4. Why Be Concerned?
• Not likely to happen to me.
• Not my job
• If something happens, someone else will look
after it – Lawyers, forensic accountants,
investigators, police, etc.
5. The Current Climate
Newsworthy
Incidents of Fraud in all forms are attracting the
attention of national and international media
Kenneth Lay, Bernie Ebbers,
Bernard Madoff, David Walsh,
Conrad Black, Earl Jones, Rashida Samji
6. The Current Climate
Civil Courts
• 2010 - Rules of Civil Procedure being amended –
improve accessibility and affordability
• Length of pre-trial Discovery process reduced
• Increased pressure upon investigation to discover all
relevant evidence
• ADR / Mediation
7. The Current Climate
Criminal Courts
• Prosecution difficult – time/resource constraints – Judges
and Crown Attorneys
• Burden of Proof – Mens Rea difficult to prove
• Large number of witnesses
• Issues tend to be complex with large volume of
documents and electronic data
• Motivated to enter into plea settlements
8. The Current Climate
Enforcement
The resources of municipal, regional, provincial
and national fraud offices are experiencing
overwhelming volumes of files which has a
negative impact upon their ability to
effectively and successfully investigate and
prosecute allegations of fraud.
9. The Current Climate
Industry Making Adjustments
Phone Busters
Financial Services Commission of Ontario
Ministry of Consumer Services
Special Investigations Units (i.e. Insurance)
Private Industry
Financial Transactions and Reports Analysis Centre
of Canada (Fintrac)
10. The Current Climate
The responsibility for effectively preventing and
investigating allegations of fraud and other
workplace incidents is being transferred on a
more regular and consistent basis to private
financial and investigative professionals
11. Poor Investigations - Implications
• Unsuccessful Criminal Prosecution
• Unsuccessful Civil Prosecution
• Civil Liability for the Company
• Potential Personal Liability
• Decreased Workplace Morale
• Loss of Credibility
• Inability to Recover Losses
• Costs
12. The Current Climate
• Most Financial Crimes Units of GTA police
services require that a fraud investigation be
undertaken and a report prepared before they
will undertake a criminal investigation.
• Typically these reports are prepared by a forensic
accountant, investigator or some combination of
the two.
• Enforcement will then use results of preliminary
investigations to conduct search warrants and
further inquiry.
13. Criminal vs Civil Fraud
Criminal Code
Every one who, by deceit, falsehood or other
fraudulent means, whether or not it is a false
pretence within the meaning of this Act,
defrauds the public or any person, whether
ascertained or not, of any property, money or
valuable security or any service…
Source: Criminal Code of Canada
14. Criminal Code Fraud Penalties
• < $5,000.00: Term of imprisonment not
exceeding two years
• > $5,000.00: Term of imprisonment not
exceeding 14 years
15. Criminal Code Fraud Penalties
Standing up for Victims of White Collar Crime
Act (2010):
Where the value of the subject matter of the
offence(s) exceeds one million dollars, the court
shall impose a minimum sentence of two years
imprisonment
16. Criminal Code Fraud – Sentencing
Total of six aggravating circumstances – four are
applicable to instances of fraud in the workplace:
• Magnitude, complexity, duration or degree of
planning of the fraud committed was significant
• The offence had a significant impact on the
victims given their personal circumstances
including their age, health and financial situation
17. Criminal Code Fraud - Sentencing
• The offender did not comply with a licensing
requirement, or professional standard, that is
normally applicable to the activity or conduct
that forms the subject-matter of the offence;
• The offender concealed or destroyed records
related to the fraud or to the disbursement of
the proceeds of the fraud.
18. Civil Fraud
• 2014 – Supreme Court of Canada articulated
the test to be applied to alleged incidents of
civil fraud:
1. False representation made by the defendant;
2. Some level of knowledge of the falsehood of
the representation on the part of the
defendant (whether through knowledge or
recklessness);
19. Civil Fraud
3) The false representation caused the
plaintiff to act; and
4) The plaintiff’s actions resulted in a loss.
Source: Bruno Appliance and Furniture, Inc. v. Hryniak 2014 SCC 8
20. Criminal vs. Civil
Primary Considerations:
(1) – Burden of Proof
• Criminal Fraud – Beyond Reasonable Doubt
• Civil Fraud – Balance of Probabilities
21. Criminal Vs. Civil
Beyond a Reasonable Doubt:
• No strict legal definition
• Tied to the presumption of innocence
• Reasonable doubt – based upon reason and
common sense
• Doubt based upon not only what the evidence
tells you but also what the evidence does not
tell you.
Source: Canadian Judicial Counsel
Revised February 2004
22. Criminal vs. Civil
Balance of Probabilities:
• No strict legal definition
• Based upon the preponderance and weight of
evidence the facts as alleged are probably true
• Lower standard than the criminal courts
• Enhanced Balance of Probabilities struck down
by Supreme Court of Canada.
23. Criminal vs. Civil
(2) Evidence Continuity
(Chain of Custody)
Criminal Code - Strictly enforced
- Must establish continuity of all
evidence presented in court
Civil - Rules more relaxed
24. Criminal vs. Civil
(3) Control of Investigation
Criminal - Investigation controlled by
Police and Crown Attorneys
Civil - Investigation controlled by
client and counsel
25. CRIMINAL VS. CIVIL
(4) Restitution
Criminal - Focused on guilt or innocence
- Restitution Orders survive
bankruptcy
Civil - Focused on liability
- More likely to issue a judgment
awarding financial damages
- Judgments do not survive bankruptcy
31. The Fraud Triangle
OPPORTUNITY
• Weak internal controls
• Poor management oversight
• High levels of trust
• Little or no accountability
32. The Fraud Triangle
RATIONALIZATION
• Entitlement – unacknowledged contributions
to the company; no pay raises; passed over for
promotion
• Need – cannot sustain lifestyle, look after
family
• Borrowing – will repay funds
34. The Fraudster’s Profile
• Male
• 31 – 45 years
• Length of employment > 6 years
• Generally holds a position in accounting
• Collusion – internal and/or external
• No history of prior involvement in fraudulent
activities.
• Holds position of trust among colleagues and
management
• Likely considered a very good employee
35. Two Main Types of Fraudsters
Opportunistic
• Most common
• Generally will be deterred by effective fraud
prevention measures
Predatory
• More rare
• Intent is to defraud his/her employer
37. Workplace Investigations
Common Weak Points
• Poor or inconsistent communication
• Inadequate policies and procedures/Poor internal
controls
• Evidence retrieval and continuity – electronic or
otherwise
• Pre-mature action by management
• Lack of timely and impartial investigations
• Statements – induced, evidence of intimidation
• Non-compliant
• Suspect not provided the opportunity to give their side of
the story
39. Workplace Investigations
Proactive Strategies
• Examination of existing systems and assess fraud
exposure
• Establish Policies and Procedures
• Ensure communication with all staff – reinforce
message (i.e. annual performance reviews)
40. Detection
• Observation - lifestyle
• Awareness - vacation time
• Spot Inspections/Audits
• Communication
• Variance Analysis - margins
- expenses
- inventory
• Inventory Write Down
• Snitch Lines - confidential and safe
- effective tool for detection and
prevention
- must be acted upon
- opportunity for abuse and revenge
41. The Interview
• Purpose
new information
confirmation
identify deception / contradictions
• Preparation
personnel file
associates
job history/duties
• Environment
location
sanitize
42. The Interview
• Dynamics
one on one
two on one
clear and direct questions
accurate and complete record of response
• Record
video
audio - if no, record rejection
- if yes - sign on
- date, time, location
- note those present
- general purpose
- start and stop times
- sign off
handwritten notes
43. The Interview
• Evidence Source
Control
Continuity / Chain of Custody
• Form Question and Answer
Pure Version
Own Handwriting
Signed
44. The Interview
• Concerns Person in Authority
Objectivity
Inducements
Threats
Voluntary
Suitability for Court
Female – ensure witness /
other female present
46. Case Study - Objectives
• Raise awareness regarding how important it is
to be diligent when conducting any attest
engagement.
• Understand how easy it is for a fraudster to
hide a fraud
47. Case Study – How is Fraud Detected?
• ACFE – Report to the Nations - 2014
– Tip – 42.2%
– Management review – 16%
– By Accident – 6.8%
– Account reconciliation – 6.6%
– Document examination – 4.2%
– External audit – 3.6%
– Surveillance monitoring – 2.6%
– Notified by Law Enforcement – 2.2%
– IT Controls – 1.1%
– Confession – 0.8%
– Other - 0.5%
48. Case Study – Employee Fraud
• Company History
– Very successful family owned manufacturing plant
– John and Mary Smith started company in 1980’s
– John President / Mary Treasurer
– Daughter-in-laws trained to do the accounting
– 2007 Company computerized started using
Quickbooks
– 2009 hired an external person
– Oct. 2010 daughter-in-law took maternity leave
49. Case Study – Employee Fraud
• Fraudster – Peggy Greedy
– Friendly, very keen, took on more responsibility
– Learned how the company ran
– She handled AP and ordering supplies
– She assisted with collecting outstanding AR
– Supervised by a daughter-in-law who was
responsible for payroll
– In October 2010 Peggy took over payroll in
addition to AR/AP
50. Case Study – Employee Fraud
• The First Clue
– January 2014 – President noted that the monthly
Visa statement, which he normally reviewed, was
not received
– Continuous follow-up with Peggy re Visa
– There appeared to be a $1,000 payment the
President did not recall authorizing
– Phoned the bank in early February
51. Case Study – Employee Fraud
• Bank Information
– There were numerous Facebook charges to Visa
that were not on the statement provided
– Peggy, could not provide any explanation for the
charges
– Initial thought –Visa account had been
compromised
52. Case Study – Employee Fraud
• Second clue
– Phone call to Senior Account Manager at bank
– Senior Account Manager stated that Peggy
requested the January $1,000 transfer
– In total there were three transfers from Business
account
– Obtained a new copy of the Visa statement
compared it to the copy provided by Peggy
53. Case Study – Employee Fraud
• Third clue
– Accountant was called in second week of February
– President explained issue of Visa
– Reviewed bank statements discovered several
pages were missing from the bank statements
– Reviewed QuickBooks reports
– Discovered several cheques written to Peggy and
her husband
58. Case Study – Employee Fraud
• Estimated Fraud
Cheques - Payees are Peggy and Kane Greedy
December 20, 2010 to January 13, 2014
Cheque # Cheque Date Payee Cheque amount
Cleared
RBC
2748 20-Dec-10 Peggy Greedy 16,895.25 11/Feb/11
3289 6-Sep-11 Kane Greedy 8,846.00 7-Sep-11
3418 4-Nov-11 Peggy Greedy 5,136.51 7/Nov/11
3646 18-Jan-12 Peggy Greedy 2,564.36 19/Jan/12
3656 12-Feb-12 Kane Greedy 4,789.81 19/Mar/12
3805 20-Mar-12 Peggy Greedy 2,577.46 21/Mar/12
3829 5-Apr-12 Peggy Greedy 1,889.62 9/Apr/12
4348 28-Sep-12 Kane Greedy 7,405.31 1/Oct/12
4369 9-Oct-12 Kane Greedy 5,112.58 15-Oct-12
4825 18-Mar-13 Kane Greedy 19,720.00 20-Mar-13
4829 22-Mar-13 Peggy Greedy 607.71 25/Mar/13
4838 27-Mar-13 Peggy Greedy 2,302.06 29/Mar/13
4848 5-Apr-13 Peggy Greedy 3,600.00 3/May/13
5521 31-Dec-13 Peggy Greedy 6,041.36 ** 31/Dec/13
5528 13-Jan-14 Peggy Greedy 3,551.69 13/Jan/14
5531 30-Dec-13 Peggy Greedy 18,800.00 ** 30/Dec/13
$109,839.72
59. Case Study – Employee Fraud
• What went wrong?
– Level of trust placed in Peggy
– Lack of segregation of duties
– Lack of oversight
– Pre-signing of cheques
– Account Manager allowing funds transfer
60. Case Study – Employee Fraud
• Why does this matter to you?
• Review or Compilation Engagements
– Help set the Tone
– Still need some level of diligence
– Anything odd -
don’t ignore
– If it happens help
the client set
objectives &
minimize the loss
61. Case Study – Employee Fraud
• Remedies – depends on client’s objectives
– Civil
• Fidelity Insurance
• Civil law suit
– Criminal
• File a complaint with local Police
62. Fraud in the Workplace
QUESTIONS
????
Steve McIntyre, CFE,CFI, CFS
smcintyre@mgforensics.com
Penny Cookson, CPA, CA.IFA, CFE, CFF
pcookson@mgforensics.com
(416) 362-8743
