FRAUD DETECTION &

INVESTIGATION
 Fraud Detection - Approaches
Whistle-blowing systems
A reporting hotline or online system that allows the other to call in or to submit an
anonymous tip of a fraud suspicion.
Examples:
Internal systems/ hotlines
The Association of Certified Fraud Examiners
Allegience

Analyze data and transactions

Purpose: to look for the suspicious trends, numbers, and other anomalies.
Examples:
Banks: Installed programs in order to identify suspected kitin
Insurance Company: Examine the claims within short time after purchasing insurance
Organizations: Implemented comprehensive fraud detection programs
US Banks: Installed a back-room function to scan the customer transactions (unusual
activity).
Short Case (Forensic Accounting
Fourth Edition - Case 1, Page 352)
You have recently graduated from college with an MBA. Upon graduation,
you start working for Roosevelt Power Plant. The boss, Mr. Jones, invites you
into his office. Mr. Jones describes to you a large fraud that has recently
taken place in the Company. He asks you what actions should be taken to
ensure that fraud does not occur again. After analyzing the Company, you
compile a list of actions that will be needed to prevent fraud from
occurring again. Upon presenting the necessary steps and controls to be
taken, Mr. Jones notices your suggestion: Create a culture of honesty and
create a positive work environment for employees. Mr. Jones is enraged
and wants to know what a positive work environment has to do with the
prevention and detection of fraud.
1. What would you tell Mr. Jones about why a positive work environment will help
prevent fraud?
2. What factors would you tell Mr. Jones contribute to a negative work
environment?
FRAUD INVESTIGATIONS
What is fraud investigations?

Is a process gathering data or evidence to prove

fraud happen.

Purposes

To discover the TRUTH

How it triggers?

Tips and fraud symptoms

Predictions
Circumstances taken as a whole, that would lead a
reasonable, prudent professional to believe a fraud
has occur, occurring or will occur.
Approaches to Fraud Investigations
The investigations must have approval
from managements.
Only pursue when there are reasons to
believe fraud happen.
Investigations may vary according to
case encounter.
Can be classified by types of evidence or
elements of fraud
Types of Evidence (Evidence Square)

Testimonial Documentary
evidence evidence

Physical Personal
evidence observations
 Testimonial evidence
Admissible in court, Interviewing
evidence
Testimony

Technique
Statements that are made Interrogations
in court by witnesses and
that are offered as proof of Honesty test
the matter asserted, or of
what is being discussed.
Sources: Testimonial Evidence & Law: Definition & Examples
http://study.com/academy/lesson/testimonial-evidence-law-definition-examples.html
Documentary evidence
Gathered from paper, computer Document examinations
evidence

Technique
Documentary

and other written or printed sources Data mining

I.e.: Contract between two party Public records searches
Audits
Net worth calculations
Financial statement analysis
Sources: Documentary Evidence http://criminal.findlaw.com/criminal-procedure/documentary-evidence.html
Gathering Using

Personal Observations
Physical evidence
involves sensory
(seen,
expert; Fingerprints Invigilation
heard, felt)

Technique
In example
forensic Surveillance
analysis Tire marks
Covert
Weapons
operations
Stolen
property
Id no.
 Theft act

Elements of fraud

Concealment Conversion
 Theft act Concealment Conversions

Effort to catch the Focusing on Searching for

perpetrator records, ways in which
Effort to gather documents, perpetrators have
fact regarding the computer spent or used their
act programs and stolen assets.
Techniques: server and other
surveillance and places that
covert operations, perpetrator
seizing the conceal or hide
property, the act
invigilation,
physical evidence
 Document
Interviewing Interrogations Honesty test
examinations

Public
Net worth
Data mining records Audits
calculations
searches

Financial Surveillance
statement Invigilation and covert
analysis operations
Interviewing
How interview help with
the investigation:
Help to obtain information to
establish elements of fraud,
develop leads for other
evidence, gain cooperation
of victims and witnesses, and
determine background and
motives of witnesses.
Types of interview:
Friendly
Neutral
Hostile
Interrogations
Similar to interview .
Ask someone a lot of
questions for a long time in
order to get information,
sometimes using threats or
violence.
Noted that confessions are
no admissible in court due
to human rights
Sources: Interrogations definitions
http://dictionary.cambridge.org/dictionary/english/i
nterrogate
 Honesty Test
Pencil-and-Paper Test
Objective tests that elicit information about a persons honesty and personal code of ethics, more
frequently used as employee screening devices.
Pencil and-paper tests are considered to be between 50 and 90 percent accurate. Some of the
more common ones are the Reid Report, the Personnel Selection Inventory, and the Stanton Survey.
Advantages is that
the results can be tabulated by a computer in a matter of minutes, making them ideal for applicant
screening or initial identification of possible suspects.
Graphology
The study of handwriting for the purpose of character analysis.
Voice Stress Analysis
determines whether a person is lying or telling the truth by using a mechanical device connected to
the person.
Polygraphs
more complicated than voice stress analysers in that they attempt to assess stress, and hence lying,
by measuring key physical responses. The theory is that people feel guilty when they lie or are
dishonest. The guilt feelings produce stress, which results in changes in behaviour. Polygraphs
measure pulse rate, blood pressure, galvanic skin response, and respiration. Like voice stress
analysers, polygraphs sometimes lead to incorrect decisions because they frighten innocent
people.
 Data Mining

Match employee addresses against vendor addresses.

Sort vendor list by size to determine the most highly paid
suppliers.
Review the structure of vendor names.
Uncover indications of ghost employees (e.g., N.O.
Police dept.).
Fraudulent expense reports (even amounts, $6).
Repeated withdrawals of even amounts from petty
cash.
D.L. Crumbley 1 Forensic Accounting: Some Strategies for Detecting & Preventing Fraud D. Larry Crumbley, CPA, CFF, Cr.FA, MAFF, FCPA KPMG Endowed Professor.
Public Records Searches
Invigilation
A technique that involves
close supervision of
suspects during an
examination period.
An expensive technique.
Management must decide
on the precise nature of the
increased temporary
controls necessary to
remove fraud opportunities.
 Surveillance and Covert Operations
Description:Watching and
recording (on paper, film, or
magnetic tape) the physical
facts, acts, and movements,
which form part of a fraud.
Stationery Of Fixed
Point
SURVEILLANCE
When to use undercover investigation:
Large-scale collusive fraud or crime is likely
Other methods of fraud investigation fail
the investigation can be closely monitored
There is significant reason to believe that the
fraud is occurring or reoccurring
The investigation is in strict compliance with

the laws and ethics of the organization

TYPES OF

Moving Or Tailing The investigation can remain secretive

Law enforcement authorities are informed
Electronic when appropriate evidence has been
Surveillance accumulated.
 Conduction a Fraud Investigation

1. Undertake to establish the truth of the matter under

consideration
2. Dont jump to conclusions-investigator needs experience &
objectivity
3. Keep information to yourself, keep speculation to yourself
4. Keep those who need to know informed
5. Independently corroborate information
6. Use investigative techniques that are legally sound & fair
7. Report all the facts fairly & objectively- point to the guilty &
exonerate the innocent