Causational Factors and the Investigation of Fraud

1. Causational Factors and the Investigation of Fraud Presented by John L. Gudavich, MA, CFE President J. Lewis & Associates Consulting

2. 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

3. Create and Maintain a Culture of Honesty & Integrity Assess the Risk of Fraud & Develop Concrete Responses to Minimize Risk & Eliminate Opportunity Activities Fundamental to Fraud Prevention?

4. The Negative Affects of Fraud. Legal Conviction Humiliation Lost Assets Lost Time Taxes & Restitution Payments Negative Publicity Legal Fees Embarassment

5. How Does an Organization Encourage Dishonesty? • Poor examples by management • Quotas or meeting targets • Rewarding individuals not groups • Competition among employees

6. What Expectations Should Management Communicate? • Appropriate Values & Ethics • Fraud Awareness & Training • Consistent Punishment of Violators

7. Factors Associated with High Levels of Fraud • Top management doesn’t care about or pay attention to appropriate behavior • Lack of recognition of job performance • Perceived inequities in the organization • Autocratic rather than participative management • Low organizational loyalty • Unreasonable budget expectations

8. Factors Associated with High Levels of Fraud • Unrealistically low pay • Poor training and promotion opportunities • High turnover and absenteeism • Lack of clear organizational responsibilities • Poor communication practices within the organizations

9. Elimination of Fraud Opportunity • Accurately Identify Sources and Measures of Risk through Threat Assessments • Implement Appropriate Fraud Prevention & Detection Controls • Create a System of Widespread Monitoring by Employees • Install Independent Checks, Including an Effective Audit/Investigative Function

10. Research Shows… Employees & ManagersNOT Auditors Detect Most Frauds Who Detects Most Frauds?

11. 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

12. The Critical Element Needed To Begin a Fraud Investigation Management Support and Approval

13. Guidelines for Conducting a Fraud Investigation Perform Steps in Logical Order Conduct Thorough Investigation Protect Confidentiality

14. 7 Steps for Conducting a Fraud Investigation • Undertake to Establish the Truth of the Matter Under Consideration • Don’t Jump to Conclusions - Investigator or Auditor Needs Experience & Objectivity • Keep Information to Yourself, Keep Speculation to Yourself • Keep Those Who Need to Know Informed

15. 7 Steps for Conducting a Fraud Investigation • Independently Corroborate Information • Employ Experts and Consultants if needed • Use Investigative Techniques that Are Legally Sound & Fair • Report All the Facts Fairly & Objectively- Point to the Guilty & Exonerate the Innocent

16. 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

17. Investigative Steps Gather Testimonial Evidence - Obtained from Individuals through Interviews and Interrogation of: • Senior Management Officials • Middle Management • Employees • Expert Witnesses • Vendors • Customers

18. Investigative Steps Gather Documentary Evidence - Business Records, Computer Records from a variety of sources • Internal Agency Records • Vendor Records • Customer Records

19. 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

20. Investigative Steps Physical Evidence -Fingerprints, Stolen/Damaged Property, Checks, Receipts, Bank Records, Contracts, etc. • Evidence can be obtained from internal agency sources or other Business Sources • Evidence can be obtained through Civil Procedures • Some evidence may need to be obtained by Law Enforcement Professionals

21. 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

22. 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

23. 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

24. 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

25. Seek Remedial Action • Administrative Action • Civil Remedies • Criminal Prosecution

26. Fact More Than 80% of Organizations Do #1 What Action Do Most Businesses Take After Discovering a Fraud? • Pursue No Legal Action • Pursue Civil or Administrative Remedies • Pursue Criminal Remedies

27. 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:

28. 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

29. Investigating Fraud QUESTIONS?