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Building a Culture of Fraud
Prevention and Detection
Responding to Discovered Fraud
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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?
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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?
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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.
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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.
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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
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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
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Receiving Fraud Allegations
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.
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Receiving Fraud Allegations
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.
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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?
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Evaluating Tips
More than 40% of frauds
are detected by a tip.
Not all tips are valid.
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Developing the Investigation Plan
Factors to consider:
• Time-sensitivity
• Notification
• Confidentiality
• Legal privileges
• Compliance
• Securing evidence
• Objectivity
• Goals
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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
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Conducting a Fraud Examination
Cases are generally
handled in a uniform
fashion.
Work from general to
specific.
Assume case will end in
litigation.
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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
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Addressing Potential Investigation Issues
Failure to consider and
successfully navigate
several legal issues and
constraints during an
investigation can
undermine the entire
case.
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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
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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
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Seeking Assistance from the Courts
Civil litigation
• Can be costly and time
consuming
• Can be critical to obtaining
information and
compensation for fraud loss
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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
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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
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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.
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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