okay, you think you’ve found a fraud. now what?
TRANSCRIPT
Okay, You Think You’ve Found a Fraud.
Now What?
John Tonsick, CFE, CPAFounder and Principal
Fraud Solutions
“The Conjurer” – Hieronymus Bosch – Late 15th Century
Payroll Fraud Examination
$2.25 million disappears!
Billing Scheme Examination
$1.5 million buys absolutely nothing!
The Fraud Examiner’s Challenge
Managing relationships• Victims• Suspects• Perpetrator • Co-workers• Witnesses• Attorneys• Law enforcement, DA/U.S. Attorney
Victim
Critical relationshipMake or break a fraud examination• How soon do you get involved?• What was the initial response?
Ignorance
Victims rarely understand:
Internal controlsHow fraud happensWhy fraud happensInvestigative techniques
Unaware, unprepared!
•Shock•Denial•Anger •Bargaining•Depression•Testing•Acceptance
• On Death and Dying, 1969, Elizabeth Kubler Ross
Emotions
Common Victim Mistakes
Confront the perpetratorDo nothingMake deals with the perpetratorFire the perpetratorMishandle/overlook critical evidenceCall the police
First Questions
What do they know?How do they know it?Who knows about it?What action have they taken?Do they have insurance?
First Steps
Manage expectations• Explain the process• Establish goals• Discuss the options• Make recommendations• Develop a plan
Working With Attorneys
• Advantages• Attorney client privilege• Legal guidance
• Disadvantages• Assume greater knowledge than they possess
Working With Attorneys
The right attorney can be a huge plus!
• CFEs• DAs, U.S. Attorneys• Law Enforcement• Litigators
The wrong attorney can be a huge detriment!
Working With Attorneys
Outside counsel• Appropriate skills and experience• Greater independence
In-house• Sometimes lack appropriate skills
and experience• May not keep attorney-client
privilege
Role of the Fraud Examiner
Minimize emotion
ExperienceKnowledgeIndependenceObjectivity
Investigation Goals
Determine the existence of fraud/illegal actsDetermine the extent of fraud/illegal actsIdentify the perpetratorsDetermine the methods usedRemove the perpetrators from your operationRecover assetsTake corrective actionSeek criminal prosecution
Secure Evidence
Secure and preserve evidence:
• Suspect’s office, computer, cell phone, etc.• Building access• System access• Bank accounts• Email• Voice mail• Snail mail• Keys, ID, symbols of authority
Avoid Spoliation
Avoid spoliation:
• Original documents• Chain of custody• Photographs• Computer
•If it’s on; leave it on•If it’s off; leave it off•Forensic copies require specialized software and procedures
•Secure storage
Who Will Investigate?
•Certified Fraud Examiners•Internal/External Auditors•Security/Private Investigators•Human Resources Personnel•Management •Outside Consultant•Legal Counsel
Establish Ground Rules
• Leadership• Types of communication• Need to know• Do not discuss outside team• Need to know basis• Keep the team as small as possible
Critical Basic Tools
• The Fraud Triangle• Knowledge of financial transactions
and fraud schemes• Knowledge of internal controls• Sound investigative techniques
The Fraud Triangle“Alive and Well”
OpportunityImmediate Need
Rationalization
Knowledge of Financial Transactions and Fraud Schemes
• Accounting is the language of business
• Fraud schemes – our stock in trade
Knowledge of Internal Controls
• Internal controls are a powerful weapon against fraud
• Ability to recognize control deficiencies can lead you quickly to what the fraudster did and how they did it
1985 COSO Diagram
1992 COSO Diagram
2004 COSO Enterprise Risk Management Diagram
2011 Proposed UpdateCOSO Enterprise Risk Management
Diagram
Evolution
Sound Investigative Techniques
• The Fraud Theory Approach –Each fraud examination begins with the proposition that all cases will end in litigation
• You won’t have time to learn from your mistakes
Sound Investigative Techniques
• ACFE Fraud Examiners Manual
• Analyzing documents• Interview theory and application• Covert examination• Sources of information• Accessing information online• Data analysis and reporting tools• Computer forensics• Tracing illicit transactions• Reporting standards• Checklists, forms, contract and opinion
letters
A Suggested Approach
1. Internal investigation2. Civil litigation3. Criminal prosecution
Existing Relationships
Never interrupt your enemy when he is making a mistake. Napoleon Bonaparte (1769–1821)
Advantages:• Maintain the element of surprise• Cooperation • Access to information• Relatively inexpensive
Civil Litigation
Advantages:• Subpoena documents• Take depositions under oath• Lower burden of proof• You retain some control• Judgment beneficial in criminal
action
Disadvantages:• Expensive• Other side has options
Civil Litigation
A Business Decision• Cost/benefit analysis• Does the other side have
assets?• How much are you willing to
spend to make a point?
Don’t start what you aren’t willing to finish!
Criminal Prosecution
Advantages:• Satisfaction• Sends a strong message
Disadvantages:• Lose control• Information becomes public• Constrained resources• Reluctance to prosecute• Higher burden of proof• Perpetrator has options
OK, You Think You’ve Found a Fraud. Now What?
February 23, 2010Thank you
John Tonsick, CFE, CPAFraud Solutions
18000 Studebaker, Suite 700Cerritos, CA 90703
213-716-0667
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