degree or special certification (i.e. CPA, CFE, CIA) does not mean that they are ready to conduct a fraud investigation. Instead, fraud investigators should “know what they know and know what they don’t,” before undertaking a fraud assignment.
PHASE 1: PRE-INVESTIGATION
When providing information, tipsters often supply the name of the fraudster and the fraud type, leaving the investigator to determine the “how” and “why.”
Sometimes the information reveals what is occurring, and the investigator must determine “who” and “how.” Either way, the pre-investigation is the starting point and should focus on proving or disproving the allegation. Critical investigative guideline:
“To prove that a fraud has occurred, one must endeavor to prove it has not; and to prove it has not occurred, one must endeavor to prove that it has.” If the fraudster is still employed, the process should be conducted covertly under the auspices of a management review or other non-threatening business practice. The pre-investigation process must develop an understanding of the suspect’s position and the opportunities that may exist for him or her to commit fraud. The process should also focus on identifying the symptoms of fraud surrounding the allegation. Examples:
• Document irregularities. Look for missing, altered or photocopied documents…errors involving duplicate payments…invoice sequences that are not logical…excessive voids or credits… aging receivables or payables…and bank reconciliations that contain old or increasing items, to name a few.
• Other accounting anomalies such as inaccuracies in the organization’s journals and ledgers…increased scrap claims when production is on a decline…paying excessive rates to vendors with little or no documentation… unusually numerous debit or credit memos…over-rings or voids.
Critical: These symptoms must be documented and secured. More than half of all fraud investigations fail because essential documentation was not obtained at the first instance.
Important: Once evidence is discovered in support of the allegation, “predication” exists. Predication refers to circumstances which, when taken as a whole, lead a reasonable, prudent professional to believe that a fraud has occurred, is occurring or will occur.
PHASE 2: SHREWD PLANNING
With initial evidence supporting the allegation of fraud in hand and an on-site evaluation of the business unit having been conducted, the investigator should be able to make informed planning decisions, designed to establish proof that a fraud has occurred. In designing the plan, focus should be centered on proving three fraud elements:
• Theft of cash or other assets including tangible inventory or information.
• Concealment—most commonly manifested in “cooking the books,” which is where the fraudster falsely records financial information in order to eliminate the “paper trail.”
• Conversion—exchanging stolen assets for cash. Among other methods, this can be done by selling the assets, taking inventory or cashing checks.
Important: Explain the investigation plan to management and provide an estimate of how long it will take to execute, at what cost and the chances of recovering stolen assets.
Reason: Management will almost certainly have goals and objectives for the probe. If these are known in advance, they should be included in the plan to allow the investigation to move forward efficiently.
PHASE 3: INVESTIGATION
Helpful: Most fraud investigations require the cooperative effort of a multi-disciplinary team which may include fraud examiners, accountants, professional investigators, attorneys and others including the personnel department and operations team. Some of these specialists may work directly for the organization, while others may be outside contractors.
Key: If the suspect is still in position, keeping the investigation covert is essential. Investigators should work rapidly to obtain evidence as long as the suspect is unaware that he or she is a suspect.
PHASE 4: POST INVESTIGATION
The investigator should assess the evidence at every stage of the investigation, but once the process is complete, it is time to document the findings. If the evidence supports the allegations, organizations have many options ranging from doing nothing, to dismissal of the suspect or perpetrator to filing a commercial crime insurance claim, civil litigation and/or criminal referral. The fraud investigator should assist management in understanding what is involved in each process. Regardless of the decision, the primary purpose of documenting the findings is to report the facts. The report should be a true and accurate record of what has been learned; discussed in a brief, objective and neutral manner.
Most reports include the following areas: Introduction, summary of the investigation, allegations, relevant policies or procedures, chronology/timeline, key factual findings, conclusions and recommendations (depending on the purpose of the report) and exhibits.
White-Collar Crime Fighter source:
R. A. (Andy) Wilson, CFE, CPP, co-founder and Managing Director of Wilson & Turner Incorporated, an investigative consulting firm in Memphis, TN. Andy specializes in the prevention, identification, investigation and resolution of employee crime. In addition to his anti-fraud practice, he serves on the adjunct faculty at The University of Memphis and Utica College, where he teaches fraud examination classes at the undergraduate and graduate levels. He can be reached at raw@wilson-turner.com.
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