What’s your fraud IQ?
McNeal, Andi, CPA. Journal of Accountancy; New York Vol. 224, Iss. 3, (Sep 2017): 32-35.
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Because of the nature of our work as CPAs, many of us will encounter potential fraud during our careers. Consequently, we need to know how to work with the people who are charged with investigating these situations. A quiz is presented on the fraud investigation basics, communicating with the fraud investigator, and supporting the clients or company during a fraud investigation.
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FRAUD
This month: Investigation basics
Most CPAs will never be formally asked to lead a fraud investigation. However, because of the nature of our work as CPAs, many of us will encounter potential fraud during our careers. Consequently, we need to know how to work with the people who are charged with investigating these situations. How familiar are you with fraud investigation basics? Can you talk the talk when a fraud investigator comes knocking? Are you prepared to support your clients or company during a fraud investigation? Take this quiz and find out.
1. Which of the following best describes the primary objective of a fraud investigation?
a. To determine the guilt or innocence of the suspected individual(s).
b. To express an opinion on the likelihood that fraud could occur within a given environment.
c. To gather evidence about whether fraud has occurred.
d. To assess the effectiveness of the organization’s anti-fraud controls.
2. Management at Blue Co. has hired Carlos, a CPA, to conduct a fraud investigation based on allegations that Mary-Ellen, a clerk in the accounting department, is stealing from the company. Tbe evidence Carlos has collected so far indicates that Mary-Ellen obtained the login information used by her supervisor, Katrina, to make electronic funds transfers. Mary-Ellen has been waiting until Katrina leaves in the evenings, and then logging in to the company’s banking system and transferring money to her husband’s business account. The only other person with the login information to the system is the company’s CFO, Henry, but there is no evidence he is aware of the situation. However, there is also some evidence that Mary-Ellen paid off her co-worker, James, to keep him from turning her in after he discovered her scheme. Based on the evidence collected, in what order should Carlos interview these parties?
a. (1) Mary-Ellen, (2) Henry, (3) Katrina, (4) James.
b. (1) Henry, (2) Katrina, (3) James, (4) Mary-Ellen.
c. (1) Katrina, (2) James, (3) Mary-Ellen, (4) Henry.
d. (1) James, (2) Mary-Ellen, (3) Henry, (4) Katrina.
3. Management of XYZ Co. received a tip that an employee has been stealing and has asked Michael, the company’s general counsel, to begin looking into the allegations. Before beginning a formal fraud investigation, Michael must:
a. Create a list of all potential suspects.
b. Contact local law enforcement for assistance.
c. Obtain the primary suspect’s computer.
d. Ensure there is sufficient cause for an investigation.
4. Management at Oak Inc. suspects a company employee of embezzling funds by submitting invoices from a shell company for payment. The company is forming a team to investigate the matter. Which of the following individuals should be primarily responsible for directing the investigation?
a. The organization’s attorney.
b. The director of human resources.
c. The director of internal audit.
d. The suspected perpetrator’s direct supervisor.
5. Which of the following is NOT true regarding how fraud investigations should be conducted?
a. The fraud investigator should collect evidence in a linear order, from the general to the specific.
b. The fraud investigator should begin the investigation with the assumption that the suspect is innocent.
c. The fraud investigator should begin the investigation with the assumption that the case will end in litigation.
d. All of the above.
ANSWERS
1. (c) Fraud investigations are fact-finding missions. The objective of a fraud investigation engagement is to gather evidence about whether fraud has occurred and, if so, who may be responsible. Consequendy, the fraud investigator must remain objective and neutral throughout the engagement, focusing solely on collecting evidence related to the allegations at hand. Even once all the evidence has been collected, the final determination of whether the suspected individual is guilty or innocent is a legal determination that can only be made by a judge or jury. Additionally, while management might engage an anti-fraud expert to assist in assessing the risk of fraud or evaluating the effectiveness of the organization’s anti-fraud controls, neither of these tasks is the primary focus of a fraud investigation.
2. (b) In a fraud investigation, interviews should take a bull’s-eye approach, moving from the outer rings-those individuals with knowledge related to the allegations but who are not complicit in the suspected scheme-inward based on how likely the individuals are to be involved in the offense. In general, that typically results in the following interview order:
1. Neutral third-party witnesses, or individuals who might have relevant information but who are not directly involved in the specific instance under investigation, such as Henry.
2. Corroborative witnesses, or individuals who can corroborate facts related to the offense under investigation, but who are not suspected to be direcdy involved, such as Katrina.
3. Co-conspirators, or individuals who are suspected of playing a role in the scheme but who are likely not the primary suspect, such as James.
4.The primary suspect, or the individual who is suspected of being the most complicit in the scheme, such as Mary-Ellen.
3. (d) Before launching a fraud investigation, Michael should determine whether there is sufficient cause or reason for an investigation. For cause to be sufficient, the totality of circumstances must be such that a reasonable, well-trained professional would believe that a fraud has occurred, is occurring, or will occur. Additionally, with every subsequent step of the investigation, the fraud investigator must consider whether sufficient cause exists to proceed further with the inquiry. Conducting a fraud investigation without sufficient cause can result in a host of issues, including legal liability for the fraud investigator and a loss of employee trust for the organization.
4. (a) It is crucial to have legal counsel involved in and, in most cases, directing any internal fraud investigation, as such investigations can be a veritable minefield of legal questions. Thus, the investigation team must have legal counsel at the helm to sort out these questions and to direct the investigation in a legally sound manner. While the directors of human resources and internal audit will likely play key roles in the investigation process, the investigation should be overseen by legal counsel. Additionally, it is generally not appropriate to designate the suspect’s supervisor as the leader of the fraud investigation team. Until it is clear who is involved in the wrongdoing and how far up the chain of command knowledge of the fraud reaches, the employee’s supervisor should be used as an information source, rather than as a formal part of the investigation team.
5. (b) The fraud investigator should not assume the guilt or innocence of any individual. While he or she may hypothesize about what truly happened and who was involved, this hypothesis should be based on evidence obtained and not on an unfounded assumption. In contrast, the fraud investigator should maintain the assumption throughout the investigation that the case will end in litigation. If the investigator assumes litigation as the final step, he or she will be more likely to conduct the engagement in accordance with the proper rules of evidence and to remain well within legal guidelines. Additionally, the fraud investigator should conduct the engagement in accordance with established fraud investigation methodology, which establishes a uniform, legal process for resolving allegations on a timely basis. This methodology provides that fraud investigations should move in a linear order, from the general to the specific, gradually focusing on the perpetrator through an analysis of evidence.
SCORING
If you answered all five questions correctly, congratulations. Your thorough knowledge about fraud investigation best practices will help you greatly in assisting organizations that are handling allegations of fraud. Well done.
If you answered three or four questions correctly, you’re on the right track. Continue to build your understanding of fraud investigation concepts and methodologies.
If you answered fewer than three questions correctly, consider brushing up on your knowledge related to fraud investigations. Enhancing your understanding of fraud investigation best practices will help ensure that you have what it takes to support organizations when they are at their most vulnerable.
To comment on this article or to suggest an idea for another article, contact Jeff Drew, senior editor, at Jeff.Drew@aicpa-cima.com or 919-402-4056.
Sidebar
The fraud investigator must remain objective and neutral, focusing solely on collecting evidence related to the allegations.
About the author
Andi McNeal (amcneal@acfe. com) is director of research for the Association of Certified Fraud Examiners, where she oversees the development and production of educational materials related to the prevention, detection, and investigation of fraud.
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