Conference paper 1 st national forensic conference, yaounde. [compatibility mode]

1ST NATIONAL FORENSIC CONFERENCE,

YAOUNDE, CAMEROON

Richard Mayungbe, PhD, MBA, FICCA, FICA, CPFA, ACFE, MICM,

MIPN, Ch.MC, MITDMIPN, Ch.MC, MITD

Global Financial and Management Trainer, Forensic

Accountant, Fraud Fighter, Consultant and Author

Tel: +23772585428, +234 8033467639,

www.richardmayungbe.blogspot.com

Skype: tsiltd.tsiltd

1

CONTENTS

• DAY 1

• Definition of fraud, How Fraud Occurs, Various Fraud

Schemes and targets.

• Psychology of fraud: what motivates the fraudster

• DAY 2• DAY 2

• Interviewing for Fraud in the Audit Process

• DAY 3

• Fraud Investigation

• Interviewing

• Free discussion on all the topics, question and answer etc

2

DEFINITION OF FRAUD, HOW FRAUD OCCURS,

VARIOUS FRAUD SCHEMES AND TARGETS

• It is a great pleasure to welcome all delegates

to this brain storming conference aimed at

pulling our collective wisdom together in pulling our collective wisdom together in

finding effective solutions to one of Africa’s

nagging problems, “Fraud and Corruption”

• For the next 3 days, we shall be here together

on this matter.

3

Definition of Fraud

• There is no single accepted definition of fraud.

• It is impossible to provide a comprehensive definition of fraud.

• Indeed, it may be possible to distinguish between two general types of definition:

• Indeed, it may be possible to distinguish between two general types of definition:

• a general broader one and

• a criminal narrower one.

• However, all definitions have one thing in common - an element of dishonesty or deceit.

4

Definition of fraud.. (contd.)

• There are many dictionary definitions of the word 'fraud' each is similar but not exactly the same.

• Expressions such as:

• Unfair advantage by unlawful or unfair means;• Unfair advantage by unlawful or unfair means;

• Knowingly making a false representation;

• Intentional deception resulting in injury to another person;

• Something intended to deceive; deliberate trickery intended to gain an advantage;

5


• An intentional perversion of truth; deceitful

practice or device resorted to with intent to

deprive another of property or other right;

• The intentional and successful employment of • The intentional and successful employment of

cunning, deception, collusion; or artifice used

to cheat or deceive another person whereby

that person acts upon it to the loss of his

property and to his legal injury;

6


• The act of leading a person to believe

something which you know to be false in a

situation where you know the person will rely

on that thing to their detriment;on that thing to their detriment;

• A deception, intended to wrongfully obtain

money or property from the reliance of

another on the deceptive statements or acts,

believing them to be true;

7


• The intentional perversion of the truth in

order to mislead someone into parting with

something of value

• The specific legal definition varies by legal • The specific legal definition varies by legal

jurisdiction, but fraud is a crime, and is also

a civil law violation.

8


• From the point of view of the criminal law,

fraud could be defined as criminal deception,

being the use of false representations to

obtain unfair advantage or to harm the obtain unfair advantage or to harm the

interests of another.

9


• To deceive is to induce someone to believe

that a thing is true which is false, and which

the person practicing the deceit knows or

believes to be false.believes to be false.

• To defraud is to deprive by deceit:

• It is by deceit to induce someone to act to his

injury.

10

Nine elements of fraud

• a representation of an existing fact;

• its materiality;

• its falsity;

• the speaker's knowledge of its falsity;• the speaker's knowledge of its falsity;

• the speaker's intent that it shall be acted upon by the

plaintiff;

• plaintiff's ignorance of its falsity;

• plaintiff's reliance on the truth of the representation;

• plaintiff's right to rely upon it; and

• consequent damages suffered by plaintiff11

How Fraud Occurs

• Fraud, like other crimes, can best be explained

by three factors:

• 1) A supply of motivated offenders;

• 2) The availability of suitable targets; • 2) The availability of suitable targets;

• 3) The absence of capable guardians or a

control system.

12

How Fraud Occurs

• When economic climate declines, it is likely to

raise the risk of fraud.

• As individuals and companies suffer

financially, more people may be tempted to financially, more people may be tempted to

cross the line of legality and engage in fraud to

maintain the lifestyles they had enjoyed

during better times.

13

How Fraud Occurs

• stagnant earnings,

• no bonuses,

• stiff competition,

• irresponsive governments, • irresponsive governments,

• the possibility of job losses –

• all of these, and more, increase the likelihood

of an individual and even organisations to

commit fraud.

14

How fraud Occurs

• Smaller business are overall more susceptible

because they generally don’t have as many

people in place to separate job functions and

put controls in place. put controls in place.

• The culture is usually open and trusting.

15

Some of the Ways Occupational Fraud Occurs

• Skimming cash receipts

• Falsifying expense reports

• Forging or tampering with company checks

• Falsifying pay roll records• Falsifying pay roll records

• Falsifying bills and invoices

16

Some of the Ways Occupational Fraud Occurs

• Stealing cash –Larceny

• Stealing other physical assets

• Stealing intellectual assets and information

• Corruption• Corruption

• Financial statement fraud

17

Various Fraud Schemes and Targets

• Fraud is as numerous as the languages under

the sun!

• Let us compile the most popular ones taking

our source from the Association of Certified our source from the Association of Certified

Fraud Examiners 2012 Global Fraud Study

18

Occupational Fraud

• This type of fraud falls into 3 categories:

• Asset misappropriation schemes, in which an

employee steals or misuses the organization’s

resources (e.g., theft of company cash, false resources (e.g., theft of company cash, false

billing schemes or inflated expense reports)

The targets here are the employers, private or

public.

19

Occupational Fraud

• Corruption schemes, in which an employee

misuses his or her influence in a business

transaction in a way that violates his or her

duty to the employer in order to gain a direct duty to the employer in order to gain a direct

or indirect benefit (e.g., schemes involving

bribery or conflicts of interest) The targets are

internal and external clients of the

organization

20

Occupational Fraud

• Financial statement fraud schemes, in which

an employee intentionally causes a

misstatement or omission of material

information in the organization’s financial information in the organization’s financial

reports (e.g., recording fictitious revenues,

understating reported expenses or artificially

inflating reported assets) The targets are

shareholders, the investing public, banks and

financial institutions, suppliers, customers,

inland revenue, and many other stakeholders.21

BANK FRAUDS

• Bank and banking related fraud can occur in

many ways from cheque fraud to credit

card fraud.

• Cheque Fraud is responsible for the loss of • Cheque Fraud is responsible for the loss of

about $815 million yearly, which is nearly 12

times the amount robbed from banks each

year

22

Bank fraud

• Many types of cheque scams exist and

include:

• Forged Signatures – involves forging a

signature on legitimate blank checksignature on legitimate blank check

• Forged Endorsement – includes endorsing and

cashing or depositing a stolen check

• Counterfeit Checks – is on the rise with the

advancement in color copying and desktop

publishing23

Bank fraud

• Altered Checks – where a person changes the name

of the payee or dollar amount on a legitimate check

• Uninsured Deposits: occurs when illegitimate

companies persuade customers with high rates of companies persuade customers with high rates of

interest or offshore secrecy to avoid paying taxes.

These companies are not monitored or authorized by

any federal bank or financial institution, meaning

depositors do not receive protection or insurance on

their investments from any state or federal

institution

24

Bank fraud

• Credit Card Fraud: is a common type of fraud that

affects millions each year.

• Statistics show that credit card causes $500 million

in damages to card companies and credit card in damages to card companies and credit card

holders.

• And, if you suspect that you’re a target of credit

fraud contact your bank or credit card

company immediately to disable your card.

25

Bank fraud

• Falsification of Loan Applications: also known

as Loan Fraud.

• It occurs when a person produces false

information to qualify for a loan, such as a information to qualify for a loan, such as a

mortgage for their house.

• Sometimes, loan officers may be in on the

fraud.

26

Bank fraud

• Stolen Checks

Some fraudsters obtain access to facilities handling large

amounts of checks, such as a mailroom or post office or the

offices of a tax authority (receiving many checks) or a

corporate payroll or a social or veterans' benefit office (issuing corporate payroll or a social or veterans' benefit office (issuing

many checks). A few checks go missing; accounts are then

opened under assumed names and the checks (often

tampered or altered in some way) deposited so that the

money can then be withdrawn by thieves. Stolen blank

checkbooks are also of value to forgers who then sign as if

they were the depositor

27

Bank fraud

• Demand draft fraud

• Demand draft fraud is usually done by one or more

dishonest bank employees. They remove few DD

leaves or DD books from stock and write them like a leaves or DD books from stock and write them like a

regular DD.

• Since they are insiders, they know the coding,

punching of a demand draft. These Demand drafts

will be issued payable at distant town/city without

debiting an account. Then it will be cashed at the

payable branch.

• For the paying branch it is just another DD. 28

Bank fraud

• Rogue traders

• Fraudulent loans

• Forged or fraudulent documents

• Bill discounting fraud• Bill discounting fraud

• Booster cheques

• Prime bank fraud

29

Identity Fraud

• Identity theft occurs when someone uses your

personally identifying information (like your

name, social security number, or credit card

information) to pretend to be you.information) to pretend to be you.

• The identity thief does this for his own

personal gain at the expense of his victim

30

Identity fraud…contd.

An identity thief may use your information to:

• Open a new credit card, phone, or utilities

account in your name and then run up the

bills without paying them. The delinquent bills without paying them. The delinquent

account then appears on your credit report.

• Open a bank account and write bad cheques

in your name, apply for a loan in your name,

or use your bank information to drain your

account.

31


• File a fraudulent tax return, or apply for

government benefits in your name.

• Get a driver's license with your information

but his own picture on it.but his own picture on it.

• Give your personal information to police

during an arrest. Then when he does not show

up for the court date, a warrant of arrest is

issued in your name

32


• There are a number of methods a skilled

identity thief may use to steal your

information. These include:

• Shoulder Surfing: watching you from a nearby • Shoulder Surfing: watching you from a nearby

location as you punch in your pin codes or

listening as you give someone else your

personal information over the phone

33


• Dumpster Diving: rummaging through your trash to

find bills or other documents with your name and

personal information on them

• Stealing: stealing mail (including bills, credit card Stealing: stealing mail (including bills, credit card

statements, credit card offers, and tax information),

or even stealing wallets and purses to gain access to

documents with your personal information on them

• Bribing: bribing employees (such as government,

bank, or credit card company employees) who have

access to your personal information

34


• Pretexting: using false pretenses to obtain your

personal information from banks, phone, credit

companies, and other companies

• Skimming: using a special storage device to scan and Skimming: using a special storage device to scan and

remember your credit and debit card numbers when

you use your cards

• Phishing: pretending to be a financial institution or

other company (like a lotto company) and sending

you spam or pop-up advertisements to persuade you

to reveal your personal information

35


• Changing your address: completing a change

of address form to divert your billing

statements and other mail to another location

where this information is easily accessiblewhere this information is easily accessible

36

warning signals

• The following is a list of warning signals

indicating that you may be a victim of identity

theft:

• Your credit card statement includes purchases • Your credit card statement includes purchases

you didn't make or your bank statement

includes withdrawals you didn’t make

• You receive a credit card that you did not

apply for

• You are denied credit or offered less favorable

credit than your past spending deserves 37

warning signals

• You get a denial of credit that you didn't apply

for

• You receive credit card or bank statements in

your name but you do not hold the account your name but you do not hold the account

they're billing you for

• You no longer receive credit card, bank, or

utilities statements.

• You applied for a credit card or bank account

but you are not getting a card or statements38

warning signals

• You notice some of your mail is missing

• You receive notice of a mail redirection request you didn't

make

• You receive bills from companies you don't recognize

• There are credit cards or loans that you didn't open listed on • There are credit cards or loans that you didn't open listed on

your credit history

• Your credit report reveals inquiries from companies you never

dealt with

• Debt collection companies try to collect debts that aren't

yours

• You are arrested for a crime you didn't commit

39

COMPUTER FRAUDS

• Computer fraud is the use of information technology

to commit fraud

• Types of computer fraud vary and can be complex or

simple. Simple types of fraud might include:simple. Simple types of fraud might include:

• Sending hoax emails intended to scare people.

• Illegally using someone else’s computer or “posing”

as someone else on the Internet.

• Using spyware to gather information about people.

40

Computer frauds

• Emails requesting money in return for “small

deposits.”

• Pyramid schemes or investment schemes via

computer with the intent to take and use someone computer with the intent to take and use someone

else’s money.

• Emails attempting to gather personal information to

be used to access and use credit cards or social

security numbers.

• Using someone else’s computer to access personal

information with the intent to use such fraudulently

41

Computer frauds

• Using the computer to solicit minors into

sexual alliances.

• Violating copyright laws by copying

information with the intent to sell information with the intent to sell

information, like DVDs, CDs.

• Hacking into computer systems to gather large

amounts of information for illegal purposes.

• Hacking into or illegally using a computer to

change information, such as grades, work

reports, etc. 42

Computer frauds

• Sending computer viruses or worms with the

intent to destroy or ruin someone else’s

computer.

• Even though there are stiff penalties for • Even though there are stiff penalties for

committing computer fraud, laws governing

against it may be difficult to enforce.

43

Computer frauds

• Do not give personal information to anyone or

to any company you’ve never heard of before.

This includes your full name, your address,

your phone number, credit card number, your phone number, credit card number,

social security numbers, or information about

the people in your household.

• Do not pay attention to get rich quick

schemes. If they seem too good to be true,

they absolutely are

44

Computer frauds

• Do not open emails from strangers. Install anti-viral

software and spam blocking programs on your

computer and your email program.

• Don’t download attachments from people you don’t Don’t download attachments from people you don’t

know.

• Teach your children about safe communication on

the Internet to protect them from Internet predators.

• Don’t keep passwords on your computer, and do not

use common passwords like the names of your kids,

birthdays, or other guessable words. Never give your

password to someone else.45

Corruption in Public Procurement

• Corruption is defined by the World Bank and

Transparency International (TI) as “the misuse

of public office for private gain.” As such, it

involves the improper and unlawful behavior involves the improper and unlawful behavior

of public-service officials, both politicians and

civil servants, whose positions create

opportunities for the diversion of money and

assets from government to themselves and

their accomplices

46

Supply and Demand of Corruption

• There are two widely-acknowledged

dimensions of corruption—supply and

demand-side.

• Supply- side is the private sector that gifts or • Supply- side is the private sector that gifts or

bribes the government officials who, in turn,

constitutes the demand-side or the receivers

47


• Over the past two decades, anti-corruption

measures have targeted only the demand-side

either by limiting the government officials’

vulnerability to bribes or in-kind gifts through vulnerability to bribes or in-kind gifts through

enactment of laws or by empowering the

people through advocacy against the demand-

side corruption.

48


• legal measures against the demand-side

corruption are important in their own right,

• we have often ignored the role of the private

sector as a supplier of corrupt payments and a sector as a supplier of corrupt payments and a

vulnerable sector for corruption itself

49

Who Corrupts

• Previously, the private sector believed that

corruption exists because the government officials

are corrupt and did not consider itself as encouraging

corruption.

• Over the years, the private sector has been

established as an equal participant in corruption

transaction, and efforts to limit its ability and

vulnerability to engage in corruption are therefore,

equally and urgently needed

50

Who Corrupts

• As corruption takes place at the interface of

the public and private sector, bringing one into

the legal net and leaving out the other has

made our anti-corruption fight one-sided. made our anti-corruption fight one-sided.

• We have seen many corporate corruption

scandals over the years. But, a few of them

have come under the judicial hammer

51

Who Corrupts

• And in most of these cases, supply-side is

hardly or inadequately penalized for the

offence due to lack of a concrete policy.

• Taking into account the rapidly changing • Taking into account the rapidly changing

forms of corruption, we need to address the

corruption in and by the private sector as

seriously as in the public sector by widening

the legal nets to tackle the menace

52

Who Corrupts

• Corruption has become so rampant that we now

need to review the existing laws to prosecute even

the bribers and the corporate corruption

• Africa is no exception to this phenomenon as Africa is no exception to this phenomenon as

majority of the anti-corruption interventions

worldwide have focused on the demand-side only.

• Though the supply-side doesn’t adequately figure in

anti-corruption discourse, it has now become

imperative to address this almost ignored dimension

by mainstreaming it in governance policies and laws

53

What causes and fuels corruption

• Corruption distorts resource allocation and government

performance. The causes are many and vary from one country

to the next. Among the contributing factors are:

• Policies, programs and activities that are poorly conceived and

managed,managed,

• Failing institutions,

• Poverty and Deprivation

• Income disparities,

• Inadequate civil servants’ remuneration,

• Lack of accountability and transparency.

• Political and or Economic Brigandage

54

EXAMPLES OF CORRUPTION AT VARIOUS STAGES OF

PROCUREMENT

• Pre-qualification and tender

• 1. Loser’s fee

• 2. Price fixing

• 3. Manipulation of pre-qualification• 3. Manipulation of pre-qualification

• 4. Bribery to obtain main contract award

• 5. Bribery during sub-contract procurement

• 6. Corruptly negotiated contract

55


PROCUREMENT

• 7. Manipulation of design

• 8. Specification of overly sophisticated design

• 9. Inflation of resources and time

requirementsrequirements

• 10. Obtaining a quotation only for price

comparison

• 11. Concealment of financial status

56


PROCUREMENT

• 12. Intention to withhold payment

• 13. Submission of false quotation

• 14. Falsely obtaining export credit insurance

57


PROCUREMENT

• Project execution

• 15. False invoicing: supply of inferior materials

• 16. False invoicing: supply of less equipment

• 17. False work certificates• 17. False work certificates

• 18. Excessive repair work

• 19. Overstating man-day requirements

• 20. Inflated claim for variation (1)

• 21. Inflated claim for variation (2)

58


PROCUREMENT

• . False variation claim

• 23. Issue of false delay certificate

• 24. False extension of time application

• 25. False assurance that payment will be made• 25. False assurance that payment will be made

• 26. Delayed issue of payment certificates

• 27. Concealing defects (1)

• 28. Concealing defects (2

59


PROCUREMENT

• 29. Set-off of false rectification costs

• 30. Refusal to issue final certificate

• 31. Requirement to accept lower payment

than is duethan is due

• 32. Extortion by client’s representative

• 33. Facilitation payment

• 34. Overstating of profits

• 35. False job application

60


PROCUREMENT

• Dispute resolution

• 36. Submission of incorrect contract claims

• 37. Concealment of documents

• 38. Submission of false supporting documents• 38. Submission of false supporting documents

• 39. Supply of false witness evidence

• 40. Supply of false expert evidence

• 41. Bribery of witness

• 42. Blackmail of witness

61


PROCUREMENT

• 43. False information as to financial status

• 44. False statement as to settlement sum

• 45. Over-manning by law firm

• 46. Excessive billing by lawyer• 46. Excessive billing by lawyer

• 47. Complicity by lawyer

62

PSYCHOLOGY OF FRAUD: WHAT MOTIVATES THE FRAUDSTER

63

Pressure or Incentive

• Perceived need is often created by expensive

addictions such as substance abuse, sex addiction,

gambling addiction, and spending addiction.

• Typically, a person committing fraud has an incentive Typically, a person committing fraud has an incentive

or is under some sort of financial pressure.

• There may be an unexpected financial crisis in the

family or the individual may be living beyond her/his

means

64


The four 'Bs' of perceived need:

• Beer,

• Boobs,

• Betting, • Betting,

• Borrowing.

65


• Once begun, the fraud typically continues, and even

grows.

• The fraudster gains confidence and becomes

accustomed to the enhanced financial situation.accustomed to the enhanced financial situation.

• Many fraudsters initially tell themselves that the

scheme is only temporary.

• Once the current crisis (or after whatever drove the

perpetrator to hatch the scheme in the first place)

has passed, the illegal activity will stop

• The fraudster becomes confident and typically

enlarges the scam. 66

Rationalization

• Fraudsters must be able to rationalize their

schemes to themselves or embrace an

attitude that the fraud is somehow justified;

thus, rationalization or attitude is a factor thus, rationalization or attitude is a factor

typically found in a fraud situation

• People who commit fraud may be able to

convince themselves that the wrongdoing is

only temporary and will stop when the

financial crisis does

67

Rationalization

• People who commit fraud might feel that they

need the money more than the entity.

• Somehow, they are justified in taking the

money or goods or services.money or goods or services.

• They might believe that they deserve the

extra money, perhaps to right a perceived

injustice

68

Opportunity

• This is one area that companies have the

ability to control.

• Opportunity is the means to steal when there

is inadequate system of internal control and is inadequate system of internal control and

segregation of duties.

• where suitable controls are in place, the

individual may be able to override the system

69

OCCUPATIONAL FRAUD

• The term "occupational fraud and abuse" is

broadly defined as "the use of one's

occupation for personal enrichment through

the deliberate misuse or misapplication of the the deliberate misuse or misapplication of the

employing organization's resources or assets”

70

LARCENY

• Larceny, according to Black's Law Dictionary, is

"felonious stealing, taking and carrying, leading,

riding, or driving away with another person's

property, with the intent to convert it or to deprive

the owner thereof.the owner thereof.

• The key element in a larceny scheme is the fact that

there is no effort to cover up the theft.

• Unlike the skimming schemes, the cash has already

been recorded on the books.

71

SKIMMING

• "Skimming" is the embezzlement of cash from

an entity prior to its being recorded on the

books

72

DAY 3

• Welcome to the 3rd Day:

• Interviewing for Fraud in the Audit Process

• Fraud Investigation

• Interviewing Fraud Suspects• Interviewing Fraud Suspects

• Free discussion on all the topics, question and

answer

73

INTERVIEWING FOR FRAUD IN THE AUDIT PROCESS

WHAT THE STANDARDS SAY

• Statement of Auditing Standards (SAS) no. 1,

Responsibilities and Functions of the

Independent Auditor, says, “The auditor has Independent Auditor, says, “The auditor has

responsibility to plan and perform the audit to

obtain reasonable assurance about whether

the financial statements are free of material

misstatement, whether caused by error or

fraud.”

74

WHAT THE STANDARD SAYS

• SAS no. 99, Consideration of Fraud in a

Financial Statement Audit, reiterates that

concept and places a heavy emphasis on

making inquiries. Paragraphs 20 through 26 making inquiries. Paragraphs 20 through 26

enumerate those questions that Auditors

should ask management in checking for fraud

risk.

75

WHAT THE STANDARD SAYS

• Paragraph 27 is clear: “The auditor should be aware

when evaluating management’s responses to

inquiries…that management is often in the best

position to perpetrate fraud.”

• Indeed, therein lies the challenge: Some people in

positions of trust commit wrongdoing, and those

committing wrongful acts and fraud can—and do—

lie to auditors and/or managers/investigators.

76

Interviewing for fraud in the audit process

• Interviews are a useful audit tool to gather

information about internal controls and fraud

risks for several reasons.

• First, employees involved in the day-to-day • First, employees involved in the day-to-day

operations of a functional area possess the

best knowledge of that area.

• They are in an excellent position to identify

weak internal controls and fraud risks

77

Interviewing for fraud in the audit process

• Second, although most employees are not

directly involved in fraud, they may have

knowledge of suspected, or actual, frauds that

interviews can bring to light.interviews can bring to light.

• Third, employees may be reluctant to tell

management about needed internal controls

and suspected or actual fraud, even when a

company has an ethics hotline, a compliance

officer, or other reporting mechanisms.

78

The Information Needed In Audit Process

• A primary difference between SAS 82 and SAS

99, which superseded it, is that the latter

includes expanded requirements for inquiries

of management.of management.

• Making inquiries of management is important

because senior management is often in the

best position to perpetrate and conceal fraud.

79

Information

• In obtaining information necessary to identify

the risk of fraud in a financial statement audit,

SAS 99 requires auditors to ask the following

questions:questions:

• Does management communicate its views on

ethical business behavior to its employees?

• Does management have programs and

internal controls designed to prevent, deter,

and detect fraud?

80

Information ..contd.

• Does management discuss with the audit committee

of the board of directors how its internal control

system serves to prevent, detect, and deter fraud?

• Does management understand the fraud risks Does management understand the fraud risks

specific to its business?

• Does management monitor fraud risks relevant to

specific components or divisions within the entity?

• Does management have any knowledge or suspicion

of fraud?

• Is management aware of any allegations of fraud?

81


• In addition to management inquiries, SAS 99

also requires an auditor to inquire of the audit

committee and of internal audit personnel

about their views on the company’s fraud about their views on the company’s fraud

risks.

• Significantly, SAS 99 mandates that other

individuals within the company also be

questioned about the risk of fraud

82


Paragraph 24 of SAS 99 states:

• The auditor should use professional judgment to

determine those others within the entity to whom

inquiries should be directed and the extent of such inquiries should be directed and the extent of such

inquiries.

• In making this determination, the auditor should

consider whether others within the entity may be

able to provide information that will be helpful to the

auditor in identifying risk of material misstatement

due to fraud.

83


• SAS 99 suggests that auditors inquire of

operating personnel with varying levels of

authority, of in-house legal counsel, and of

others knowledgeable of fraud risk.others knowledgeable of fraud risk.

• Because employees are often aware of where

specific fraud risks lie, auditors should

understand employees’ views on the risk of

fraud.

84


• Auditors should look for discrepancies in

information received from various

interviewees.

• Unusual situations or conditions identified • Unusual situations or conditions identified

through interviews with management and

others can be revealing

85

Interview Subjects

• SAS 99, paragraph 6, identifies the two types of fraud

that auditors should be aware of as “misstatements

arising from fraudulent financial reporting and

misstatements arising from misappropriation of

assets.” assets.”

• As a result, inquiries should be directed toward

individuals concerned with financial reporting as well

as those with direct or indirect access to the

company’s assets

86

Interview Subjects

• The CEO and the CFO should be carefully interviewed by a

partner or experienced audit manager about their knowledge

or suspicion of fraud.

• These executives have the power to override internal

controls, and therefore are in a position to perpetrate and controls, and therefore are in a position to perpetrate and

conceal fraud.

• Their administrative assistants may be privy to sensitive

information and may suspect or be aware of fraudulent

activity, and should also be interviewed.

• Individuals may be aware of fraudulent activities but not

disclose them unless specifically asked

87

FRAUD INVESTIGATION

• A fraud investigation can cover a wide variety

of issues and actions

• Fraud investigations and forensic enquires

may not involve actual fraud or corrupt may not involve actual fraud or corrupt

behavior but may instead be concerned with a

breach of company policy, a problem with

health and safety, harassment, or an

investigation into security

88

FRAUD INVESTIGATION

• Fraud itself is defined as a misrepresentation that is

intended to deceive a person or business.

• Companies can be accused of fraud if they make

claims about a product they sell that are untrue or claims about a product they sell that are untrue or

made up only in order to make a profit.

• Fraud investigations are carried out to determine

whether fraud has taken place or whether there is

evidence of the fraud

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FRAUD INVESTIGATION

• Fraud can cause serious problems not only

concerning loss of money but physical harm to

people and harm to reputations.

• Fraudulent behavior or unethical actions can • Fraudulent behavior or unethical actions can

impact strongly on a business.

• Unethical behavior can bring emotional as

well as financial trauma from which a business

may take years to recover

90

FRAUD INVESTIGATION

• Fraud investigations cover a number of procedures,

including the thorough analysis of electronic data.

• Computer forensics is vitally important when dealing

with fraudulent or unethical actions in businesses with fraudulent or unethical actions in businesses

today.

• It can reveal evidence that would otherwise never

have come to light — evidence can be hidden within

mountains of electronic data, and only professional

computer forensic investigators will be able to

uncover it

91

FRAUD INVESTIGATION

• Computer forensics is one of the first procedures to

be carried out in a fraud investigation — making sure

that dates and time stamps on files are not changed,

and that critical information is not overwritten.

• A fraud investigation should always be carried out

from an objective position and supported by

documented evidence.

• The investigation should be carried out by a neutral

professional, so that the company can ensure it is

seen to be complying with a commitment to

objectivity.92

INVESTIGATION AND EXPERT WITNESS TESTIMONY

• Forensic Accountants are often called upon to initiate

a fraud investigation for the primary purpose of

determining whether a fraud has occurred.

• Other reasons for initiating a fraud investigation Other reasons for initiating a fraud investigation

include the following: a tip or concern received (from

an employee, a vendor, a customer, or other source),

an accidental discovery, fraud uncovered as a result

of an audit, or a concern from the business as to the

adequacy of their internal controls system.

93

Fraud Investigation

A fraud investigation is the systematic

examination to obtain the truth as to:

1. Whether a fraud has occurred

2. Who is involved2. Who is involved

3. How it was perpetrated

4. How much is involved

94

Fraud Investigation versus Accounting Audit

Target Purpose Techniques

Employed

Required

Standards

Financial

Statement

Audit

Examination of

financial data,

i.e. financial

statements

Express an

opinion on

the financial

data i.e.

Audit

sampling,

examination

of financial

SAS No.99

requires

auditors to

approach

financial

statements

data,

confirmation

audits using

professional

skepticism

Fraud

Investigation

Resolve one

or more very

specific

allegations of

fraud

Determine if

fraud has

occurred, who

is involved,

and what do

they know

Sufficiency of

proof in order

to either

prove or

disprove the

fraud

allegation95

Difference between the two

• The differences between forensic accounting/fraud

investigation and auditing can be explained by how

they vary by

• scope, scope,

• nature,

• purpose,

• frequency,

• methods used,

• and presumption.

96

Steps in Conducting a Fraud Investigation

There are five key steps in conducting the

investigation:

• -gathering record,

• -looking for patterns, • -looking for patterns,

• -determining possible fraud theories,

• - interviewing witnesses,

• - and the report.

97

Gather the Records

• Forensic accountants are well-acquainted with

the activities of this step, mainly to gather

documents used within the organization.

• Records would include vendor invoices, • Records would include vendor invoices,

customer invoices, cancelled checks and bank

statements, purchase orders and receiving

reports.

98

Look for Patterns and Irregularities

• After gathering the necessary organizational

document, the forensic accountant will review

and analyze the documents to look for

patterns and irregularities. patterns and irregularities.

• The accountant may use analytical

procedures, sampling techniques, and ratio

analysis in order to determine if patterns or

irregularities exist within the data

99

Determine Possible Fraud Theories

• After inspecting and analyzing the documents,

the forensic accountant will be able to

develop a possible fraud theory (or multiple

theories). theories).

• The theory will identify potential schemes and

methods used.

• As theories are developed, the accountant will

need to “test” the theory to determine likely

scenarios for the fraud.

100

Interview the witnesses

• This step is undertaken usually to support an

allegation of fraud.

• Before beginning this step, the forensic

accountant should recommend that the accountant should recommend that the

clients advise their legal counsel.

• There may be additional considerations to

include, for which the attorney can be a

resource.

101

Fraud Interview Questions

• A fraud interview is nothing more than a structured

meeting in which questions are designed to elicit

information from witnesses.

• The interviewer may be scheduled to ask only one The interviewer may be scheduled to ask only one

question, but more often, the interview is comprised

of a series of questions.

• There is an art to asking questions, and the means to

acquiring the artful skill is through practice.

102

--

• Fraud examiners should conduct the interview

in a manner so as to ensure the individuals

privacy, and the interview should be

conducted under reasonable circumstances.conducted under reasonable circumstances.

• They must ensure that they are not accusing

the individual of the fraud in the course of the

interview

103

--

• The fraud examiner should be direct in asking the

subject specifically if she/he has committed the

fraud.

• If the case should go to litigation and the examiner is If the case should go to litigation and the examiner is

attacked professionally, she/he would be able to

respond that all individuals in question, during the

course of the investigation, were asked if they were

involved with the fraud.

• This establishes that the fraud examiner did not

avoid her/his professional responsibility

104

INTERVIEWING FRAUD SUSPECTS

Good Fraud Interview

• A good interview should be succinct, but last

long enough to disclose the significant facts.

• The interview should also occur as soon after • The interview should also occur as soon after

the event as possible, in order to avoid losing

key details.

• The interview should be conducted privately,

so that others can neither hear nor observe

the interview.105

Seven key attributes of an interviewer

• Organized

• Engaged

• Thoughtful

• Listening• Listening

• Flexible

• Observant

• Non-Threatening

106

Understanding Body Language

The following is a list of some physical

indicators:

1. Placing hand in front of mouth when speaking

2. Excessive blinking or blinking too quickly2. Excessive blinking or blinking too quickly

3. Frequent touching of the nose (the nose is

especially sensitive to stress)

4. Raising of eyebrows

5. Crossing of arms or legs

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--

6. Lack of eye contact (or an excess of eye

contact)

7. Tapping of fingers feet

8. Frequent swallowing8. Frequent swallowing

9. Constant touching of hands to face or head

10. Holding tightly to arms of chair

11. Sweating

12. Shifting posture

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The End

Thank you for your:

• Time

• Interest and

• Attention• Attention

109

Conference paper 1 st national forensic conference, yaounde. [compatibility mode]

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