Investigation and Forensic Audit Methodology in

a Computerized Work Environment

Compiled and Presented

By:

Godwin Emmanuel OYEDOKUN(HND, BSc. Ed, MBA, MTP (SA), ACA, ACIB, FCTI, AMNIM, ACCA-CertIFR, CFA, CFE, CNA, FCFIP, FCE, CICA, ABR, CPFA)

godwinoye@yahoo.com +2348033737184, +2348055863944

Assistant Director (Head) Education, Research & Technical

The Chartered Institute of Taxation of Nigeria

And

Chief Technical Consultant

OGE Professorial Services Ltd

Being a lecture delivered at 2-Day Capacity Building Workshop for the Staff of

Internal Audit Department of Niger Delta Development Commission (NDDC)

Held at Limpopo Spring Hotel, Aba Road, Port-Harcourt, Rivers State

on March 6 - 7, 2015

Organized by Gexim Nigeria Limited

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The Facilitator- “Nemo Dat Quod Non Habet” Godwin Emmanuel Oyedokun, HND, BSc.Ed, MBA, MSc., MTP (SA), ACA, FCTI, ACIB, AMNIM, CAN, FCFIP, CICA, CFA,CFE, CPFA, ABR,

CertIFR

Assistant Director (Head) – Education, Research & Technical Directorate of The Chartered Institute

of Taxation of Nigeria (CITN)

Godwin is an Experience Certified Fraud Examiner, Chartered Accountant, Chartered Tax Professional,

Certified Forensic Accountant, Chartered Banker, Chartered Manager, Insolvency Practitioner, and Financial

Analyst of good repute.

He also holds a Certificate in International Financial Reporting (CertIFR) of Association of Certified

Chartered Accountant (ACCA)

He is a seasoned professional who is currently serving as an Advisory Council Member of Association of

Fraud Examiner (ACFE), Austin, USA, and Vice President of Nigeria Chapter of same Association

Godwin is a leader in Forensic Accounting and Fraud Investigation, he is a sought after intellectual, who has

presented over 35 technical papers in various Training/Seminars on Forensic Accounting, Fraud

Investigation, Internal Audit & Control, Risk Management, IFRS, ICT, Strategic Management, Finance &

Accounting related subjects. He is also an Examiner to The Chartered Institute of Bankers of Nigeria (CIBN)

on “Introduction to Financial Accounting (FA)” and “Information Communication Technology (ICT)”

He has been trained on Forensic Accounting, Accountancy and Fraud Investigation and other Finance &

Accounting related courses, in Ghana, Senegal, Liberia, Cote d’Ivore, Canada- Toronto, at some States in

United State of American and in Nigeria including Lagos Business School of Pan Atlantic University.

He was the Assistant Director (Head) – Finance & ICT of The Chartered Institute of Taxation of Nigeria

(CITN).

He is the Chief Technical Consultant to OGE & CO Professional Services Ltd. (www.ogecops.com) and A &

D Forensic Consults Ltd. Nigeria (www.adforensicconsults.com).

This presentation will cover the following major sub topics :

• Concept of Investigations

• Forensic Investigations

• Forensic Audit Investigation Methodology

• Forensic Audit and the Internal Auditor

• Forensic in Computerized Work Environment

• Forensic Investigation & Audit Reporting

• Conclusion

Contents

Oyedokun Godwin Emmanuel

Introduction

It is not a gaining saying that forensic accounting/audit has taken an importantrole in both private and public companies since the birth of the 21st century.

One can but always remember the avoidable failure of some formerly prominentpublic companies like Enron and Tyco in the late 1990s, so also terrorist attacks ofSeptember 11, 2001, contributed immensely to the high demand for forensicaccounting expert that can bring about a new, important and lucrative specialty.

Forensic accounting procedures target financial and operational fraud, discoveryof hidden assets, and adherence to federal regulations (Pirraglia, nd).

Forensic Investigation and Forensic Audit are better forensic strategies inresolving the allegations of fraudulent activities as signs of financial crime can beinitially detected in a variety of ways; by accident, by whistle-blowing, byauditors, by data mining, by controls and testing, or by the organization's topmanagement requesting an inspection on the basis of mere suspicion.

This paper will help the readers in understanding the concept of Investigations,forensic investigations, forensic audit investigation methodology, forensic auditand the internal auditor, forensics in computerized work environment, andforensic investigation & audit reporting.

Concept of Investigations Investigation is the act or process of investigating or the condition of being investigated.

A searching inquiry for ascertaining facts; detailed or careful examination(dictionary.reference.com).

Investigation is a vital part of forensic accounting and auditing process but only appliedwhen the event or transaction is beclouded. It is carried out when lapse has beenestablished to ascertain who is responsible, the reason for the action including the extent ofdamage if any.

It could be referred to as a detailed verification and clarification of doubt about atransaction or event.

It is 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 agreedpolicies in order to ascertain if and why the keeping of the records resulted in a gap and theresponsible person.

Investigation is a structured gathering of documentary evidence and testimony to resolvean allegation of improper activity.

In most cases, fraud investigations are investigations of white collar crime, which involvessurveillance and careful consideration of complicated financial records.

Types of Investigations

Fraud Investigation

A fraud investigation tries to determine whether fraud has taken place and triesto detect evidence of fraud has occurred.

Fraud is considered to involve misrepresentation with intent to deceive.

Most fraud investigations begin with a meeting between the investigator and theclient.

A good fraud investigator will use this initial information to find more evidenceand more facts.

A fraud investigator may use surveillance, asset searches, background checks,employee investigations, business investigations, and other types of methods toget to the bottom of a case.

In most cases, fraud investigations are investigations of white collar crime, whichinvolves surveillance and careful consideration of complicated financial records.

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Types of Investigations Corruption

There are three types of corruption fraud:

1. conflicts of interest,

2. bribery, and

3. extortion.

In a conflict of interest fraud, the fraudster exerts their influence toachieve a personal gain which detrimentally affects the company.

The fraudster may not benefit financially, but rather receives anundisclosed personal benefit as a result of the situation.

For example, a manager may approve the expenses of an employee who isalso a personal friend in order to maintain that friendship, even if theexpenses are inaccurate.

Bribery is when money (or something else of value) is offered in order toinfluence a situation.

Extortion is the opposite of bribery, and happens when money isdemanded (rather than offered) in order to secure a particular outcome.

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Types of Investigations Asset misappropriation

The common feature is the theft of cash or other assets from the company, for example:

1. Cash theft – the stealing of physical cash, for example petty cash, from the premises of acompany.

2. Fraudulent disbursements – company funds being used to make fraudulent payments.Common examples include billing schemes, where payments are made to a fictitioussupplier, and payroll schemes, where payments are made to fictitious employees (oftenknown as ‘ghost employees’).

3. Inventory frauds – the theft of inventory from the company.

4. Misuse of assets – employees using company assets for their own personal interest.

Financial statement fraud

This is also known as fraudulent financial reporting, and is a type of fraud that causes amaterial misstatement in the financial statements.

It can include deliberate falsification of accounting records; omission of transactions,balances or disclosures from the financial statements; or the misapplication of financialreporting standards.

This is often carried out with the intention of presenting the financial statements with aparticular bias, for example concealing liabilities in order to improve any analysis ofliquidity and gearing.

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Fraud Investigations & Govt. Agencies

Interview and Interrogation They are two major techniques in investigation.

Used to elicit responses from the suspect or accused.

The investigator (interviewer or interrogator) cannot usurp the power of thecourt of competent jurisdiction by pronouncing the suspect or accused guilty.

An interview is non-accusatory (Fred, John, Joseph, Brian, 2004)

Interrogation is an art. You can master it through your study and experience.

A good investigator is not necessarily a good interrogator.

To be a good interrogator you need to be a good actor and must have an insight ofhuman psychology.

Interview is conducted in a cordial atmosphere where a witness is morecomfortable physically and psychologically.

On the other hand, whenever a person is questioned in an uncomfortableatmosphere (interrogation room) where he is under the psychological pressure, itis an interrogation.

Only when an interrogator overpowers a suspect psychologically, he gets aconfession or the fact of a case which is not possible otherwise (Becca and Jay,2004).

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Forensic Audit Investigation Methodology

Forensic investigation is the utilization of specialized investigative skills in carryingout an inquiry conducted in such a manner that the outcome will have applicationto a court of law.

Forensic Investigators are to be grounded in accounting, medicine, engineering orsome other discipline.

Forensic investigation is the examination of evidence regarding an assertion todetermine its correspondence to established criteria carried out in a mannersuitable to the court.

Fraud/forensic auditors/investigators could approach theirexaminations/investigations from both the angels of whether the fraud could haveoccurred and whether it could not have occurred (Umeraziz, 2014) viz:

1. Analyzing data which is available

2. Creating a hypothesis based on such data

3. Testing the hypothesis

4. Refining and altering the hypothesis

5. Communicating Results

Fraud Auditors’ Skills

An effective fraud auditor should know, with some degree ofdepth, what fraud is from the following perspectives:

1. Human and individual

2. Organizational, cultural, and motivational

3. Economic/Competitive

4. Social

5. Regulatory, legal, and evidential (how to discern, detect, anddocument such frauds)

6. Accounting, audit, and internal control (when, where, andhow fraud is most likely to occur in books of account and infinancial statements)

Fraud Auditors’ Skills

An effective fraud auditor should be able to do the following competently:

1. Conduct a review of internal controls.

2. Assess the strengths and weaknesses of those controls.

3. Design scenarios of potential fraud losses based on identified weaknessesin internal controls.

4. Identify questionable and exceptional situations in account balances.

5. Identify questionable and exceptional transactions (too high, too low, toooften, too rare, too much, too little, odd times, odd places, odd people).

6. Distinguish between simple human errors, and omissions in entries andfraudulent entries (international error, such as recurring small errorsversus unintentional random error and ignorance).

7. Follow the flow of documents that support transactions.

8. Follow the flow of funds into and out of an organization’s account.

9. Search for underlying support documents for questionable transactions.

Fraud Auditors’ Skills

10. Review such documents for peculiarities such as raised amounts; forgery;counterfeiting; fake billings; invoicing of claims; destruction of data; improperaccount classification; irregularities in serial sequences, quantity, pricing,extensions, and footings; and substitution of copies for original documents.

11. Gather and preserve evidence to corroborate asset losses, fraudulent transactions,and financial statements.

12. Document and report a fraud loss criminal, civil, or insurance claims.

13. Be aware of management, administrative, and organizational policies, procedures,and practices.

14. Test the organization’s motivational and ethical climate.

15. The skills of a criminal investigator are in some respects similar to those of anauditor. An auditor and a detective both seek the truth of or with respect to theproper accounting of business transactions and the detective/investigator withrespect to the proper (legal) behavior of citizens. Both should have inquisitiveminds and challenge things that appear out of order and out of sequence, such asodd times, odd places, and odd places – in a word, things that are the opposite ofwhat one would logically expect.

Thirteen Principles of Fraud Auditing

1. Fraud auditing is unlike financial auditing. It is more a mind-set than amethodology.

2. Fraud auditors are unlike financial auditors. Fraud auditors focus on exceptions,oddities, accounting irregularities, and patterns of conduct, not on errors andomissions.

3. Fraud auditing is learned primarily from experience, not from audit text books orlast year’s work papers. Learning to be a fraud auditor means learning to thinklike a thief— “ Where are the weakest links in this chain of internal controls?”

4. From an audit perspective, fraud is intentionally misrepresenting financial facts ofa material nature. From fraud-audit perspective, fraud is an internationalmisrepresentation of finance facts.

5. Frauds are committed for economic, egocentric, ideological, and psychoticreasons. Of the four, the economic motive is the most.

6. Fraud tend to encompass the theory structure around the motive, opportunity,and benefit

7. Fraud is a computerized accounting environment can be committed at any state ofprocessing---input, throughout, or output. Input frauds (entering false andfraudulent data) are the most common

Thirteen Principles of Fraud Auditing

8. The most common fraudulent schemes by lower-level employees involvedisbursement (payable, payroll, and benefit and expense claims).

9. The most common fraudulent schemes by higher-level managers involve“profit smoothing” (deferring expenses, booking sales too early,overstating inventory).

10. Accounting-type frauds are caused more often by absence of controlsthan by loose controls.

11. Fraud incidents are not growing exponentially, but lose are.

12. Accounting frauds are discovered more often by accident than byfinancial audit purposes or design. Over 90 percent of financial frauds arediscovered.

13. Fraud prevention is a matter of adequate controls and work environmentthat places a high value on personal honesty and fair dealing.

Forensic Audit and the Internal Auditor

Internal Control

It is the methods put in place by a company to ensure the integrity of financial and accountinginformation, meet operational and profitability targets and transmit management policiesthroughout the organization.

Internal controls work best when they are applied to multiple divisions and deal with theinteractions between the various business departments. No two systems of internal controlsare identical, but many core philosophies regarding financial integrity and accountingpractices have become standard management practices.

Internal Control according to Business dictionary is Systematic measures (such as reviews,checks and balances, methods and procedures) instituted by an organization to (1) conduct itsbusiness in an orderly and efficient manner, (2) safeguard its assets and resources, (3) deterand detect errors, fraud, and theft, (4) ensure accuracy and completeness of its accountingdata, (5) produce reliable and timely financial and management information, and (6) ensureadherence to its policies and plans.

Internal control and risk management are fundamental components of good corporategovernance. Good corporate governance means that the board must identify and manage allrisks for a company. In terms of risk management, internal control systems span finance,operations, compliance and other areas, i.e. all the activities of the company. Controlsattempt to ensure that risks, those factors which stop the achievement of company objectives,are minimized (Kaplan 2012).

Forensic Audit and the Internal Auditor

An internal control system (ICS) comprises the whole network ofsystems established in an organisation to provide reasonable assurancethat organisational objectives will be achieved.

The Internal Control System (ICS) consists of a set of rules, proceduresand organizational structures which aim to ensure that corporate strategyis implemented, achieve effective and efficient corporate processes,safeguard the value of corporate assets, ensure the reliability and integrityof accounting and management data and ensure that operations complywith all existing rules and regulations.

Internal management control refers to the procedures and policies inplace to ensure that company objectives are achieved.

It is the control procedures and policies provide the detailed controlsimplemented within the company (Kaplan 2012, Unicreditgroup 2012).

Forensic Audit and the Internal Auditor

Internal Auditing

Internal Auditing is an independent, objective assurance and consulting activities designedto add value and improve an organisation’s operation. It help an organization accomplish itsobjectives by bringing a systematic, disciplined approach to evaluate and improve theeffectiveness of risk management, control and governance process (IIA, Millichamp andTaylor, 2008), .

Internal auditors are different from external auditors because they do not focus solely onfinancial statements or financial risks, much of their work is looking at operational orstrategic risks (Millichamp and Taylor, 2008, p 262).

Internal audits are conducted by employees of a business or by external auditors acting assubcontractors.

They are becoming increasingly important because of the development of CorporateGovernance. These differ from statutory audits because the priorities are set by themanagement who, to some extent, control the work of internal auditors (Millichamp andTaylor, 2008).

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Forensic in Computerized Work Environment

Computer forensics is the practice of collecting, analysing and reporting on digitaldata in a way that is legally admissible. It can be used in the detection andprevention of crime and in any dispute where evidence is stored digitally. Computerforensics follows a similar process to other forensic disciplines, and faces similarissues.

There are few areas of crime or dispute where computer forensics cannot beapplied. Law enforcement agencies have been among the earliest and heaviest usersof computer forensics and consequently have often been at the forefront ofdevelopments in the field.

Computers may constitute a ‘scene of a crime’, for example with hacking or denialof service attacks or they may hold evidence in the form of emails, internet history,documents or other files relevant to crimes such as murder, kidnap, fraud and drugtrafficking.

It is not just the content of emails, documents and other files which may be ofinterest to investigators but also the ‘metadata’ associated with those files. Acomputer forensic examination may reveal when a document first appeared on acomputer, when it was last edited, when it was last saved or printed and which usercarried out these actions.

Stages of computer forensic examination

Computer forensic examination process could bedivided into six stages, presented in their usualchronological order.

Readiness

Evaluation

Collection

Analysis

Presentation

Review

Issues facing computer forensics

The issues facing computer forensics examiners can be broken down into three broad categories: technical, legal and administrative.

Technical issues

Encryption

Increasing storage space

New technologies

Anti-forensics

Legal issues

Administrative issues

Accepted standards

Fit to practice

Forensic Investigation & Audit Reporting

Forensic accountants/auditors should be familiar with theissues of attorney work product while preparing their reports,analyses, and notes.

He added that forensic accountants must bear in mind thatalmost everything involved in the process, including theirdrafts and notes, may be subject to discovery by the opposingparty.

Scrupulous caution is advised whenever forensic accountantsundertake an engagement (Renick, 2007).

Conclusion

Increasingly, as various parties perceive the value of such evidence, grounded as it isin "accounting facts," forensic accountants are called upon to play importantperemptive roles (as of right, without cause), offering independent assurance insuch diverse areas as audit committee advisory services, merger and underwritingdue diligence, investment analyst research, and enterprise risk management.

The validation and enhancement of the body of knowledge (the models andmethodologies) relating to the evidentiary value of accounting data, within a strictlegal framework, is the raison d'être of the Journal of Forensic Accounting.

Forensic accounting techniques are useful in prevention, detection, and deterrencein the area of fraud, money laundering, investigations, crime and terroristfinancing.

These techniques includes, investigative skills, audit skills, legal skill etc.

It is now clear that audit, investigation and forensic accounting are much relatedbut they cannot be used interchangeably.

Conclusion

It is hereby recommended that all would be forensic accountants/investigators,fraud/forensic auditors, statutory auditors, and investigative accountants, shouldbe well equipped with forensic accounting techniques in obtaining admissibleevidence suitable for litigation purposes.

Forensic accountants are currently in great demand, with the public need forhonesty, fairness and transparency in reporting increasing exponentially.

These forensic accountants need accounting, finance, law, investigative andresearch skills to identify, interpret, communicate and prevent fraud.

As more and more companies look for forensic accountants and professionalorganizations offer certifications in the area, it is becoming evident that theforensic accountant has a skill set that is very different from an auditor or afinancial accountant.

Thank you

See the complete paper for the references

References & Further Reading