Fraud_Investigation

Internal Fraud Investigation Basics Fraud investigation is a methodology of resolving fraud allegations from inception to disposition. More specifically, fraud investigation involves: • Obtaining evidence and taking statements. • Writing reports. • Testifying to findings. • Assisting in the detection and prevention of fraud. Initiating a Fraud Investigation Frauds are discovered by any of several sources, including tips or complaints from someone, auditing procedures, or by luck. No matter how the initial indicator comes to light, the accumulation of the evidence to prove or disprove the allegation of fraud is substantially different from a routine audit. It is necessary to have counsel involved in, and in most cases, "directing" the investigation, at least as far as the legal aspects of the case are concerned. Evaluating Tips One formal study showed that about one-third of all internal investigations begin with a tip from a co-worker, manager, or other employee. Audits, on the other hand, uncover about 20 percent of internal thefts, while the remainder is discovered by "accident." Companies should encourage a reporting system that allows anonymous tips to be furnished to security, audit, or management. Because most tips are not actually valid, it is important to understand the motives of persons willing to supply information to evaluate whether the tip merits further inquiry. The three principal reasons, explored below, that persons furnish tips are: 1. Revenge. 2. Genuine concern. 3. Money. Revenge Co-workers furnish information as a result of some grudge against a fellow employee to cause trouble. This information often is without value, and careful screening of the information can eliminate the need for an unnecessary investigation. Genuine Concern In some instances, the tipster does indeed find information of value worthy of initiating an internal fraud case. The tipster observes some activity that is suspicious and feels a sense of obligation to report it. Money Some persons will furnish information in response to an offer of financial reward. Although these situations may result in valuable information, in still other cases the information is fabricated for the purpose of obtaining money. Investigators should be circumspect in paying for information. Investigation Methodology Regardless of the nature of the fraud investigation, three basic tools are available to the investigator: • Interviewing. • Document examination. • Observation. Interviewing Interviewing consists of the process of obtaining relevant information about the matter from those with knowledge. Document Examination The investigator must be skilled in the examination of financial statements, including journals, ledgers, and supporting documents. He or she must also know the legal ramifications of evidence and how to maintain the chain of custody over documents. Observation The investigator often is in a position to observe behavior, to search for obvious displays of wealth, and in some instances is able to observe specific offenses. Steps in Fraud Investigation Fraud investigation steps are constructed so that all cases are handled in a uniform fashion. The methodology involves going from the general to the specific, beginning with the examination of documents. The five steps, discussed below, are: 1. Document examination. 2. Neutral third party witnesses. 3. Corroborative witnesses. 4. Co-conspirators. 5. Accused. Document Examination As a general rule, documents should be examined before interviews are conducted to gain an understanding of the potential evidentiary value of the case and to protect the security of documents. Neutral Third-Party Witnesses After conducting sufficient document examination, witnesses should be interviewed in a logical fashion starting with the least likely to the most likely to be involved. Corroborative Witnesses Interviews from witnesses to corroborate facts should be conducted after the neutral third-party witnesses. Note that these witnesses may or may not be cooperative. Co-Conspirators Those suspected of complicity should be interviewed next, from the least culpable to the most culpable. If appropriate, law enforcement officials and prosecutors can promise leniency in return for cooperation. Accused In general, the accused is examined last. Even if the accused is not likely to offer a confession, an interview is usually scheduled because in many instances it can be used for subsequent impeachment. Internal Fraud and the Law Investigators should be knowledgeable of the meaning of terms commonly used during fraud investigations. The definitions provided in this section are taken from Black's Law Dictionary. Definitions: Fraud All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or suppression of the truth, and includes all surprise, trick, cunning, or dissembling, and any unfair way by which another is cheated. Embezzlement Willfully to take, or convert to one's own use, another's money or property, of which the wrongdoer acquired possession lawfully, by reason of employment or position of trust. Larceny Felonious stealing, taking and carrying, leading, riding, or driving away another's personal property, with intent to convert it or to deprive owner thereof. The unlawful taking and carrying away of property of another with intent to appropriate it to use inconsistent with latter's rights. Corruption An act done with intent to give some advantage inconsistent with official duty and the rights of others. The act of an official or fiduciary person who unlawfully and wrongfully uses his (her) station or character to procure some benefit for himself or for another person, contrary to duty and the rights of others. Bribery Giving or receiving (or offering or soliciting) any thing of value to influence an official act. Illegal Gratuity Giving or receiving (or offering or soliciting) anything of value for or because of an official act. Economic Extortion A demand of payment by the recipient to refrain from discriminating against a business decision. Conflict of Interest An agent taking an interest in a transaction which is actually or potentially adverse to the interest of the principal without disclosure to the principal. Elements of Fraud There are four general elements under common law, which all must be present for a fraud to exist: 1. Misrepresentation of a material fact. 2. Made knowingly and with intent to defraud. 3. Reliance on the misrepresentation by the victim. 4. Resulting in injury from such reliance. Ways to Prove a Suspect's Intent to Defraud • Alteration of documents. • Concealment of evidence. • Destruction of evidence. • False statements (lies). • Personal gain. • Obstruction of justice. • Pattern of conduct (repetition of behavior). • Testimony of co-conspirator. • Admissions. • Confessions.