Causational Factors and the
Investigation of Fraud
Presented by
John L. Gudavich, MA, CFE
President
J. Lewis & Associates Consulting
What is Meant by “Predication of
Fraud?”
Circumstances, Taken as a
Whole, that Leads a
Reasonable Prudent
Professional to Believe a
Fraud is Occurring, or Has
Occurred, or Will Occur
Activities Fundamental to Fraud
Prevention?
Create and Maintain a
Culture of Honesty &
Integrity
Assess the Risk of Fraud &
Develop Concrete Responses
to Minimize Risk & Eliminate
Opportunity
The Negative Affects of Fraud.
How Does an Organization
Encourage Dishonesty?
• Poor examples by
management
• Quotas or meeting
targets
• Rewarding individuals
not groups
• Competition among
employees
What Expectations Should
Management Communicate?
1. Appropriate
Values & Ethics
2. Fraud Awareness
& Training
3. Consistent
Punishment of
Violators
Factors Associated with High
Levels of Fraud
1. Top management doesn’t care about or
pay attention to appropriate behavior
2. Lack of recognition of job performance
3. Perceived inequities in the organization
4. Autocratic rather than participative
management
5. Low organizational loyalty
6. Unreasonable budget expectations
Factors Associated with High
Levels of Fraud
7. Unrealistically low pay
8. Poor training and promotion
opportunities
9. High turnover and absenteeism
10. Lack of clear organizational
responsibilities
11. Poor communication practices within the
organizations
Elimination of Fraud
Opportunity
1. Accurately Identify Sources and Measures of
Risk through Threat Assessments
2. Implement Appropriate Fraud Prevention &
Detection Controls
3. Create a System of Widespread Monitoring by
Employees
4. Install Independent Checks, Including an
Effective Audit/Investigative Function
Who Detects Most Frauds?
Research Shows…
Employees
& Managers
NOT
Auditors
Detect Most
Frauds
What Does Sarbanes-Oxley Say about
Employees Reporting Fraud?
• It recognizes the value of having a system for
employees and others to report wrong doing
• Establish “Fraud, Waste and Abuse Hotlines”
• Section 307 requires a “whistle-blower” system
to be in place
• Section 806 prohibits retaliation against “whistleblowers” or others
The Critical Element Needed To Begin
a Fraud Investigation
Management
Support and
Approval
Guidelines for Conducting a Fraud
Investigation
7 Steps for Conducting a Fraud
Investigation
1. Undertake to Establish the Truth of the
Matter Under Consideration
2. Don’t Jump to Conclusions - Investigator
or Auditor Needs Experience & Objectivity
3. Keep Information to Yourself, Keep
Speculation to Yourself
4. Keep Those Who Need to Know Informed
7 Steps for Conducting a Fraud
Investigation
5. Independently Corroborate Information
6. Employ Experts and Consultants if needed
7. Use Investigative Techniques that Are
Legally Sound & Fair
8. Report All the Facts Fairly & ObjectivelyPoint to the Guilty & Exonerate the
Innocent
Evidence
2
Testimonial Documentary
Evidence
Evidence
1
4
Physical
Evidence
Personal
Observation
3
1. Gathered from Individuals,
Includes Interviewing,
Interrogation & Honesty Tests
2. Gathered from Papers,
Computers & Written &
Printed Sources
3. Fingerprints, Weapons,
Stolen Property Often Involves
Forensic Analysis
4. Collected by the
Investigator, Includes
Invigilation, Surveillance and
Covert Operations
Investigative Steps
Gather Testimonial Evidence - Obtained from
Individuals through Interviews and
Interrogation of:
1.
Senior Management Officials
2.
Middle Management
3.
Employees
4.
Expert Witnesses
5.
Vendors
6.
Customers
Investigative Steps
Gather Documentary Evidence Business Records, Computer Records
from a variety of sources
1. Internal Agency Records
2. Vendor Records
3. Customer Records
Investigative Steps
Obtaining Documentary Evidence
•
•
•
•
•
Use Internal Authority granted by Management
Develop Internal/External Sources
Use Contract Provisions
Criminal Investigation – Use Subpoenas or
obtain Warrants
Civil Investigation – Use Discovery and Civil
Subpoenas
Investigative Steps
Physical Evidence -Fingerprints,
Stolen/Damaged Property, Checks,
Receipts, Bank Records, Contracts, etc.
1. Evidence can be obtained from internal
agency sources or other Business Sources
2. Evidence can be obtained through Civil
Procedures
3. Some evidence may need to be obtained by
Law Enforcement Professionals
Types of Evidence
• Best Evidence – Known as primary evidence
such as original documents, equipment, etc.
• Circumstantial Evidence – Known as Indirect
Evidence and based on inference
• Conclusive Evidence – Evidence so strong it
overshadows any other evidence to the contrary
• Critical Evidence – Evidence strong enough that
its presence could tilt a decision makers mind
Types of Evidence
• Corroborating Evidence – Evidence that
differs from, but strengthens or confirms
other evidence
• Credible Evidence – Evidence that is
worthy of belief; trustworthy evidence
• Demonstrative Evidence – Evidence that
one can see and inspect usually offered to
clarify testimony. Often termed illustrative,
real or tangible evidence
Types of Evidence
• Forensic Evidence – Evidence arrived at
by scientific means
• Expert Evidence – Evidence about a
scientific, technical or professional issue
presented by a qualified expert witness
• Photographic Evidence – Photographs
taken by competent authority which can be
attested to as being true and unchanged
Report Preparation
• Culmination of all work to prove the fraud and
identify those responsible
• Begins with Predication
• Identifies “Who, What, When, Where and How of
the Fraud
• Identifies “Elements of Proof” to substantiate the
Fraudulent Activity
• Attach and List all Evidence to support findings
• List locations of evidence that cannot be
attached to the report
Seek Remedial Action
• Administrative Action
• Civil Remedies
• Criminal Prosecution
What Action Do Most Businesses Take
After Discovering a Fraud?
1. Pursue No Legal Action
2. Pursue Civil or
Administrative Remedies
3. Pursue Criminal
Remedies
Fact
More Than
80% of
Organizations
Do #1
Organizations Contribute
to Fraud
Termination without
Prosecution and
Publicity of the Fraud
Allows:
Individuals do it all over
again someplace
else.
Employees get the
message that you can
get away with fraud
without suffering any
penalty.
Summary
• Be Proactive
• Never Disregard the Obvious
• Take Action quickly to Stop Fraudulent
Activities
• Conduct thorough Audits/Investigations
• Don’t limit the scope of your activities
• Take Affirmative Action
• Publicize the Findings and Action Taken
Investigating Fraud
QUESTIONS?