Investigating Theft and Embezzlement - In the Workplace

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Investigating Theft and Embezzlement –
In the Workplace
North Alabama Chapter Institute of Internal Auditors - March 2012 Meeting March 13, 2012
A Forensic Accountant’s Perspective

WHAT IS FORENSIC ACCOUNTING?

“The Art of figuring out
what we don’t know”

AUDITORS AND FORENSIC ACCOUNTANTS

► Auditors usually reason from numbers to people, forensic
accountants seem to do the reverse
► Auditors typically do not presume fraud exists and are
generally more trusting
► Auditors may make materiality judgments
► Forensic accountants may have “self-selected” into the
investigative side and are natural sleuths
► Forensic accountants have the benefit of years of experience
with different fraud schemes
► Forensic accountants adopt different approaches beyond the
auditor’s tool kit, such as e-mail reviews, computer forensics
and space-time analysis

Institute of Financial Operations

 International Accounts Payable Professionals (IAPP),
International Accounts Receivable Professionals
(IARP), the National Association of Purchasing &
Payables (NAPP), and The Association for Work
Process Improvement (TAWPI)
 May 15, 2011 - In informal poll of 622 managers, 72%
said fraud in the back office was on the rise

WHAT IS FRAUD?

Black’s Law Dictionary - “Fraud is a generic term, and embraces all the
multifarious means which human ingenuity can devise, which are resorted to
by one individual, to get an advantage over another by false representations.
No definite and invariable rule can be laid down as a general proposition in
defining fraud, as it includes surprise, trickery, cunning and unfair ways by
which another is cheated. The only boundaries defining it are those which
limit human knavery.”

Legal Elements of Fraud -
1. A material false statement
2. Knowledge that the statement was false when it was made
3. Reliance on the false statement by the victim, and
4. Damages as a result

OCCUPATIONAL FRAUD AND ABUSE
 The use of one’s occupation for personal enrichment
 The misconduct of employees, managers and
executives
 Internal fraud

O c c u p a t io n a l F ra ud an d A bus e

Asset Fr a udule nt
C or r uption
M is a ppr opr ia tion S ta te m e nts

C o n f lic t s Ille g a l E c o n o m ic Non-
B rib e r y F in a n c ia l
o f In t e re s t G ra t u it ie s E x t o rt io n F in a n c ia l

P u rch a se In vo ice A sse t/R e ve n u e A sse t/R e ve n u e E m p lo ym e n t
S ch e m e s K ickb a cks O ve rsta te m e n t U n d e rsta te m e n t C re d e n tia ls

Tim in g In te rn a l
S a le s
B ig R ig g in g D iffe re n ce s
S ch e m e s D o cu m e n ts

Fictitio u s
R e ve n u e s E xte rn a l
O th e r O th e r
D o cu m e n ts

C o n ce a le d
L ia b ilitie s &
E xp e n se s

Im p ro p e r
D isclo su re s

Im p ro p e r
A sse t
In v e n t o r y
V a lu a tio n s
C ash
a n d a ll
O th er A sset s

La rc e ny S k im m ing
M is us e La rc e ny

C a sh S a le s R e ce iva b le s R e fu n d s &
O n Han d O th e r A sse t R e q .
& Tra n sfe r
W rite -o ff
U n re co r d e d
Fr o m th e S ch e m e s
D e p o sit Fa lse S a le s
& S h ip p in g
U n d e rsta te d L a p p in g
S ch e m e s
O th e r Fra ud ule n t P u rch a sin g &
D is bu rs e m e nt s R e ce ivin g
U n co n ce a le d

U n co n ce a le d
L a rce n y
B illin g P a yro ll E xp e n se C h e ck R e g iste r
S ch e m e s S ch e m e s R e im b u rse m e n ts Ta m p e rin g D isb u rse m e n ts

S h e ll G h o st M isch a ra cte rize d Fo rg e d
Co mp an y E m p lo ye e s E xp e n se s M a ke r Fa lse V o id s

N o n -A cco m p lice Fo rg e d Fa lse
C o m m issio n O ve rsta te d
V e nd or E n d o rse m e n t R e fu n d s
S ch e m e s E xp e n se s

P e rso n a l A lte re d
W o rke rs Fictitio u s
P u rch a se s P a ye e
C o m p e n sa tio n E xp e n se s

C o n ce a le d
Fa lsifie d M u ltip le C h e cks
W age s R e im b u rse m e n ts

A u th o rize d
M a ke r

COSO’S FRAUDULENT FINANCIAL
REPORTING 1998-2007
Common Financial Statement Fraud Techniques

 Improper Revenue Recognition 61%
 Overstatement of Assets 51%
 Understatement of Expenses/Liabilities 31%
 Misappropriation of Assets 14%
 Inappropriate Disclosures 1%
 Other Miscellaneous Techniques 20%
 Disguised Through Related Party Trans 18%
 Insider Trading Cited 24%

REPORTING 1998-2007
Improper Revenue Recognition
 Sham sales
 Conditional sales
 Round-tripping
 Loans as sales
 Bill and hold
 Revenue before sale completed
 Improper cutoff of sales
 Improper use of percentage of completion
 Unauthorized shipments
 Consignment sales

REPORTING 1998-2007
Asset Accounts Misstated
 Inventory
 Accounts Receivable
 Property and Equipment
 Cash/Marketable Securities
 Loans and Notes Receivable
 Investments
 Prepaid Expenses

Billing Schemes

Perpetrator causes the victim organization to issue a
payment by submitting invoices for fictitious goods or
services, inflated invoices or personal purchases:

• Invoicing via Shell Companies
Submitting False Invoices
Pass through Entities
• Non-Accomplice Vendor
Pay and return
Overbilling or duplicate invoices
• Personal Purchases

Check Tampering Scheme

Perpetrator converts an organization’s funds by forging or
altering a check on one of the organization’s bank accounts, or
steals a check the organization has legitimately issued to
another payee:

• Forged Maker
• Forged Endorsements
• Altered Payee
• Concealed Check
• Authorized Maker

BENEFITS OF AN
EFFECITVE INVESTIGATION
 Figure out what happened
 Deal with employee problems early
 Enforce company policies
 Encourage reporting
 Avoid or counter bad publicity
 Protect your company from lawsuits

WHAT DO YOU WANT TO ACCOMPLISH?

 Who done it
 Find out the amount of losses
 Obtain justice
 Set an example
 Obtain restitution
 Determine weaknesses in internal control
 Terminate the employee
 File criminal complaint with authorities
 File civil lawsuit
 File claim for insurance

HOW DO YOU CONDUCT THE RIGHT
INVESTIGATION?

 Be fair
 Be thorough
 Make good-faith efforts to get to the truth

STEPS TO A SUCCESSFUL INVESTIGATION

 Decide to investigate
 Take immediate action
 Choose an investigator
 Plan the investigation
 Interviews
 Gather documents and other evidence
 Evaluate the evidence
 Take action
 Document the investigation
 Report writing and follow up

DEFAMATION DEFENCES

 Speak only to people who have a legitimate need to
know
 Make only statements you know to be true
 Good-faith reference to a prospective employer
 Good-faith statement to a government agency

COMMON INVESTIGATION MISTAKES

 Failing to investigate
 Delay
 Inconsistency
 Retaliation
 Failing to be through
 Compromising confidentiality
 Losing objectivity
 Strong-arm interview tactics

ITEMS TO CONSIDER WHEN
INVESTIGATING

 Privacy issues
 Chain of custody 1) who has had possession and 2)
what have the done with it
 Miranda
 Fair Credit Reporting Act

DISCOVERING PROBLEMS

 Formal complaints
 Anonymous complaints
 Reports by managers, supervisors or internal
auditors
 Workplace observation
 Third party reports

PREDICATION

“The totality of circumstances that would lead a reasonable,
professionally trained and prudent individual to believe a
fraud had occurred, is occurring or will occur.”

FRAUD THEORY APPROACH

 Analyze available data
 Create hypothesis
 Test the hypothesis
 Refine and amend hypothesis

ELEMENTS OF PROOF –
FALSE INVOICING SCHEME

 Individual created the invoices
 Invoices were false
 Victim company acted upon the invoices
 Victim company suffered damage
 Individual received the payments
 Individual knew the invoices were false

PROVING INTENT

 Could not have a legitimate motive for their actions
 Altered documents
 Took steps to conceal or destroy evidence or
obstruct the investigation
 Gave false, misleading statements concerning
matters under investigation
 Repeatedly engaging in an activity of an apparent
wrongful nature
 Personally gained from the fraudulent act

INTERVIEWING

 Interviewing is a conversation with a purpose
 Active listening
 Use of pregnant pauses
 Structure of the interview
 Detection of deception

INTERVIEWING

 Ask open-ended questions
 Start with easy questions
 Keep opinions to yourself
 Keep it confidential
 Ask to contact you with additional information
 Document your interviews
 Union members have a right to have a representative
present
 Follow up interviews

ACTIVE LISTENTING

“I know you believe you understand what you think I
said, but I am not sure you realize that what you
heard is not what I meant.”
- President Bill Clinton

General Rules for
Introductory Questions

 Don’t interview more than one person at a time
 Conduct interviews under conditions of privacy
 Ask nonsensitive questions:
Instead of: Use:
Investigation Inquiry
Audit Review
Interview Ask a few questions
Embezzle Shortage or paperwork problems

31

DETECTION DECEPTION

 Text analysis or linguistic analysis helps determine a
Probability of Deception
 Liars were found to be over 6 times more evasive
than truth tellers
 Consider what a person might be trying not to tell us
 98% of languages in the world, the Subject precedes
the object - “John shot Bill” (active) as opposed
to“Bill was shot by John” (passive)

DETECTING DECEPTION

 Untruthful person must response to inquiries by either
lying directly of being verbally evasive
 For most people, instead of telling a direct lie, they will
dilute, reroute and rearrange bits and pieces of language
into verbal evasion
 A deceptive interviewee is an “intelligent organism” who
views the interview as an exercise of survival
 The deceptive person is like an author if fiction who tries
to write a believable story based upon real memories and
imagination
 Each word, phrase and sentence the untruthful person
utters must be carefully selected to misdirect and
mislead a questioner away from “hot” areas

DETECTION DECEPTION

Q:“Did you steal any of the missing money?”
A: “Why would I steal money from where I work? I’m
not the kind of person to get involved in stuff like
that. I would deny any accusations that points to
me as being involved in this.”

Can’t say “NO.” Already feeling guilt for stealing the
money, now has to feel guilt about lying.
Least Resistance: Evasion and indirect deception

DETECTION OF DECEPTION

Miller’s Law:
In order to understand what a person is telling you, you must
first accept that what the person has said is the complete truth,
and then ask yourself: What is that true of?

Q: “Tell me what you know about the money that is missing?”
A: “There’s really not much I can tell you. There’s just not much I can
say about it.”

Rule of Thumb: If the response does not match the parameters of the data
within the topic, apply Miller’s Law and put the response under a “linguistic
microscope.”

DETECTION OF DECEPTION –
Signs of Deception
1. Lack of Self-Referral – “The safe was left unlocked” rather than “I left the safe
unlocked.”
2. Verb Tense – Truthful people usually describe historical events in the past
tense. “After closing the store, I put the cash pouch in my car and drove to
the bank. I entered the parking lot and rolled down my window, a guy jumps
out and yells at me. He has a gun and he grabs the cash and runs away.”
3. Answering Questions with Questions – “Do I seem like the kind of person who
would do something like that?”
4. Oaths – “I swear.” “as God as my witness.”
5. Alluding to Actions – “I try to backup up my computer every night before
going home. Last night, I decided to copy my files onto the network and I
needed to lock up the deposits in the safe.”
6. Lack of Detail – Truthful statements usually contain specific detail….song that
was playing…..woman at the next table. Those who fabricate at story, tend to
keep their statements simple and brief.

DETECTION OF DECEPTION – WAYS TO LIE
Without Lying – Thematic Categories
1. Unfinished Business – “That’s about it, That’s about the size of it, I guess
that’s about all”
2. I Can’t… – “I can’t say, I can only tell you this, I can’t think of anything”
3. Hypothetically Structured Phrase – Says that they could, would, should or
ought to give us an answer, but does not. “I would say not.”
4. Hard Question – “That’s a hard question to answer.”
5. Objection – “I’m not the kind of person who would do that.”
6. No Pause for Reflection – “I don’t remember, I don’t recall.”
7. Maintenance of Dignity – “I beg your pardon, What kind of question is that to
ask me”
8. Interrogatory Evasive Response – “How should I know that?”
9. Projection – “Someone would have to be sick to do that.”
10. Accusatory – “Are you accusing me of doing that?”
11. The Answer Is.... – “The answer is no.”
12. Denial of Presence – “Is that question directed at me?, Who me?”

Admission-Seeking Questions
 Distinguish the innocent from the culpable
 Obtain a valid confession
 Obtain from the confessor a written statement
acknowledging the facts

38

Admission-Seeking Questions

 Presence of outsiders
 Miranda warnings
 Theme development
 People will confess if they perceive that the
benefits outweigh the penalties
 Offer a morally acceptable reason for the
confessor’s behavior
 Convey absolute confidence in the premise of the
admission you seek from the subject

39

Accusing an Innocent Person

 The accuser has reasonable suspicion or
predication to believe the accused has committed
an offense.
 The accusation is made under conditions of
privacy.
 The accuser does not take any action likely to
make an innocent person confess.
 The accusation is conducted under reasonable
conditions.

40

Steps In The Admission-Seeking Interview
 Direct accusation
 Observe reaction
 Repeat accusation
 Interrupt denials
 Delays
 Interruptions
 Reasoning

41


 Establish  Establish
rationalization rationalization
 Unfair treatment  Stress, drugs, alcohol
 Revenge
 Inadequate recognition
 Depersonalizing the
 Financial problems victim
 Aberration of conduct  Minor moral infraction
 Family problems  Altruism
 Accuser’s actions  Genuine need

42

 Diffuse alibis
 Display physical evidence
 Discuss witnesses
 Discuss deceptions
 Present alternative
 Benchmark admission
 Reinforce rationalization

43

 Verbal confession
 That the accused knew the conduct was wrong
 Facts known only to the perpetrator
 An estimate of the number of instances or amounts
 A motive for the offense
 When the misconduct began

44

 Verbal confession
 When/if the misconduct was terminated
 Others involved
 Physical evidence
 Disposition of proceeds
 Location of assets
 Specifics of each offense

45

Discussion
 BillAcuff@Decosimo.com

Investigating Theft and Embezzlement - In the Workplace

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