Fraud investigations session 1 slides
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Zeeshan Shahid, an expert in fraud examination, outlines key aspects of fraud, its types, and common behaviors of perpetrators in a detailed overview designed for fraud investigators. He discusses the fraud triangle, highlighting the factors that lead to fraudulent behavior, and outlines the investigation process including planning, evidence collection, and legal considerations. The document emphasizes the importance of understanding fraud dynamics to effectively prevent and address cases of misconduct.
Fraud investigations session 1 slides
- 1. Fraud Investigations ZEESHAN SHAHID JULY 30, 2021 | SESSION 1 OF 2 This Photo by Thoufeeq Ahamed is licensed under CC BY-SA-NC
- 2. Zeeshan Shahid • Chartered Accountant; Certified Fraud Examiner; >18y experience; served as partner in Deloitte and Yousuf Adil • >10y running country’s first dedicated Forensic practice in Deloitte; Experience of investigating allegations of fraud, abuse, bribery, corruption and misconduct in public (federal, provincial and corporate), private (domestic and MNCs for FCPA/UKBA), non-profit (foreign government and NGO)
- 3. Overview • Introduction and context • Common factors in reported frauds and Pakistan Perspective • Perpetrator behavioral analysis • Fraud investigations • Fraud interviews • Report writing • Legal considerations during investigations • Roles and responsibilities • Understanding fraud prevention • Nuances of modern fraud investigations • Selected specific fraud and corruption scenarios Photo by John Fowler on Unsplash
- 4. “Fraud and falsehood only dread examination. Truth invites it.” - SAMUEL JOHNSON Photo by Chris Lynch on Unsplash
- 6. • “Fraud is an intentional or deliberate act to deprive another of property or money by deception or other unfair means.” – The Association of Certified Fraud Examiners • “Any illegal acts characterized by deceit, concealment or violation of trust. These acts are not dependent upon the application of threat of violence or of physical force. Frauds are perpetrated by parties and organizations to obtain money, property or services; to avoid payment or loss of services; or to secure personal or business advantage.” – The Institute of Internal Auditors • Occupational fraud and abuse is “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets”. – The Association of Certified Fraud Examiners Definition of fraud
- 7. Internal fraud (or occupational fraud and abuse) Corruption Asset misappropriation Financial statements fraud External fraud Customer frauds Vendor frauds Security breaches IP theft Fraud against individuals ID theft Ponzi schemes; MLM schemes Phishing scams Types of frauds
- 8. Corruption Conflicts of interest Purchasing / Sales schemes Bribery Invoice kickbacks / Bid rigging Illegal gratuities Economic Extortion Asset Misappropriation Cash Theft of cash on hand Theft of cash receipts (skimming / larceny) Fraudulent disbursements Billing schemes / Payroll schemes / Expense reimbursement schemes / Check and payment tempering / Register disbursements Inventory and all other assets Misuse / Larceny Financial Statement Fraud Net worth/Net income overstatement Net worth/Net income understatement Occupational fraud and abuse classification system (the Fraud Tree) - Extract acfe.com/fraudtree
- 9. Why does fraud occur? The best and most widely accepted model for explaining why people commit fraud is the fraud triangle. Developed by Dr. Donald Cressey, a criminologist whose research focused on embezzlers—people he called “trust violators.
- 10. “Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non- shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property. - DONALD R. CRESSEY, Other People's Money (Montclair: Patterson Smith, 1973) p. 30
- 11. • Motivates crime • Financial problem (personal / professional) unable to be solved by legitimate means • Examples: Inability to pay bills/debt; Need to meet earnings / productivity targets; materialistic desires Pressure • Defines the way crime can be committed • Control weakness or some other opportunity allows abusing a position of trust without perceived risk of getting caught Opportunity • Vast majority of fraudsters are first time offenders. They perceive themselves as ordinary, honest people caught in bad set of circumstances • Consequently, fraudster must justify the crime to himself in a way that makes it an acceptable or justifiable act • “I was only borrowing money”; “I was underpaid, my employer cheated me”; “My employer deserves it. Rationalization The fraud triangle
- 12. • Cressey’s fraud triangle demonstrates certain characteristics that increase the likelihood for fraud to occur, but it does not provide perfect guidance. • Although the fraud triangle helps explain the nature of many occupational offenders, it does not explain the nature of all occupational offenders. • Cressey’s study is nearly half a century old, and there has been considerable social change in the interim. • Now many anti-fraud professionals believe there is a new breed of occupational offender—one who simply lacks a conscience sufficient to overcome temptation. • Moreover, some experts believe that the fraud triangle could be enhanced by considering a fourth element. • In their article “The Fraud Diamond: Considering the Four Elements of Fraud,” David Wolfe and Dana Hermanson incorporated the element of capability—personal traits and abilities that play a major role in whether fraud will actually occur—into Cressey’s model, transforming it from a triangle into a diamond • Source: ACFE The fraud triangle enhanced
- 13. Fraud triangle revisited… The fraud triangle The three-pronged framework Rationalization Frame of mind that allows one to justify their dishonesty.
- 14. “Opportunity opens the doorway to fraud, and incentive and rationalization can draw the person toward it. But the person must have the capability to recognize the open doorway as an opportunity and to take advantage of it by walking through, not just once, but time and time again. Accordingly, the critical question is, ‘Who could turn an opportunity for fraud into reality?’” - DAVID T. WOLFE AND DANA R. HERMANSON, “The Fraud Diamond: Considering the Four Elements of Fraud,” The CPA Journal 74, December 2004 The fraud diamond The three- pronged framework expanded by capability
- 15. Common factors in reported frauds and Pakistan Perspective
- 16. • Typical fraud case: • Lasts 14 months before detection • Causes a loss of $8300 per month • Organizations lose an estimate of 5% of revenue to fraud each year • Median loss per case: $125,000; Average loss per case: $1.5 million • Corruption most common in every global region • Asset misappropriation: Most common; least costly (86% cases; $100k median loss) • Financial statements fraud schemes: Least common; most costly (10% cases; $954k median loss) • Owners / executives caused only 20% of occupational frauds but with largest losses (median losses by owner / executive: $600k; Manager: $150k; Employee: $60k) Facts about fraud – Key findings from ACFE’s Report to the Nations 2020
- 17. • 43% schemes detected by Tip; 50% tips from employees • Whistleblowers used Telephone hotline and email in 33% of cases • Organizations with Fraud Awareness Training more likely to gather tips through Formal Reporting Mechanisms (56% of tips with training; 37% of tips without training) • Certain fraud risks more likely in small businesses than in large organizations (2x in billing fraud, payroll, check and payment tempering) • A lack of internal controls contributed to 1 out of 3 frauds; presence of Anti-fraud controls associated with lower fraud losses and quicker detections • Use of targeted Anti-Fraud controls increased (Hotline, Anti-fraud policy, Fraud trainings) Facts about fraud – Key findings from ACFE’s Report to the Nations 2020 (continued)
- 18. • More than half of all occupational fraud came from four departments: Operations 15%; Accounting 14%; Executive / Upper management: 12%; Sales: 11% • 80% of fraudsters faced internal discipline from organization; 46% victim organizations declined to refer cases to law enforcement considering internal discipline as sufficient • 42% of fraudsters lived beyond means; 26% of fraudsters faced financial difficulties Facts about fraud – Key findings from ACFE’s Report to the Nations 2020 (continued)
- 20. • Tenure: Occupational fraudsters who had been with their organizations at least 6 years caused TWICE the loss of less-tenured employees • Gender: Men caused 72% of all occupational fraud, and also caused larger losses than women. • Education: 64% of occupational fraudsters had a university degree or higher and caused 2x median loss compared to non-degree holder fraudsters • Age: Older fraudsters cause much larger median loss (55+: $425k; 40-54: $150k; <40: $75k) • Collusion of 3 or more fraudsters triples the median loss. • 89% of fraudsters are first-time offenders with no criminal conviction; 86% were never punished or terminated in prior employment Facts about fraud – Profile of fraudsters from ACFE’s Report to the Nations 2020 (continued)
- 21. • Seven most common behavioral red-flags: • living beyond means (globally noticed in 42% of cases; • financial difficulties; • unusually close association with a vendor or customer; • excessive control issues or unwillingness to share duties; • unusual irritability, suspiciousness, or defensiveness; • a general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior; and • recent divorce or family problems. • Source: https://www.acfe.com/report-to-the- nations/2020/ • Red-flags 3-6 are more common in Pakistan environment. • Other red-flags less common globally but more relevant in Pakistan: • Complained about inadequate pay; • Refusal to take vacations; • Excessive pressure from within organization; • Complained about lack of authority; Facts about fraud – Profile of fraudsters from ACFE’s Report to the Nations 2020 (continued)
- 23. BRAINSTORMING PLANNING COLLECTION EVIDENCE GATHERING THROUGH ANALYSIS REPORTING AND CLOSURE Fraud audit / Investigation process
- 24. • A fraud investigator needs solid business operations insight as well as accounting expertise. • In fraud investigations, perpetrator's identity is often suspected / known. The job of the fraud auditor is to prove that the perpetrator's actions resulted in fraud. • There usually are no transaction trails for the actual activity perpetrated (no smoking guns) and clues to fraud cases usually come from small, seemingly insignificant inconsistencies in records, data, suspect's speech or actions. Key points
- 25. • Fraud investigator needs to gather and analyze necessary evidence required by a management and/or legal authorities to determine the facts and circumstances surrounding the fraud / suspected fraud. The investigation may include legal advisors. • A fraud investigation seeks to answer the following questions: • Who did it? • Why did he/she did it? • How did they gain from the fraud? What assets were taken and how were they converted into benefits? • How, when and where was the fraud perpetrated and concealed? • What is the extent of losses? • Were any laws broken? Objective of fraud investigation
- 26. Brainstorming • Identify parties, investigation parameters and risks as input to the plan. Planning: • Thorough planning determines focus and helps manage the investigation Collection phase: • Information gathering in a forensically sound manner Evidence gathering through analyses: • issue-tailored analyses performed to obtain evidence Reporting and closure: • Reporting of findings The Fraud Audit / Investigation Process Problem recognition and definition Refine and amend hypothesis Analyze data; create and test hypothesis
- 27. • Objective: • To identify relevant parties, • Understand and confirm scope, and • Initiate the investigation based on initial understanding. • Refer handout for details Brainstorming
- 28. • Planning is essential to help ensure that the investigation has clear objectives and that the strategy aligns with the objectives. Investigations, by nature, can grow rapidly and lead an investigation team in many directions - therefore it is important that each step in the investigation process is properly considered in terms of what is going to be completed and what will be achieved. • Planning enables the investigation team to answer critical questions: • What are the engagement’s objectives? • What are the fraud hypotheses which are to be tested? • What is the engagement strategy (i.e., what actions must be taken to achieve the objectives)? • What is the progress towards achieving our objectives during the engagement? • Have we achieved our objectives at the conclusion of the engagement? • What other service providers may we be working with on this engagement (e.g., Counsel, discovery service providers, etc.) and have we defined the roles and responsibilities of each party (and evaluated related direct and indirect marketplace business relationships)? • The work plan needs to be cognizant of specific jurisdictional issues, as well as specific limitations or requirements that are unique to the area. • Consider Forensic Accounting and Benford Analysis. Forensic accounting is the application of investigative and analytical skills for the purpose of resolving financial issues in a manner that meets standards required by courts of law. • Refer handout for details Planning
- 29. • Establish project management • Identify and obtain necessary skills and resources • Use of non-forensic professionals • Manage data preservation and retention • Communication Planning
- 30. “A poorly planned project will take three times longer than the original plan. A well- planned project will only take twice as long.” - ANONYMOUS; on a lighter note!
- 31. • Objective: To assemble relevant evidence in order to focus the investigation, and readily identify issues with respect to information gathering. • Refer handout for details Collection phase Electronic information Physical information Human information
- 32. • Consider Chain of Custody • According to ACFE Fraud Examiner’s Manual, the Chain of custody is both a process and a document that memorializes: • Who has had possession of an object and • What they have done with it It is simply a means of establishing that there has not been a material change or alteration to a piece of evidence. Collection phase Other parties Investigation team Investigation team main liaison Departmental liaison for investigation Archive custodian Departmental custodian Originator of information
- 33. • Collect third party information Collection phase Publicly available information Government sources Social media Surface web
- 34. BASIC EQUIPMENT EXAMPLE OF EVIDENCE Some forensic lab snapshots
- 35. EXAMINATION TOOLS EVIDENCE BAGS Some forensic lab snapshots
- 36. Triangulation of information Evaluation for forensic soundness Manipulate information for triangulation Triangulate information for analysis Financial analysis Non- financial analysis Evaluate work performed and findings identified Information (data) anlayses Evidence gathering through analysis Refer Handout for details
- 37. Additional forensic lab snapshots (analysis)
- 38. Additional forensic lab snapshots (analysis)
- 39. • Consider government, regulator and/or other third party requirements. • Prepare for potential litigation • Perform RCA, if required • Follow project closure protocols Reporting and closure
- 40. • Fraud investigator gather and analyze the necessary evidence required by management and legal authorities. • Fraud investigator answers the questions like extent of fraud and monetary value, when & where the fraud take place along with violation of specific laws. • Fraud investigations follow a sequence of activities that initiate with brainstorming and planning, follow through with information collection and analysis and concludes with identification of findings and giving recommendations. • The process can be iterative and may lead to additional findings. • The information collected and used need to be obtained, stored and released based on strict traceable protocols to ensure the report withstands scrutiny Investigation process Wrap-up
- 41. ONE: Fraud definitions and concepts TWO: Theory on fraudsters and behavioral understanding based on Fraud Triangle / Diamond theory THREE: Fraud investigation process overview FOUR: Nuances of evidence collection and analyses FIVE: Considerations for legal admissibility SIX: Prepare for litigation Key Takeaways
- 42. • Reflect over what we went through for 10 minutes after session today, 10 minutes tomorrow and 10 minutes prior to next session • Imbibe the concept of fraud, investigation formalities and considerations, and the need for standardized approach towards fraud examination. Call to Action