Causational Factors and the Investigation of Fraud Presented by John L. Gudavich, MA, CFE President J. Lewis & Associates Consulting
Jan 15, 2016
Causational Factors and the Investigation of Fraud
Presented by
John L. Gudavich, MA, CFEPresident
J. Lewis & Associates Consulting
What is Meant by “Predication of Fraud?”
Circumstances, Taken as a Whole, that Leads a Reasonable Prudent
Professional to Believe a Fraud is Occurring, or Has
Occurred, or Will Occur
Activities Fundamental to Fraud Prevention?
Create and Maintain a Culture of Honesty &
Integrity
Assess the Risk of Fraud & Develop Concrete
Responses to Minimize Risk & Eliminate
Opportunity
The Negative Affects of Fraud.
How Does an Organization Encourage Dishonesty?
• Poor examples by management
• Quotas or meeting targets
• Rewarding individuals not groups
• Competition among employees
What Expectations Should Management Communicate?
1. Appropriate Values & Ethics
2. Fraud Awareness & Training
3. Consistent Punishment of Violators
Factors Associated with High Levels of Fraud
1. Top management doesn’t care about or pay attention to appropriate behavior
2. Lack of recognition of job performance3. Perceived inequities in the organization4. Autocratic rather than participative
management5. Low organizational loyalty6. Unreasonable budget expectations
Factors Associated with High Levels of Fraud
7. Unrealistically low pay8. Poor training and promotion
opportunities9. High turnover and absenteeism10.Lack of clear organizational
responsibilities11.Poor communication practices within the
organizations
Elimination of Fraud Opportunity
1. Accurately Identify Sources and Measures of Risk through Threat Assessments
2. Implement Appropriate Fraud Prevention & Detection Controls
3. Create a System of Widespread Monitoring by Employees
4. Install Independent Checks, Including an Effective Audit/Investigative Function
Who Detects Most Frauds?
Employees Employees & &
ManagersManagers
NOTNOT Auditors Auditors Detect Detect Most Most
FraudsFrauds
Research Shows…Research Shows…Research Shows…Research Shows…
What Does Sarbanes-Oxley Say about Employees Reporting 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
The Critical Element Needed To Begin a Fraud Investigation
Management Support and
Approval
Guidelines for Conducting a Fraud Investigation
7 Steps for Conducting a Fraud Investigation
1. Undertake to Establish the Truth of the Matter Under Consideration
2. Don’t Jump to Conclusions - Investigator or Auditor Needs Experience & Objectivity
3. Keep Information to Yourself, Keep Speculation to Yourself
4. Keep Those Who Need to Know Informed
5. Independently Corroborate Information
6. Employ Experts and Consultants if needed
7. Use Investigative Techniques that Are Legally Sound & Fair
8. Report All the Facts Fairly & Objectively- Point to the Guilty & Exonerate the Innocent
7 Steps for Conducting a Fraud Investigation
Evidence
14
3
2Testimonial Evidence
Personal Observation
Physical Evidence
Documentary Evidence
14
3
2
14
3
2Testimonial Evidence
Personal Observation
Physical Evidence
Documentary 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 Invigilation, Surveillance and Covert Operations
Investigative Steps
Gather Testimonial Evidence - Obtained from Individuals through Interviews and Interrogation of:
1. Senior Management Officials
2. Middle Management
3. Employees
4. Expert Witnesses
5. Vendors
6. Customers
Investigative Steps
Gather Documentary Evidence - Business Records, Computer Records from a variety of sources
1. Internal Agency Records
2. Vendor Records
3. Customer Records
Investigative Steps
Obtaining Documentary Evidence
• Use Internal Authority granted by Management• Develop Internal/External Sources • Use Contract Provisions• Criminal Investigation – Use Subpoenas or
obtain Warrants• Civil Investigation – Use Discovery and Civil
Subpoenas
Investigative Steps
Physical Evidence -Fingerprints, Stolen/Damaged Property, Checks, Receipts, Bank Records, Contracts, etc.
1. Evidence can be obtained from internal agency sources or other Business Sources
2. Evidence can be obtained through Civil Procedures
3. Some evidence may need to be obtained by Law Enforcement Professionals
Types of Evidence
• Best Evidence – Known as primary evidence such as original documents, equipment, etc.
• Circumstantial Evidence – Known as Indirect Evidence and based on inference
• Conclusive Evidence – Evidence so strong it overshadows any other evidence to the contrary
• Critical Evidence – Evidence strong enough that its presence could tilt a decision makers mind
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
Report Preparation
• Culmination of all work to prove the fraud and identify those responsible
• Begins with Predication• Identifies “Who, What, When, Where and How of
the Fraud• Identifies “Elements of Proof” to substantiate the
Fraudulent Activity• Attach and List all Evidence to support findings• List locations of evidence that cannot be
attached to the report
Seek Remedial Action
• Administrative Action
• Civil Remedies
• Criminal Prosecution
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
Fact
More Than 80% of
Organizations Do #1
Organizations Contribute to Fraud
Individuals do it all over again someplace
else.
Employees get the message that you can
get away with fraud without suffering any
penalty.
Termination without Prosecution and Publicity of the Fraud Allows:
Summary
• Be Proactive• Never Disregard the Obvious• Take Action quickly to Stop Fraudulent
Activities• Conduct thorough Audits/Investigations• Don’t limit the scope of your activities• Take Affirmative Action• Publicize the Findings and Action Taken
Investigating Fraud
QUESTIONS?