Investigating Theft and Embezzlement - In the Workplace

2,941 views

Published on

Bill Acuff presented this PowerPoint at the North Alabama IIA's March 2012 Meeting.

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
2,941
On SlideShare
0
From Embeds
0
Number of Embeds
149
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Investigating Theft and Embezzlement - In the Workplace

  1. 1. A Global Reach with a Local Perspective www.decosimo.comInvestigating Theft and Embezzlement –In the WorkplaceNorth Alabama Chapter Institute of Internal Auditors - March 2012 Meeting March 13, 2012A Forensic Accountant’s Perspective
  2. 2. WHAT IS FORENSIC ACCOUNTING? “The Art of figuring out what we don’t know”
  3. 3. AUDITORS AND FORENSIC ACCOUNTANTS ► Auditors usually reason from numbers to people, forensic accountants seem to do the reverse ► Auditors typically do not presume fraud exists and are generally more trusting ► Auditors may make materiality judgments ► Forensic accountants may have “self-selected” into the investigative side and are natural sleuths ► Forensic accountants have the benefit of years of experience with different fraud schemes ► Forensic accountants adopt different approaches beyond the auditor’s tool kit, such as e-mail reviews, computer forensics and space-time analysis
  4. 4. 2010 CORRUPTION INDEX
  5. 5. Institute of Financial Operations International Accounts Payable Professionals (IAPP), International Accounts Receivable Professionals (IARP), the National Association of Purchasing & Payables (NAPP), and The Association for Work Process Improvement (TAWPI) May 15, 2011 - In informal poll of 622 managers, 72% said fraud in the back office was on the rise
  6. 6. WHAT IS FRAUD? Black’s Law Dictionary - “Fraud is a generic term, and embraces all the multifarious means which human ingenuity can devise, which are resorted to by one individual, to get an advantage over another by false representations. No definite and invariable rule can be laid down as a general proposition in defining fraud, as it includes surprise, trickery, cunning and unfair ways by which another is cheated. The only boundaries defining it are those which limit human knavery.” Legal Elements of Fraud - 1. A material false statement 2. Knowledge that the statement was false when it was made 3. Reliance on the false statement by the victim, and 4. Damages as a result
  7. 7. OCCUPATIONAL FRAUD AND ABUSE The use of one’s occupation for personal enrichment The misconduct of employees, managers and executives Internal fraud
  8. 8. O c c u p a t io n a l F ra ud an d A bus e Asset Fr a udule nt C or r uption M is a ppr opr ia tion S ta te m e ntsC o n f lic t s Ille g a l E c o n o m ic Non- B rib e r y F in a n c ia lo f In t e re s t G ra t u it ie s E x t o rt io n F in a n c ia l P u rch a se In vo ice A sse t/R e ve n u e A sse t/R e ve n u e E m p lo ym e n t S ch e m e s K ickb a cks O ve rsta te m e n t U n d e rsta te m e n t C re d e n tia ls Tim in g In te rn a l S a le s B ig R ig g in g D iffe re n ce s S ch e m e s D o cu m e n ts Fictitio u s R e ve n u e s E xte rn a l O th e r O th e r D o cu m e n ts C o n ce a le d L ia b ilitie s & E xp e n se s Im p ro p e r D isclo su re s Im p ro p e r A sse t In v e n t o r y V a lu a tio n s C ash a n d a ll O th er A sset s La rc e ny S k im m ing M is us e La rc e ny C a sh S a le s R e ce iva b le s R e fu n d s & O n Han d O th e r A sse t R e q . & Tra n sfe r W rite -o ff U n re co r d e d Fr o m th e S ch e m e s D e p o sit Fa lse S a le s & S h ip p in g U n d e rsta te d L a p p in g S ch e m e s O th e r Fra ud ule n t P u rch a sin g & D is bu rs e m e nt s R e ce ivin g U n co n ce a le d U n co n ce a le d L a rce n y B illin g P a yro ll E xp e n se C h e ck R e g iste r S ch e m e s S ch e m e s R e im b u rse m e n ts Ta m p e rin g D isb u rse m e n ts S h e ll G h o st M isch a ra cte rize d Fo rg e d Co mp an y E m p lo ye e s E xp e n se s M a ke r Fa lse V o id s N o n -A cco m p lice Fo rg e d Fa lse C o m m issio n O ve rsta te d V e nd or E n d o rse m e n t R e fu n d s S ch e m e s E xp e n se s P e rso n a l A lte re d W o rke rs Fictitio u s P u rch a se s P a ye e C o m p e n sa tio n E xp e n se s C o n ce a le d Fa lsifie d M u ltip le C h e cks W age s R e im b u rse m e n ts A u th o rize d M a ke r
  9. 9. COSO’S FRAUDULENT FINANCIALREPORTING 1998-2007 Common Financial Statement Fraud Techniques  Improper Revenue Recognition 61%  Overstatement of Assets 51%  Understatement of Expenses/Liabilities 31%  Misappropriation of Assets 14%  Inappropriate Disclosures 1%  Other Miscellaneous Techniques 20%  Disguised Through Related Party Trans 18%  Insider Trading Cited 24%
  10. 10. COSO’S FRAUDULENT FINANCIALREPORTING 1998-2007 Improper Revenue Recognition  Sham sales  Conditional sales  Round-tripping  Loans as sales  Bill and hold  Revenue before sale completed  Improper cutoff of sales  Improper use of percentage of completion  Unauthorized shipments  Consignment sales
  11. 11. COSO’S FRAUDULENT FINANCIALREPORTING 1998-2007 Asset Accounts Misstated  Inventory  Accounts Receivable  Property and Equipment  Cash/Marketable Securities  Loans and Notes Receivable  Investments  Prepaid Expenses
  12. 12. O c c u p a t io n a l F ra ud an d A bus e Asset Fr a udule nt C or r uption M is a ppr opr ia tion S ta te m e ntsC o n f lic t s Ille g a l E c o n o m ic Non- B rib e r y F in a n c ia lo f In t e re s t G ra t u it ie s E x t o rt io n F in a n c ia l P u rch a se In vo ice A sse t/R e ve n u e A sse t/R e ve n u e E m p lo ym e n t S ch e m e s K ickb a cks O ve rsta te m e n t U n d e rsta te m e n t C re d e n tia ls Tim in g In te rn a l S a le s B ig R ig g in g D iffe re n ce s S ch e m e s D o cu m e n ts Fictitio u s R e ve n u e s E xte rn a l O th e r O th e r D o cu m e n ts C o n ce a le d L ia b ilitie s & E xp e n se s Im p ro p e r D isclo su re s Im p ro p e r A sse t In v e n t o r y V a lu a tio n s C ash a n d a ll O th er A sset s La rc e ny S k im m ing M is us e La rc e ny C a sh S a le s R e ce iva b le s R e fu n d s & O n Han d O th e r A sse t R e q . & Tra n sfe r W rite -o ff U n re co r d e d Fr o m th e S ch e m e s D e p o sit Fa lse S a le s & S h ip p in g U n d e rsta te d L a p p in g S ch e m e s O th e r Fra ud ule n t P u rch a sin g & D is bu rs e m e nt s R e ce ivin g U n co n ce a le d U n co n ce a le d L a rce n y B illin g P a yro ll E xp e n se C h e ck R e g iste r S ch e m e s S ch e m e s R e im b u rse m e n ts Ta m p e rin g D isb u rse m e n ts S h e ll G h o st M isch a ra cte rize d Fo rg e d Co mp an y E m p lo ye e s E xp e n se s M a ke r Fa lse V o id s N o n -A cco m p lice Fo rg e d Fa lse C o m m issio n O ve rsta te d V e nd or E n d o rse m e n t R e fu n d s S ch e m e s E xp e n se s P e rso n a l A lte re d W o rke rs Fictitio u s P u rch a se s P a ye e C o m p e n sa tio n E xp e n se s C o n ce a le d Fa lsifie d M u ltip le C h e cks W age s R e im b u rse m e n ts A u th o rize d M a ke r
  13. 13. O c c u p a t io n a l F ra ud an d A bus e Asset Fr a udule nt C or r uption M is a ppr opr ia tion S ta te m e ntsC o n f lic t s Ille g a l E c o n o m ic Non- B rib e r y F in a n c ia lo f In t e re s t G ra t u it ie s E x t o rt io n F in a n c ia l P u rch a se In vo ice A sse t/R e ve n u e A sse t/R e ve n u e E m p lo ym e n t S ch e m e s K ickb a cks O ve rsta te m e n t U n d e rsta te m e n t C re d e n tia ls Tim in g In te rn a l S a le s B ig R ig g in g D iffe re n ce s S ch e m e s D o cu m e n ts Fictitio u s R e ve n u e s E xte rn a l O th e r O th e r D o cu m e n ts C o n ce a le d L ia b ilitie s & E xp e n se s Im p ro p e r D isclo su re s Im p ro p e r A sse t In v e n t o r y V a lu a tio n s C ash a n d a ll O th er A sset s La rc e ny S k im m ing M is us e La rc e ny C a sh S a le s R e ce iva b le s R e fu n d s & O n Han d O th e r A sse t R e q . & Tra n sfe r W rite -o ff U n re co r d e d Fr o m th e S ch e m e s D e p o sit Fa lse S a le s & S h ip p in g U n d e rsta te d L a p p in g S ch e m e s O th e r Fra ud ule n t P u rch a sin g & D is bu rs e m e nt s R e ce ivin g U n co n ce a le d U n co n ce a le d L a rce n y B illin g P a yro ll E xp e n se C h e ck R e g iste r S ch e m e s S ch e m e s R e im b u rse m e n ts Ta m p e rin g D isb u rse m e n ts S h e ll G h o st M isch a ra cte rize d Fo rg e d Co mp an y E m p lo ye e s E xp e n se s M a ke r Fa lse V o id s N o n -A cco m p lice Fo rg e d Fa lse C o m m issio n O ve rsta te d V e nd or E n d o rse m e n t R e fu n d s S ch e m e s E xp e n se s P e rso n a l A lte re d W o rke rs Fictitio u s P u rch a se s P a ye e C o m p e n sa tio n E xp e n se s C o n ce a le d Fa lsifie d M u ltip le C h e cks W age s R e im b u rse m e n ts A u th o rize d M a ke r
  14. 14. Billing Schemes Perpetrator causes the victim organization to issue a payment by submitting invoices for fictitious goods or services, inflated invoices or personal purchases: • Invoicing via Shell Companies Submitting False Invoices Pass through Entities • Non-Accomplice Vendor Pay and return Overbilling or duplicate invoices • Personal Purchases
  15. 15. Check Tampering Scheme Perpetrator converts an organization’s funds by forging or altering a check on one of the organization’s bank accounts, or steals a check the organization has legitimately issued to another payee: • Forged Maker • Forged Endorsements • Altered Payee • Concealed Check • Authorized Maker
  16. 16. BENEFITS OF ANEFFECITVE INVESTIGATION Figure out what happened Deal with employee problems early Enforce company policies Encourage reporting Avoid or counter bad publicity Protect your company from lawsuits
  17. 17. WHAT DO YOU WANT TO ACCOMPLISH? Who done it Find out the amount of losses Obtain justice Set an example Obtain restitution Determine weaknesses in internal control Terminate the employee File criminal complaint with authorities File civil lawsuit File claim for insurance
  18. 18. HOW DO YOU CONDUCT THE RIGHTINVESTIGATION? Be fair Be thorough Make good-faith efforts to get to the truth
  19. 19. STEPS TO A SUCCESSFUL INVESTIGATION Decide to investigate Take immediate action Choose an investigator Plan the investigation Interviews Gather documents and other evidence Evaluate the evidence Take action Document the investigation Report writing and follow up
  20. 20. DEFAMATION DEFENCES Speak only to people who have a legitimate need to know Make only statements you know to be true Good-faith reference to a prospective employer Good-faith statement to a government agency
  21. 21. COMMON INVESTIGATION MISTAKES Failing to investigate Delay Inconsistency Retaliation Failing to be through Compromising confidentiality Losing objectivity Strong-arm interview tactics
  22. 22. ITEMS TO CONSIDER WHENINVESTIGATING Privacy issues Chain of custody 1) who has had possession and 2) what have the done with it Miranda Fair Credit Reporting Act
  23. 23. DISCOVERING PROBLEMS Formal complaints Anonymous complaints Reports by managers, supervisors or internal auditors Workplace observation Third party reports
  24. 24. PREDICATION“The totality of circumstances that would lead a reasonable, professionally trained and prudent individual to believe a fraud had occurred, is occurring or will occur.”
  25. 25. FRAUD THEORY APPROACH Analyze available data Create hypothesis Test the hypothesis Refine and amend hypothesis
  26. 26. ELEMENTS OF PROOF –FALSE INVOICING SCHEME Individual created the invoices Invoices were false Victim company acted upon the invoices Victim company suffered damage Individual received the payments Individual knew the invoices were false
  27. 27. PROVING INTENT Could not have a legitimate motive for their actions Altered documents Took steps to conceal or destroy evidence or obstruct the investigation Gave false, misleading statements concerning matters under investigation Repeatedly engaging in an activity of an apparent wrongful nature Personally gained from the fraudulent act
  28. 28. INTERVIEWING Interviewing is a conversation with a purpose Active listening Use of pregnant pauses Structure of the interview Detection of deception
  29. 29. INTERVIEWING Ask open-ended questions Start with easy questions Keep opinions to yourself Keep it confidential Ask to contact you with additional information Document your interviews Union members have a right to have a representative present Follow up interviews
  30. 30. ACTIVE LISTENTING“I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant.” - President Bill Clinton
  31. 31. General Rules forIntroductory Questions  Don’t interview more than one person at a time  Conduct interviews under conditions of privacy  Ask nonsensitive questions: Instead of: Use: Investigation Inquiry Audit Review Interview Ask a few questions Embezzle Shortage or paperwork problems31
  32. 32. DETECTION DECEPTION Text analysis or linguistic analysis helps determine a Probability of Deception Liars were found to be over 6 times more evasive than truth tellers Consider what a person might be trying not to tell us 98% of languages in the world, the Subject precedes the object - “John shot Bill” (active) as opposed to“Bill was shot by John” (passive)
  33. 33. DETECTING DECEPTION Untruthful person must response to inquiries by either lying directly of being verbally evasive For most people, instead of telling a direct lie, they will dilute, reroute and rearrange bits and pieces of language into verbal evasion A deceptive interviewee is an “intelligent organism” who views the interview as an exercise of survival The deceptive person is like an author if fiction who tries to write a believable story based upon real memories and imagination Each word, phrase and sentence the untruthful person utters must be carefully selected to misdirect and mislead a questioner away from “hot” areas
  34. 34. DETECTION DECEPTIONQ:“Did you steal any of the missing money?”A: “Why would I steal money from where I work? I’m not the kind of person to get involved in stuff like that. I would deny any accusations that points to me as being involved in this.”Can’t say “NO.” Already feeling guilt for stealing the money, now has to feel guilt about lying.Least Resistance: Evasion and indirect deception
  35. 35. DETECTION OF DECEPTIONMiller’s Law: In order to understand what a person is telling you, you must first accept that what the person has said is the complete truth, and then ask yourself: What is that true of?Q: “Tell me what you know about the money that is missing?”A: “There’s really not much I can tell you. There’s just not much I can say about it.”Rule of Thumb: If the response does not match the parameters of the data within the topic, apply Miller’s Law and put the response under a “linguistic microscope.”
  36. 36. DETECTION OF DECEPTION –Signs of Deception1. Lack of Self-Referral – “The safe was left unlocked” rather than “I left the safe unlocked.”2. Verb Tense – Truthful people usually describe historical events in the past tense. “After closing the store, I put the cash pouch in my car and drove to the bank. I entered the parking lot and rolled down my window, a guy jumps out and yells at me. He has a gun and he grabs the cash and runs away.”3. Answering Questions with Questions – “Do I seem like the kind of person who would do something like that?”4. Oaths – “I swear.” “as God as my witness.”5. Alluding to Actions – “I try to backup up my computer every night before going home. Last night, I decided to copy my files onto the network and I needed to lock up the deposits in the safe.”6. Lack of Detail – Truthful statements usually contain specific detail….song that was playing…..woman at the next table. Those who fabricate at story, tend to keep their statements simple and brief.
  37. 37. DETECTION OF DECEPTION – WAYS TO LIEWithout Lying – Thematic Categories1. Unfinished Business – “That’s about it, That’s about the size of it, I guess that’s about all”2. I Can’t… – “I can’t say, I can only tell you this, I can’t think of anything”3. Hypothetically Structured Phrase – Says that they could, would, should or ought to give us an answer, but does not. “I would say not.”4. Hard Question – “That’s a hard question to answer.”5. Objection – “I’m not the kind of person who would do that.”6. No Pause for Reflection – “I don’t remember, I don’t recall.”7. Maintenance of Dignity – “I beg your pardon, What kind of question is that to ask me”8. Interrogatory Evasive Response – “How should I know that?”9. Projection – “Someone would have to be sick to do that.”10. Accusatory – “Are you accusing me of doing that?”11. The Answer Is.... – “The answer is no.”12. Denial of Presence – “Is that question directed at me?, Who me?”
  38. 38. Admission-Seeking Questions  Distinguish the innocent from the culpable  Obtain a valid confession  Obtain from the confessor a written statement acknowledging the facts38
  39. 39. Admission-Seeking Questions  Presence of outsiders  Miranda warnings  Theme development  People will confess if they perceive that the benefits outweigh the penalties  Offer a morally acceptable reason for the confessor’s behavior  Convey absolute confidence in the premise of the admission you seek from the subject39
  40. 40. Accusing an Innocent Person  The accuser has reasonable suspicion or predication to believe the accused has committed an offense.  The accusation is made under conditions of privacy.  The accuser does not take any action likely to make an innocent person confess.  The accusation is conducted under reasonable conditions.40
  41. 41. Steps In The Admission-Seeking Interview  Direct accusation  Observe reaction  Repeat accusation  Interrupt denials  Delays  Interruptions  Reasoning41
  42. 42. Steps In The Admission-Seeking Interview  Establish  Establish rationalization rationalization  Unfair treatment  Stress, drugs, alcohol  Revenge  Inadequate recognition  Depersonalizing the  Financial problems victim  Aberration of conduct  Minor moral infraction  Family problems  Altruism  Accuser’s actions  Genuine need 42
  43. 43. Steps In The Admission-Seeking Interview  Diffuse alibis  Display physical evidence  Discuss witnesses  Discuss deceptions  Present alternative  Benchmark admission  Reinforce rationalization43
  44. 44. Steps In The Admission-Seeking Interview  Verbal confession  That the accused knew the conduct was wrong  Facts known only to the perpetrator  An estimate of the number of instances or amounts  A motive for the offense  When the misconduct began44
  45. 45. Steps In The Admission-Seeking Interview  Verbal confession  When/if the misconduct was terminated  Others involved  Physical evidence  Disposition of proceeds  Location of assets  Specifics of each offense45
  46. 46. Discussion  BillAcuff@Decosimo.com

×