Fraud &
Forensic
Investigations
Frank Pina, CPA, CFF, CFE, CGMA
Joseph Galdo, CPA, CFE, CGMA
A Statistical Certainty
“At any given moment, there is a certain percentage of
the population that’s up to no good”
-J. Edgar Hoover
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Fraud Defined
 Any intentional or deliberate act to deprive
another of property or money by guile, deception
or other unfair means (ACFE)
 Deception brought about by misrepresentation of
material facts, or silence when good faith requires
expression, resulting in material damage to one
who relies on it and has the right to do so (IRS)
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Types of Fraud
• Internal
 Illegal acts of employees, managers and
executives against the organization
• External
 Illegal acts of outsiders (i.e., non-employees)
against the organization
• On the books versus off the books
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Execution of Fraud
• The Act
 Normally a theft or misrepresentation
• The Concealment
 Once the act is accomplished, efforts must be made to conceal
the fraud to prevent detection
• The Conversion
 Once the act is concealed, the perpetrator must convert the
asset to his or her own benefit
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Indicia of Fraud
Some clue or hint that someone has misappropriated something…
• No written policies and procedures
• Overly complex organizational structure
• Key employee never takes time off
• Management override of controls
• Inadequate internal controls/segregation of duties
• Incompetent accounting personnel
• Indicators are not proof, but what is?
 Intent goes to proof of fraud
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Recent Fraud Statistics
Typical organizations lose 5% of annual revenues to fraud
• Translates to a potential global fraud loss of nearly $3.7 trillion
Primary Categories
• Asset misappropriations - $130,000 median loss
• Corruption - $200,000 median loss
• Financial statement fraud - $1 million
• Frauds lasted a median of 18 months before detection
• Most likely method of detection?
• A tip!
Source: ACFE 2014 Report to the Nations on Occupational
Fraud and Abuse; 2014 Global Fraud Study
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Fraud Triangle
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The Perpetrator
Pressure/Need
 Usually an immediate financial need
oLiving beyond means
oDrug or gambling addiction
oHigh personal debts
oJob dissatisfaction
oEmotional instability
oSickness in the family
oChallenge to beat the system
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The Perpetrator
Opportunity (perceived)
 Ability to commit AND conceal fraud
–I can do it!
–I can conceal it!
–I will not get caught!
 Manifests itself in weak internal controls
 Lack of oversight
 Management override of controls
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The Perpetrator
Rationalization
 Perpetrator justifies actions as something other than
fraud, providing a morally acceptable excuse
–“I’m only borrowing the money”
–“It’s for a good purpose”
–“I deserve it”
–“Everyone does it”
–“I need it more than they do”
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The Perpetrator
A recent study of white collar crime by the Association
of Certified Fraud Examiners
• College-educated white males
• Men committed nearly three-fourths of the
offenses
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The Perpetrator
• Possible factors / characteristics
 Greed
 Financial difficulties
 Revenge
 Compulsive / irrational behavior
 Employee in position of trust
 Earnings versus lifestyle
 Does not take vacations
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Organizational Vulnerability
• Internal controls are weak
• Dominated by one or two people
• Insufficient working capital
• Employees are overworked, poorly paid, with low moral
• High turnover rate, especially in accounting group
• Poor accounting records / document management
• No internal audit function
• Poor tone at the top
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Who should be concerned?
• Government regulators
• Management (CEO, CFO, Budget Director)
• Counsel to companies (internal and external)
• Board of directors/trustees
• Audit committee
• Auditors (internal and external)
• Outside lenders (banks and related parties)
• Taxpayers
• Business owners, including shareholders
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Typical Fraud Schemes
Asset Misappropriation
 Lapping – A/R
 Skimming – cash receipts
 Theft of goods - inventory
 Ghost employees - payroll
 False/inflated/duplicate invoices – A/P
 Ponzi schemes - investments
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Typical Fraud Schemes
Corruption
 Bribes / Kickbacks
o “Things of value”
 Conflicts of interest
 Bid Rigging
Financial Statement Fraud
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Improper revenue recognition
Overstatement of assets
Manipulation of liabilities and/or expenses
Improper disclosures
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Indicators of Fraud
• Two sets of books / records
• Use of large amounts of and/or frequent use of cash
• Incomplete, missing or inaccurate records
• Unusual check transactions (multiple endorsements, forgeries, etc.)
• Stale items on bank reconciliations
• Frequent / suspicious related-party transactions
• Lack of adherence to, or absence of policies/procedures/controls
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Indicators of Fraud
• Use of nominees
• Use of foreign or off-shore entities or financial institutions
• Destruction of records – prematurely or contrary to retention policy
• Altered documents: photocopies rather than originals, apparent
alterations, duplicate invoices
• Numeric documents out of date order
• Expense account abuse
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FORENSIC
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Why Investigate?
What is your goal?
• Termination?
• Restitution?
• Prosecution?
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Investigative Challenges
• Developing effective and efficient investigative strategies
o What documents are relevant?
o Who to interview?
o How to present findings?
• Identifying investigative constraints
• Determining appropriate resolutions
• Improving internal controls (prevention, detection, deterrence)
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Investigative Scope
• Tailor investigative scope / procedures to address:
o What happened and during what time period?
o Who was involved?
o Were they authorized?
o How and why did it happen?
o What was the impact?
o Who needs to know?
• Perform the investigation efficiently (cost & time)
• Develop remedial actions
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Investigative Scope
• Respond to interested parties (e.g., government
agencies, regulators, counsel, etc.)
• Also consider:
 Internal auditor authority
 Outside forensic assistance
 Scope limitations
 Attorney-client privilege
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Attorney-Client Privilege
• The attorney-client privilege exists when a client seeks
or receives legal advice from an attorney in confidence.
• The communications may be protected forever. The
underlying facts, on which the communications are
based, are not protected.
• The burden of proving the existence of the privilege
rests on the party asserting it.
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Accountant-Client Communications
• Federal courts generally do not recognize an
accountant-client privilege.
• There are various state statutes that do speak to the
issue of CPA-client communications/production of
documents and afford varying degrees of protection in
state courts.
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Investigative Planning
• Understand probative value
oKnow your investigative goals
–Determine what evidence is useful
»Know importance/relevance of
information obtained
• Evaluate evidence at hand
• Be nimble and flexible
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Document Analysis
• What do you want to know?
• How do you obtain the information?
oVoluntary compliance
oRegulatory authority
oCompulsory process
• Public record information can make a case!
oInternet and subscriber databases
• Electronic communications
oEmails
oComputer drives
• Interview testimony can be critical!
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Document Analysis
• Financial records and source documents
oInvoices
oCancelled checks
oLedgers and journals
oPayroll records
oPurchase orders
• Financial statements
oInternal/external
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Document Analysis
• Forecasts/projections
• Tax returns
• Confirmation
 Transactions will be disguised and concealed
 All records should be suspect!
 Third-party confirmation to pierce disguise
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Document Analysis
• Transaction tests
 Fraudsters usually leave a trail
o Trail starts with financial records and source documents
 Detailed and thorough document review necessary
o Invoices: authentic/altered or fictitious?
o Checks: information on checks can tell the real story
o Payroll: false payroll is an easy way to divert funds
o Emails: modern-day wire taps!
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Why Interview?
“ I can solve ANY case…..
no matter how old
no matter how complicated
no matter how difficult………
If I can get someone to tell me who did it!”
~FBI Instructor, FBI Academy, Quantico, VA, May 10, 1976
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Why Interview?
• Spoken word is the most important source of
investigative information
• No investigation is complete unless witnesses are
interviewed
• How do you know if you don’t ask?
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What are the most important
elements of an effective interview?
•Preparation!
•Preparation!
•Preparation!
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Interviewing
• Master all evidence; have it at your fingertips
• Draw from previous interviews
• Secure, review, integrate and understand the probative value
of all available documents:
oEmails
oFinancial records
oData analysis
oAll other relevant documents including
correspondence, contracts, bid documents, etc.
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Interviewing
• Probe
• Conduct interviews to obtain sufficient detail
• Do not accept incomplete or unresponsive answers
• Ask all questions necessary for required information
oAsk until you’re satisfied!
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Interviewing
• Feel free to challenge:
 Inconsistencies
 Answers that do not make sense
 Non-responsive answers
 Demeanor changes
 Blatant lies
*Fraudsters try to tell 50% of the truth, 100% of the time!
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Reporting
• What is the best way to report your findings?
 Written report
 Oral presentation
• To whom should you discuss the results?
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Case Examples
QUESTIONS?
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Contact Information
Frank Pina, CPA, CFF, CFE, CGMA
fpina@Mercadien.com
Joseph Galdo, CPA, CFE, CGMA
jgaldo@Mercadien.com
609-689-9700
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