Best practices in conducting Financial Investigations

1. Best Practices in Conducting Financial Investigations in
a Cashed-Based Economy
Compiled and Presented
BY
Chief Godwin Emmanuel OYEDOKUN
(HND, BSc.Ed, MBA, MTP (SA), ACA, ACIB, AMNIM, ACTI, CFA, CFE, CPFA, FCFIP, CCFS, CNA, ACAMS, ACCA-CertIFR)
Asst. Director (Head) – Education, Research & Technical
The Chartered Institute of Taxation of Nigeria (CITN)
DL: +2348033737184, +2348095491026
godwinoye@yahoo.com
Being a paper presented at the
C5’s Third Forum on Anti-Corruption – West Africa
Held at Mövenpick Ambassador Hotel, Accra, Ghana on June 10 - 11, 2014

2. This presentation will cover the following major sub topics as follows:
• Introduction
• Corruption and its Challenges
• Cashed-Based Economy
• Black Economy & Underground Economy
• Investigation without accurate, incomplete or unreliable data
• Best Practices in conducting Financial Investigations
• Fraud, fraud triangle and the triangle of fraud action
• Forensic accounting techniques and forensic accountants in court
• Conclusion
2
Contents

3. 3
• Conducting investigation in cashed-based economy could be so tasking to
the extent that if care is not taking, it may amount to wasted effort, both in
term of fund and human resources employed in the cause of the
investigation.
• World economy is in stimulating, though in challenging times, effort must be
made and proper foundations must be laid to check the effect of the
challenges that comes with it.
• Fraud and corruption risks are not going away, in the word of Amato (2014),
the threats facing companies doing business anywhere, but especially in
emerging markets, are growing in number and complexity.
• It has been proven that traditional investigative skill can no longer resolve the
challenges posed by the fraudster in this century.
• This presentation will explore the Best Practices in conducting financial
investigations in a cashed-based Economy by exposing the reads to the
concepts that closely related to the understanding of the key words in this
article.
Introduction

4.  Corruption is the violation of the obligations of probity, fidelity and
impartiality in the exercise of a public service, to the detriment of the
user.
 Corruption is said to have taken place when an individual is paid to
perform or refrain from performing his duty either with gifts, promises
or presents; corruption is also deemed to have occurred when an
individual pays a compliant professional to do his work or to refrain
from doing so (Gerddes-Cameroon 1999).
 So many lives have been lost in the bid to tracing, investigating,
exposing, prosecuting and serving as expert witness in financial
investigation of these nature.
 This then leaves the professional forensic investigators to no other
option than to explore the best practices in conduction investigation of
this nature.
4
Corruption and its Challenges

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2015
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• According to collinsdictionary.com, cashed-based economy is an
economic system, or part of one, in which financial transactions are
carried out in cash rather than via direct debit, standing order, bank
transfer, or credit card.
• In this type of economy, it will be very difficult to trace the flow of fund
and the possibility of government losing tax income is very high.
• It is an unofficial or illegal part of the economy, where goods and
services are paid for in cash, and therefore not declared for tax
(qfinance.com)
• Cashed-based economy is not the same with cash basis of accounting
which is a major accounting method that recognizes revenues and
expenses at the time physical cash is actually received or paid out.
• Cashed-based Economy is similar to black economy or underground
economy.
Cashed-Based Economy

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• A black economy, is an economy where goods and services are paid for in
cash, and therefore not declared for tax (Investopodia).
• Activities in Black Economy are usually untraceable, and hence untaxable,
business dealings that are not reflected in a country's gross domestic product
(GDP) computations.
• To Business Dictionary.com, black or cash economy is an integral part of most
third-world and many first-world economies, it is a cash based system in which
transaction records are kept in secret account books (called 'number two'
accounts).
• Though it employs illegal (and even criminal) methods, it is a survival practice in
repressive tax regimens or where legitimate expression of entrepreneurial
activity is made unnecessarily difficult by a maze of regulations.
• Black economy and black money go hand in hand. Also called parallel
economy, shadow economy, or underground economy. (Business
Dictionary.com).
Black Economy

7.  The underground economy, also known as the shadow economy, has been
in existence as long as its legitimate counterpart.
 The difference is that the government has any number of methods for
tracking the exchange of goods, services and currency in an above-board
economy, but very few ways of tracking the activities of a shadow economy.
 Prostitutes, gamblers and others earning illicit incomes are not likely to
provide the government with accurate income information on their tax
forms, for instance, and cash-based transactions often work best without
governmental interference.
 In the statement of Wisegeek.org “when government agencies calculate
economic figures such as the gross national product (GNP), they rely on
information gathered from legitimate income reports generated by
companies, non-profit organizations, and individual taxpayers.
 What these agencies cannot use in their economic forecasts, however, are
the estimated billions of dollars in cash circulating through what is known
as the "underground economy."
 This includes income generated through illegal means, such as prostitution
or gambling, as well as legitimate but cash-based activities such as online
auctions or bartering services”. 7
Underground Economy

8. Investigations
 Investigation is a vital part of auditing process but only applied when the
event or transaction is beclouded.
 It is carried out when lapse has been established to ascertain who is
responsible, the reason for the action including the extent of damage if any.
 It could be referred to as a detailed verification and clarification of doubt
about a transaction or event.
 The search and examination of the particulars of an event to determine the
hidden, unique, or complex facts surrounding the event.
 A deliberate search and review of records in accordance with the laid down
and agreed policies in order to ascertain if and why the keeping of the
records resulted in a gap and the responsible person.
 Investigation is a structured gathering of documentary evidence and
testimony to resolve an allegation of improper activity.
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9. Interview and Interrogation
 Interview and interrogation as evidence-gathering techniques involve
asking people questions.
 The basic difference is that interrogation is confrontational while
interviewing is not.
 In either case, the interviewer records both the answers to the questions
and physical behaviors; these may include the interviewed person looking
at the floor rather than making eye contact.
 Key information to gather centers on the suspect’s pressures: Being deep in
debt; Perceived opportunities such as having access to the organization’s
assets; and Rationalization due to being passed over for a promotion.
 Effective interviewing is a skill that can be enhanced with continuous
education and practice.
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• It is not impossible that most of the information needed to access
financial impropriety are not available.
• This may be due to a deliberate destruction of data by the fraudster in
order to cover their track.
• Investigation, when accurate data are missing, incomplete and or
unreliable requires that the Forensic investigators employ forensic
accounting techniques.
• As postulated by ACFE (2013:286), Information about the suspect
business should be obtained, including information about the
organization, personnel, money flow pattern (source of available funds,
related expenditures, etc), and location of bank accounts, financial
condition, and recordkeeping system.
• This information can be obtained through interview of employees,
customer, and competitors; business; and business public fillings.
Investigation without accurate, incomplete or
unreliable data

11. Best Practices in conducting
Financial Investigations
 The following among others are the methods of
proving (investigating) corrupt payment (ACFE
2013):
 Identify and trace them by audit steps
 Turn an inside witness
 Secretly infiltrate or record ongoing transaction
11

12. Best Practices in conducting Financial Investigations
 The following questions provides lead way into resolving
the allegation of corruption and fraudulent activities (ACFE
2013):
 How is the business organize, legally and structurally
 Who are the key personnel associated with the enterprise
 What is the money flow pattern involved in the transaction
 Where are the company’s bank accounts
 What is the financial condition of the business
 What is the company’s record-keeping system
12

13. Sources of information
 Principals, employees, and records of suspect business
 Customers and competitors
 Banks and lending institutions
 Business reporting companies
13
Best Practices in conducting Financial Investigations

14. Best Practices in conducting Financial Investigations
 Best practices in financial forensic investigation of off-book and
payments in cash demand that the forensic investigators should have
the expertise in:
 Identifying the indirect evidence of unrecorded sales on the suspect
company’s Book and Records;
 Identifying unbalanced ratio of cost to sales;
 Conducting Investigation in the marketplace;
 Matching evidence of cash withdrawers or disbursements;
 Looking for the purchase of cashier’s cheques or wire transfers payable
to the recipients at, or shortly after, cash withdrawer or disbursement;
 Look for correlation between cash-generating transactions and ,money
wires or currier services which are sometimes use to send cash;
 The use of Visual or surveillance if the scheme is ongoing;
 Interviewing the payer if known;
 Focusing investigation on the suspected recipients
14

15. 15
Definition of Fraud:
intentional
(deliberate) deception
resulting in injury to
another person
In a broad strokes definition,
fraud is a deliberate
misrepresentation which
causes another person to
suffer damages, usually
monetary losses.
Most people consider the
act of lying to be
fraudulent, but in a legal
sense, lying is only one
small element of actual
fraud.
Fraud usually involves
lying for a specific gain
that causes someone
loss while lying does not
always include hurt.
Fraud and lying

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2015
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Lie is to bridge a gap???????????.
Strangers lies 10 times in 10mins when
they first meet.
In fact, Men lie 8 times to boost self up.
Godwin: Please give practical examples in
class
Fraud and lying

17. 17
Which of these can organization control and how?

18. Fraud Triangle
 Fraud Examiners relies on the Fraud Triangle to find weak points in
business processes and identify possible suspects in cases of fraud.
 It consists of three core concepts that together create a situation ripe for
fraud; incentive, opportunity and rationalization.
 People must have the incentive and opportunity to commit financial
fraud as well as the ability to justify it.
 Recent analysis has suggested adding a fourth concept to make a
diamond: capability.
 Just because someone has the opportunity or incentive to steal, it doesn't
mean that they have the capability to do so.
 For example, if someone doesn't understand how to do journal or ledger
entries, they wouldn't know how to manipulate the numbers no matter
what the incentive or opportunity.
18

19. Triangle of Fraud Action
 Albrecht et al (2006) and Kranacher et al (2011) described the
action an individual must perform to perpetrate fraud as
follows (Dada 2013):
 The Action - the execution of the fraud, embezzlement,
cheque kiting or material fraudulent financial reporting.
 Concealment- hiding of the fraud action by raising false
journal, falsification of bank reconciliation and destroying
files
 Conversion – this is the process of turning the gains from
fraud into something useable by the perpetrator for instance,
money laundered, cars or house.
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20. Wednesday, February 18, 2015 20
Is your tool sophisticated enough to
Investigate or fight fraudsters?

21. Wednesday, February 18, 2015 21
Fraud Investigations & Govt. Agencies

22. Forensic Accounting
 Forensic accounting has been defined as "accounting analysis that can
uncover possible fraud that is suitable for presentation in court.
 Such analysis will form the basis for discussion, debate, and dispute
resolution."
 Forensic accounting, sometimes referred to as investigative accounting, is
a unique career field that combines accounting with information
technology.
 A Forensic Accountant uses his knowledge of accounting, law,
investigative auditing and criminology to uncover fraud, find
evidence and present such evidence in court if required to.
 According to Oyedokun (2013), Forensic Accounting is a Scientific
Accounting method of uncovering, resolving, analyzing and
presenting fraud matters in a manner that is acceptable in the
court of law
22

23. Why is forensic accounting
 Because of the struggling stock market and lack of investor
confidence which has forced many organizations to take a long, hard
look at their financial statements.
 A sluggish economy with its attendant problems
 The increase in white collar crime and the difficulties faced by law
enforcement agencies in uncovering
 Many accounting firms believe that the market is sufficiently large to
support an independent unit devoted strictly to forensic accounting.
 The need to use investigative skills to seek out irregularities in
companies’ financial statements
23

24.  Uses sophisticated computer programs
 Performs investigative accounting as well as litigation support.
 Use both accounting and investigating skills to interpret financial
evidence
 Expert witnesses
 Review financial records for mergers and acquisitions.
 Serve as advisers to a corporation’s audit committee
 Work to resolve shareholder disputes within a company.
 Calculate economic damages
 In a criminal case, a Forensic Accountant may be asked to present
evidence of insurance fraud, identity theft, money laundering, terrorist
financing, embezzlement, price fixing, stock market manipulation, or
other related offences.
24
Forensic Accountant

25.  To be successful as a forensic accounting, forensic investigator/anti-
fraud professional, you must be:
 detail oriented,
 persistent,
 ambitious, and
 highly organized.
 a great deal of creativity,
25
Forensic Accountant cont’

26. Qualities and Qualifications of Forensic Accountants
Characteristics
• Curiosity;
• Persistence;
• Creativity;
• Discretion;
• Organization;
• Confidence; and
• Sound professional judgment.
A capable Forensic Accountant should have the following
characteristics (Zysman, 2011):
• A Forensic Accountant must be open to consider all alternatives, scrutinize
the fine details and at the same time see the big picture. In addition, a
Certified Fraud Examiner must be able to listen effectively and communicate
clearly and concisely.
Forensic Accountant
26

27. 27
Forensic Accountants in Court
A key piece of evidence is the report of the Forensic Accountant.
The report should not be accusatory or conclusive as to guilt. It is
critical to ensure that the tone of the report is not inflammatory or
prejudicial.
•The fraud trial can be a civil or a criminal trial.
•In either case, the role of the Forensic Accountant is to study
relevant materials documents, and the authoritative literature
relating to the case on hand.
•Direct and cross examination questions will be asked, and the
Forensic Accountant has the responsibility to answer these
questions clearly and concisely.

28. 28
Forensic Accountant in Court
To Zysman, 2004, in court, the Forensic Accountant can
be:
• an expert witness,
•a consultant, or
•play other roles such as Trier of fact,
•special master,
•court-appointed expert,
•referee,
•arbitrator, or mediator
Godwin, explain types of witness and their roles

29. 29
• Cashed-based economy is an economic system, or part of one, in which
financial transactions are carried out in cash rather than via direct debit,
standing order, bank transfer, or credit card.
• It was noted that in this type of economy, it is difficult to trace the flow of fund
and the possibility of government losing tax income is very high.
• Government tax income is always badly affected if the most of the entities in
such country operate in black economy or underground economy.
• Government of each countries are to intensify effort in ensuring that the
Cashless policy in respective countries are working.
• In the word of the Central Bank of Nigeria through one of its deputy Governors
Kingsley Moghalu, “Nigeria is predominantly a cash-based society and this is
not good for us.
• This is why the CBN decided to launch the Cash-Lite Policy; so that Nigeria
can join other developed economies that adopted cashless society”.
• The nation (Nigeria) runs a cash-based economy and this informed the central
bank’s Cash-Lite Policy which aims to reduce the amount of cash in
circulation (Moghalu 2014) in Tarpel (2014).
Conclusion

31. 31
Albrecht W. S (2006), Fraud Examination, Thomson South-Western Publishing, 2006.
Association of Certified Fraud Examiners (2013): 2013 International Fraud Examiners
Manual
Association of Certified Fraud Examiners, www.acfe.com
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Anti-money laundry and Combating Terrorist Financing Min Zhu, Deputy Managing Director of
the IMF http://www.imf.org/external/np/leg/amlcft/eng/
Enyi, E.P (2008): Detecting Causes of Variances in Operational Outputs of Manufacturing
Organizations: A Forensic Accounting Investigation Approach. Downloaded from
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Ezumba S. (2011), The Transition to a cashless economy in Nigeria; downloaded from
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Becca, Howard, Jayne, Brian (2004), Interview and Interrogation;
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References

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Investopedia http://www.investorwords.com/9108/cash_economy.html
http://www.qfinance.com/dictionary/cash-economy
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