building a culture of fraud prevention and detection

© 2014 Association of Certified Fraud Examiners, Inc.

Building a Culture of Fraud

Prevention and Detection

Responding to Discovered Fraud

2 of 25 © 2014 Association of Certified Fraud Examiners, Inc.

Discussion Questions

1. Does your organization have formal procedures

for responding to discovered frauds? Who is

responsible for investigating such frauds? Are

identified instances of fraud within your

organization always reported to the authorities?


Discussion Questions

2. You are an internal auditor who has just

uncovered significant evidence that an

employee in the accounting department has

been embezzling money from the company.

What steps do you take in response to this

discovery?


Learning Objectives

Understand what to do when an organization

receives fraud allegations and how to determine

whether to undertake an investigation.

Know how to develop a fraud investigation plan

and form a fraud investigation team.

Understand the steps and techniques involved

in conducting a fraud examination.


Learning Objectives

Consider the risks that arise during a fraud

examination and how best to manage those

risks.

Determine how and to whom to report the

results of a fraud examination.

Consider necessary follow-up steps after the

conclusion of a fraud examination.


Introduction

An effective anti-fraud program includes formal

and consistent procedures for:

• Receiving and handling reports of fraud allegations

• Thoroughly investigating identified instances of fraud

• Swiftly and appropriately punishing perpetrators

• Remediating weaknesses that allowed fraud to occur


Receiving Fraud Allegations

Potential fraud can come to management’s

attention in many ways:

• Tips from employees, customers, or vendors

• Internal audits

• External audits

• By accident



Categorize

issues.

Confirm the validity of allegation.

Define the severity of allegation.

Escalate issue as appropriate.

Refer issues outside the scope

of program.

Conduct the investigation.

Resolve or close the investigation.



Identify information to be kept confidential.

Define how investigation will be documented.

Manage and retain documents and information.

Log allegations received.

Track and manage cases.


Evaluating Fraud Allegations

Does alleged act involve violation of law, rules,

or company policy?

Do any other departments need to be

consulted?

Should external auditors be advised?

Is allegation required to be disclosed to the

board, audit committee, or any other party?


Evaluating Tips

More than 40% of frauds

are detected by a tip.

Not all tips are valid.


Developing the Investigation Plan

Factors to consider:

• Time-sensitivity

• Notification

• Confidentiality

• Legal privileges

• Compliance

• Securing evidence

• Objectivity

• Goals


Developing the Investigation Plan


Forming the Investigation Team

Legal counsel

Fraud investigators

Accountants or forensic accountants

Internal auditors

External auditors

HR personnel

IT personnel

Security or loss prevention personnel

Computer forensics specialists

Management representatives


Conducting a Fraud Examination

Cases are generally

handled in a uniform

fashion.

Work from general to

specific.

Assume case will end in

litigation.


Tasks in a Fraud Examination

Documenting the findings and quantifying losses

Analyzing evidence

Conducting interviews

Gathering physical evidence

Examining documents Computer forensic examinations

Making observations


Addressing Potential Investigation Issues

Failure to consider and

successfully navigate

several legal issues and

constraints during an

investigation can

undermine the entire

case.


Rights and Responsibilities of

Employees and Third Parties

Need to identify rights affected by investigation

• Employees

• Union employees

• Third parties

May have responsibility to investigate based on

duties of officers and directors


Collecting Evidence

Some evidence must be voluntarily provided or

subpoenaed:

• Banking records

• Tax returns and related documents

• Credit reporting agency records

• Telephone records

• Credit card account records


Seeking Assistance from the Courts

Civil litigation

• Can be costly and time

consuming

• Can be critical to obtaining

information and

compensation for fraud loss


Seeking Assistance from the Courts

Advantages of criminal prosecution:

• Save litigation expense

• Government has greater investigatory power

• Criminal cases move more quickly

• Conviction can establish facts to use in a civil trial

Disadvantages of criminal prosecution:

• Less control over case decisions

• Cannot request or control sentence

• Criminal penalties might render defendant insolvent


Monitoring the Integrity of the Investigation

Investigation information might be sought by

government agencies and civil litigants.

Understand and use protection provided by

applicable legal privileges


Reporting the Investigation Results

Report findings to party overseeing the

investigation.

• In general, the party to whom the report is made will

determine the appropriate form of the report.

Retain reports for use in future fraud risk

assessments.


Disclosure to Law Enforcement

Might be better to

voluntarily disclose a

violation to law

enforcement than waiting

for the agency to discover

the violation and take

action

Voluntary disclosure can

result in leniency


Responding to the Investigation Findings

Preserve evidence.

Maintain confidence.

Mitigate losses.

Punish the perpetrators.

File insurance claim.

Undertake extended investigation.

Remediate business processes and internal

controls.

building a culture of fraud prevention and detection

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