03 Oct

Can Fraud Investigations Reduce Fraud?

When consumers think about investigating fraud, they do not usually think of the investigation as part of an overall plan to reduce fraud in a company. An investigation is typically seen as a reactive process that is only engaged in when a major problem is identified. Fraud investigations are representative of something completely negative, and they should be avoided at all costs, because if we do not have fraud investigations, then we do not have fraud.

The reality is not quite so fatalistic. Fraud investigations can and should be a routine part of a proactive fraud prevention program. Anti-fraud education and proactive fraud prevention procedures are essential to reducing corporate fraud, but fraud investigations are a third and equally important part of the equation.

Even in companies with the most comprehensive fraud prevention policies, procedures, and controls, there will still be some level of fraud. Investigations are needed to thoroughly examine allegations and suspicions of fraud. They also play a deterrent role, as employees are less likely to engage in fraud if they know that periodic checks occur throughout the company.

It would be nice if fraud investigations became completely unnecessary, but that is not realistic. In companies with increasingly better anti-fraud controls, the need for reactive investigations should decrease. But fraud investigations should never be completely eliminated, because even the companies with the most effective fraud prevention programs will still have some instances of fraud to investigate. The hope is that incidents requiring a full-blown investigation will be decreased and that management can focus their best efforts on turning a profit instead of examining cases of fraud.

18 Sep

When to Stop Investigating

How does a fraud investigator know when enough investigation has been done on a case? If a scope of work was agreed upon with the client, the investigator should finish that work in order to meet her or his obligations. However, there could come a point in the investigation when the cost outweighs the benefit of further investigation. The client relies on the fraud investigator’s expertise and experience to guide the work. It is not the investigator’s job to spend as much of the client’s money as possible or stretch out the engagement as long as possible.

The fraud investigator should alert the client to the issue, and explain why there may not be much benefit in continuing the investigation. If the client still decides to continue the work, the fraud examiner should cooperate. Ultimately, it is the client’s decision to continue or suspend work. Read More

10 Sep

Fraud Investigations vs. Traditional Audits

After management becomes aware of a potential fraud and decides that a fraud investigation is necessary, the process of creating a team, mapping the investigation plan, and requesting information begins. An organized approach is the best way to ensure that all facets of the investigation flow smoothly, that staff is properly assigned and supervised, and that all critical evidence is analyzed.

Many of the administrative parts of a forensic accounting or fraud investigation project are similar to those in a traditional auditing assignment. For those who have played an active role in managing audit engagements, some of this information will be familiar. Read More

20 Aug

Tax Returns and Divorce Cases

One of the most common documents utilized in a financial investigation is the income tax return. It’s a key document in any divorce case, so the personal income tax return is always examined. And if there is a business, the tax return for that entity should be examined too.

What can we learn from the tax return? Maybe more than you imagine. Today I’m going to walk through the lines on the personal tax return (Form 1040) and some ways that these items can be analyzed to search for hidden income and hidden assets. Read More

14 Aug

Net Worth Method of Proof for Unreported Income

When an IRS auditor or criminal investigator suspects that a taxpayer has unreported sources of income, he or she looks for ways to calculate that unreported income. One way is the net worth method of proof.

Forensic accountants and fraud investigators can use the same method to calculate unreported income in other types of cases, such as divorce. In this video, Tracy describes how the calculation is done and how the results may be used.

02 Aug

Interviewing in Fraud Investigations

Interviewing witnesses and suspects is a critical part of any fraud investigation. There are tons of resources out there to help fraud investigators learn how to be effective interviews. There are books, videos, courses, and certifications.  I’m going to quickly cover some of the high points of interviewing here.

Fraud investigators are continually in question-and-answer mode when trying to understand a company, its operations, the players, and the suspected fraud. Much of this is done informally, with an information exchange between employees and investigators.

A big part of interviewing involves having the right demeanor and body language. People who are uninvolved in the fraud and are giving you information want to feel comfortable doing so, and they want to know that the investigator is listening. That has to be accomplished while directing the discussions so that time is not wasted on much unnecessary commentary. There must be a focus on the items that will help solve the case.

The best interviewers are able to connect with those being interviewed in a way that makes them want to help and provide information. They have a way of guiding the discussion while listening to the person giving information. They do not interrupt a lot, and even when they need to focus the interviewee, they do it in a way that does not seem like an interruption. Excellent interviewers have the ability to put the interviewee at ease. They are professional in their demeanor, yet relaxed enough that the interviewee feels comfortable sharing information. Read More

26 Jul

Management’s Judgment and Financial Statement Fraud

With thousands of detailed accounting rules, how can there be financial statement fraud? There are areas of the financial statements that rely heavily on the judgment of management. They make estimates and decide how to apply the accounting rules. This leaves the door wide open for abuse.

Many accounting entries are pretty simple. It’s easy when the company buys a small item, gets an invoice for it, and pays it. We can record the amounts and the dates pretty simply based on that information.

But it gets more difficult when the situation is not so black and white. For example, when a company sells a long-term service contract to a customer, when is that revenue recognized? The revenue usually is going to be recorded over time, and the way to calculate this can vary.

Who is to say that management won’t decide to recognize the revenue using a schedule most beneficial to that company? There may be reasons for wanting to recognize that revenue sooner or later, and management has the ability to manipulate the situation.

19 Jul

Keeping Forensic Reports Simple

Making complex transactions easy to understand is no small task, but it is part of the job of any good fraud investigator. You can find the most earth-shattering proof of fraud, but if you cannot articulate your findings in a report that others can understand, your investigation results are not worth much.

Use graphs, charts, and tables to help illustrate your points. Even though you may not need a graph or chart to demonstrate your findings, consider that the reader of your report might benefit from it. Remember that people learn and comprehend in different ways, and that fact could be very important if your case ever goes in front of a jury.

One juror might understand your written words best, so it is important to make the report very reader-friendly with short, well-organized paragraphs. Other jurors might understand the most by listening to your court testimony, which should support and reiterate the written report. Other jurors might be most receptive to pictures or charts that demonstrate what you have found. Read More

12 Jun

The Fraud Investigation Report

Reporting the findings of a fraud investigation will require varying levels of detail and precision, depending on the specifics of the engagement. Yet it is fairly easy to develop a standard reporting process that can be followed by staff.

One option in some cases is providing an oral report to the client and counsel. This is not the most common way to report on the findings of a fraud investigation. However, it is appropriate in certain cases, such as ones in which legal counsel does not yet want a discoverable report in the file.

The results of a fraud investigation are usually detailed in a written report. When writing a report, the fraud investigator must remember who will be reading the report. It is important to consider that even though today the report may only be for a company’s internal purposes, somewhere down the road the report may be used by law enforcement or in court proceedings. So it is important to know the current audience for an investigation report, but it is also imperative to consider who might need the report in the future. Read More

14 May

Finding Hidden Income in a Cash Business

I love working on divorce cases where one spouse is trying to hide money.

When a business owner has a cash business and is getting divorced, sometimes the income coincidentally (or not so coincidentally!) drops dramatically.

What can we do to investigate that? It’s hard. The business owner knows that cash leaves no paper trail and is difficult to prove.

But all is not lost. There are techniques we can use to find indirect proof of the amount of cash a business should be generating (even if the owner isn’t reporting all of it). Read More