Fraud investigations session 2 slides
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Ran a Fraud Investigation session online for The Institute of Chartered Accountants of Pakistan. These are slides for day 2. Link for session 1 slides at the bottom of the description. These slides cover considerations for fraud interviews, report writing, legal considerations during investigations, roles and responsibilities, some input on understanding fraud prevention and fraud risk management (another link below for a detailed slide deck on this topic), some nuances of modern fraud investigations, and selected specific fraud and corruption scenarios. The last topic was covered in the session for the audiences where I shared some interesting aspects; will probably cover those in a blog post soon for wider sharing. Links: Fraud Investigations Session 1 slides: https://www.slideshare.net/ZeeshanShahid1/fraud-investigations-session-1-slides Fraud Risk Management - High level perspective https://www.slideshare.net/ZeeshanShahid1/fraud-risk-management-high-level-perspective-for-the-board-of-directors
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Fraud investigations session 2 slides
- 1. Fraud Investigations ZEESHAN SHAHID AUGUST 6, 2021 | SESSION 2 OF 2 This Photo by Thoufeeq Ahamed is licensed under CC BY-SA-NC
- 2. Overview • Introduction and context • Common factors in reported frauds and Pakistan Perspective • Perpetrator behavioral analysis • Fraud investigations • Fraud interviews • Report writing • Legal considerations during investigations • Roles and responsibilities • Understanding fraud prevention • Nuances of modern fraud investigations • Selected specific fraud and corruption scenarios Photo by John Fowler on Unsplash
- 3. Introduction and context Fraud defined Introduction to Fraud tree Introduction to Fraud triangle and diamond Common factors in fraud and Pakistan perspective Findings of ACFE’s Report to the Nations 2020 based on research from data of 125 countries, 23 major industry categories, and 2,504 cases; Importance of whistle-blowing systems and fraud awareness trainings emphasized. Perpetrator behavioral analysis; most common behavioral red-flags and perspective from Pakistan Fraud investigation process Brain storming; planning; collection; evidence gathering through analysis; reporting and closure Review of topics covered in last session
- 4. Brainstorming • Identify parties, investigation parameters and risks as input to the plan. Planning: • Thorough planning determines focus and helps manage the investigation Collection phase: • Information gathering in a forensically sound manner Evidence gathering through analyses: • issue-tailored analyses performed to obtain evidence Reporting and closure: • Reporting of findings The Fraud Audit / Investigation Process Problem recognition and definition Refine and amend hypothesis Analyze data; create and test hypothesis
- 6. Admission-seeking stage Interview of suspect Confirmation phase Corroborative interviews with withnesses Interviews of co-conspirators Evidence-gathering phase Collection and evidence gathering through anlaysis (excl. human info) Preliminary observation drafting Corroborative or information seeking interviews with neutral persons Fraud interviews
- 7. Types of communications Chronemic; use of time to convey meaning, attitudes and desires (respondent late in keeping appointments or delaying; potentially avoiding Proxemic; use of interpersonal space to convey meaning Paralinguistic; using volume, pitch and voice quality to convey meaning Kinetic; use of body movements to convey meaning Overarching considerations
- 8. Preparation • Review case files • Have clear objectives • Determine order of interviews • Determine type of information expected to be received • Select a comfortable and secure venue • Select members of investigation team as interviewers • Formulate a brief outline of key points to discuss
- 9. Types of questions • Introductory; used to provide intro, establish rapport, set theme and baselining behaviour; do not use sensitive questions or emotive words at this stage • Informational; used to gather unbiased facts; could be open, closed or leading; however, questioning should be general to specific • Closing; used to reconfirm facts gathered; see if additional information can be gathered; and to achieve a pleasant end to the process • Assessment; used to evaluate credibility • Admission seeking; only used for individuals whose culpability is reasonably certain; designed to obtain legal admission of wrongdoing; reasonable certainty is achieved when there is reasonable probability about the culpability of suspect and reasonable investigation steps already taken; convey absolute confidence with accusation, do not become a moral judge, be firm with empathy; offer a moral excuse; diffuse defenses.
- 10. Mechanics and other considerations • Do not react to difficult persons or conversations • Prepare the room appropriately; privacy; door closed but not locked and easily reachable by interviewee; communicate that they’re free to leave anytime; keep interviewer chairs apart; interviewee should not be behind any physical barrier • At least two interviewers in an admission seeking interviews
- 11. Things to cover in verbal confessions • Knowledge of action being wrong; demonstrating intent • Facts known only to perpetrator • Motive; may need to dig further • Facts about offense (timing, continuing or stopped, others involved, evidences, location of any assets misappropriated)
- 12. Things to cover in signed confessions • Statement that the confession is voluntary • Intent • Facts about fraud (dates, amount of loss, instances, etc) • Willingness to cooperate • Confessor’s rationalization • Acknowledgement that confessor has read the statement • Truthfulness of the statement • Witness signatures (HR and/or Legal Counsel should be included) Consult your lawyer for your jurisdiction’s requirements with respect to confession statements.
- 13. Report writing
- 14. • Background • The background section is generally about two paragraphs. It should state very briefly why the fraud examination was conducted. • Executive Summary • In this section the reporter summarizes what actions were performed during the fraud investigation, such as reviewing documents, interrogating witnesses, conducting analyses or tests, etc. Doing so provides the reader with an overview of what was done during the examination process. At the end of this section, you should summarize the outcome of the examination. For example, “PKR 500,000 in checks was deposited into an account owned by YZ. When confronted with this information, Ya stated that he had only borrowed the money and meant to pay it back. Report writing
- 15. • Scope • This section consists of just one paragraph explaining the scope of the fraud examination. For example, “Determine whether accounts receivables were manipulated in the books record,” or “Determine why cash inventory recorded is not matching with actual quantity in the warehouse. • Approach and methodology • This section gives a brief description of the following items: • Fraud examination team members • Procedures performed (generally what documents were reviewed or what tests were conducted) • Individuals interviewed • Any limitations • It provides a handy reference as to who was involved in the fraud examination, what the team reviewed, what tests or analyses were conducted, and what individuals the team interviewed. Report writing (cont’d)
- 16. • Findings • This section contains the details of the fraud examination. It will generally consist of several pages. In this section, you should describe what actions or duties the reporter performed and what was found. Provide enough detail so that the reader understands what occurred, but not so much detail that the reader begins to lose interest or becomes bogged down in the details. • The reader wants to know how many instances occurred, who was involved, how they did it, what proof you have, etc. If the findings section is long, you might use subheadings for particular topics or individuals to make it easier for the reader to stay organized. The information can be presented either chronologically or by topic— whatever makes it easier for the reader to follow. • Approach • This section should be one or two paragraphs and should briefly summarize the results of the fraud investigation. It should be similar to the outcome stated at the end of the Executive Summary section Report writing (cont’d)
- 17. • Impact • This section consists of how the fraud impacted the overall business. The reporter can provide an estimate amount of loss or any other tangible or intangible damage suffered by the victim and also which might affect in future. • Recommendation • The organizations mainly look for the recommendations as they are willing to implement the changes. However, this section is optional. There might be instances where fraud investigator wish to discuss remedial measures or specific recommendations in a separate document. If investigator do wish to include this section, then should state what follow-up action is necessary or recommended, including remedial measures such as a review of internal controls, introduction of a whistle blower - hotline, increased security, etc. • Limitations and caveats • Standard caveats • Identify any matter outstanding Report writing (cont’d)
- 18. • Opinions and conclusions: • Conclusions need to be self-evident, not requiring to be pointed out • Opinions regarding guilt or innocence are not allowed • Fraud examiner should not include any statement of opinion as to the integrity or veracity of any witness. Report writing (cont’d)
- 20. • Collection sensitivities; what can and cannot be examined • Labor laws sensitivities; will the investigation be challenged subsequently in the court? • Evidence admissibility; are there any conjecture in the report rather than facts? Are the facts sufficiently establishing beyond reasonable doubt the culpability of suspect? • Interviews; what is the admissibility of the interview process? • Disciplinary options in light of laws • Any statutory reporting responsibility? • Consult legal counsel throughout the process Legal considerations during investigations
- 22. • Primary responsibility for fraud prevention • Responsible for ensuring appropriate policies and procedures are implemented in the organization. • Developing and maintaining an adequate system of internal control as well as maintaining accounts, records, and books that accurately and fairly record and represent company transactions are statutory obligations. • COSO principle: The organization considers the potential for fraud in assessing risks to the achievement of objectives. Board and management
- 23. • International Standards for the Professional Practice of Internal Auditing (IPPF Standards) require: • 1210.A2 – Internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in which it is managed by the organization, but are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud. • 2120.A2 The internal audit activity must evaluate the potential for the occurrence of fraud and how the organization manages fraud risk. • 2210.A2 – Internal auditors must consider the probability of significant errors, fraud, noncompliance, and other exposures when developing the engagement objectives. • Additionally other IPPF Standards also include fraud, including standards relating to role of internal audit in evaluating organization’s ethics and values. • Source: https://na.theiia.org/standards-guidance/public%20documents/ippf-standards-2017.pdf (please check for updates) Internal auditor
- 24. • ISA 240: ‘The Auditor’s Responsibility To Consider Fraud in an Audit of Financial Statements’, an auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. • In planning and performing the audit to reduce audit risk to an acceptably low level, the auditor should consider the risks of material misstatements in the financial statements due to fraud; if risk is high; involve expert. • Only two types of misstatements concern the auditor: misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets. • Due to significant inherent limitations in case of misstatement from fraud, particularly management fraud, auditor is responsible for maintaining professional skepticism throughout the audit, considering the potential for management override of controls. A subsequent discovery of fraud does not necessarily imply non-compliance with ISAs. • Auditor is expected to identify and assess the risks of material misstatement due to fraud and design procedures to detect such misstatement. • Source: https://www.ifac.org/system/files/downloads/2008_Auditing_Handbook_A080_ISA_240.pdf (please check for updates) External auditor
- 26. Training Fraud reporting mechanism Tone at the top / Code of conduct Internal audit / Surprise audit Data mining (proactively looking for anomalies) Anti-fraud controls •Segregation of duties •Safeguard of assets •Management authorization and review •Job rotation •Mandatory vacation •Background checks / Due diligence Disciplinary actions Anti-fraud better practices
- 27. • Fraud Risk Management is a process that results in board and upper management and all other staff deterring fraud in their organization. • Fraud deterrence is a process of eliminating factors that may cause fraud to occur. • Key considerations: • All organization are subject to fraud risks. • Elimination of all fraud in all organizations impossible. • Some sort of principle needed to create procedures and make environment risk free. • BoD, top management and personal at all levels have responsibility for managing fraud risk. • Fraud risk management framework helps organizations develop a program to deter fraud Fraud risk management
- 28. Visible and rigorous fraud governance process Effective fraud control processes and procedures Periodic Fraud Risk Assessment Swift allegation response and appropriate action against wrong-doers Attributes of a deterrence creating FRM process Fraud risk management
- 30. • Mobile devices • Personal data on official machines • BYOD • Cloud and network forensic • OSINT (external sources, public records, court records, property records, tax records, business filings with regulators); Social Catfish (or use programming skills to build your own VM) • WayBackMachine (notable mention!) • Privacy issues when collecting social media; best practices (screen capture; print; PDF etc.) • Email headers Nuances of modern fraud investigations
- 32. Financial services sector • Islamic bank private lending scheme • Large commercial bank trade finance fraud investigation • Microfinance bank (investigations; methodology; AML/CFT) • AMC – Fraud against customers • SWIFT fraud • Service provider to large commercial bank making improper arrangements Government and WorldBank • Review of program with branchless banking nuances • Pakistan Railways (draft) Selected investigations
- 33. Tech / Startup: • Investigation of procurement fraud • Staff’s Anti-Corruption due diligence Pharma • Frauds in Hardship cases • Vaccine fraud • Compliance audit of distributors • ABAC DD • Medical devices company distributor FCPA NPO • Forensic of Pakistan operations • Afghanistan foreign government charity (Head investigation; Ops investigation) Selected investigations
- 34. HNW fraud • Trading PPP platform scam Oil and gas • Foreign company investigation of conflict of interest FMCG • ABAC / FCPA DD • Trust fraud Hospitality • Multinational fast-food chain; senior management fraud Selected investigations
- 35. ONE: No opinions in report TWO: Interview and question types THREE: Responsibilities of fraud prevention, detection and investigation FOUR: Fraud prevention including FRM FIVE: Whether you’re an internal or external auditor, engage an expert when situation calls for it. SIX: Legal considerations Key Takeaways
- 36. PUBLICATION STORY Suggested supplementary reading Jul-Sep 2014 Published Oct 2014
- 37. Become certified, get access to leading resources and part of an expert community of fraud fighters around the globe. Stay away from ‘Diploma Mills’!
- 39. Zeeshan Shahid • Chartered Accountant; Certified Fraud Examiner; >18y experience; served as partner in Deloitte and Yousuf Adil • >10y running country’s first dedicated Forensic practice in Deloitte; Experience of investigating allegations of fraud, abuse, bribery, corruption and misconduct in public (federal, provincial and corporate), private (domestic and MNCs for FCPA/UKBA), non-profit (foreign government and NGO)