INTRODUCTION:
I take the privilege to present the paper on “Investigative Techniques” in fraud investigation. In today’s scenario, there is a growing need for fraud awareness and separate considerations towards preventing Occupational Fraud.
Recent cases of fraud like in the case of an European hacker nicknamed as Poxxie, in the mid-September 2011, hacked into the computer systems of an US company and grabbed 1400 credit card numbers, the account holder names, and the security code that comes with the card. With a little trouble he just sold them for $3.50 each on his own seller’s site called “CVV2s.in” to underworld buyers who come to trust the quality of his goods. Thieves annually steal 8.4 million credit card numbers and cause a potential loss to the holders which accounts for $114 billion a year.
Olympus fraud is another case that struck the world in mid-October. This time the Camera maker, Olympus corp., a Japanese corporate overstated its earnings and the initial report was that there was an estimate of $1.7 billion worth of accounting fraud.
The REPORT TO THE NATIONS, 2010 issued by The Association of Certified Fraud Examiners reported that annually there is a loss of 5% of total turnover. This estimate was a result of survey of 1,843 cases of fraud reported during the year 2009 and 2010.
This is the kind of world that we are conducting our business in. A mere research on the fraud and reporting it to the media is not the correct step to control fraud. Fraud is like a virus, which no one knows when it enters the corporate system and damages its reputation. There has to be a clear investigation and detection of fraud.
Each detection of fraud needs a thorough investigation of such fraud to reach towards the actual perpetrator. Although it is not entirely possible to recover the entire losses, a well performed investigation helps in recovering maximum losses. Also, a good investigation throws lessons to cover up the weakness which paved way for occurrence of such fraud. Because, it is not weakness of the internal control but absence of adequate internal control in an organization for occurrence of fraud in maximum cases.
We have to appreciate the fact that there is no accurate or approved method of investigating a fraud. It completely relies on the examiner’s tact and professional competence in formulating a sequence of investigation. However, there are certain aspects which can be commonly applied in investigation of a fraud.
WHAT IS AN INVESTIGATION?
Investigation is the examination of physical evidence, documents, E-Mails, Computer storage, access log reports, inventory verification etc., to gather evidence and catch the actual perpetrator.
WHY AN INVESTIGATION?
- To find out the ultimate perpetrator.
- To recover losses
- To find out the internal control flaws
- To create a fraud awareness in the organization, to see it doesn’t repeat.
LIMITATIONS OF AN INVESTIGATION
We have to accept the fact that every investigation will not meet the desired end result i.e. there is no surety that every investigation will become successful. It is also not possible to recover the entire loss of a fraud. There are some legal limitations and political influences which act like a bottle-neck to the investigation process.
PRE-REQUISITES:
GAIN AN UNDERSTANDING:
It is of utmost importance to gain an understanding before the start of an investigation with the management authorities. The following are a set of question which needed to be answered before accepting an investigation.
1. What is the time frame under review?
2. What is the nature of concerns and allegations?
3. Who are the possible targets?
4. Have other investigations have been carried out prior to this investigation?
5. Are back ground checks of the employees are conducted before the employment?
6. How long the problem persisted before being detected?
7. Is there any employee, vendor or any other person related to the organization with a personal problem or an addiction (drugs, alcohol, gambling), who might seek additional financial resources at any potential cost and risk?
8. Does the company have a fraud policy?
TIMING:
Timing is an important aspect in investigation. A fraud investigator normally in most of the cases will have less time to gather evidence. Let us not forget the fact that the perpetrator of a fraud will always see to get away with fraud. He will be always on upper hand at the start of an investigation. So the investigator has to plan his investigation along with his team so that no single area of investigation is left out without being dealt appropriately.
COMMUNICATION:
Communication, although is a very common aspect, fraud investigators need to concentrate more on this issue as effective communication, including setting clear expectations etc., are required.This is an essential skill of investigative team. Clear, frequent and timely communications are critical aspects for a fraud investigator. An investigator’s communication should never conclude or transmit an information which is lethal to his investigation.
PREDICATION:
The totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, will occur is predication.
Predication is the basis upon which an examination is commenced. Predication may take any form like, anonymous tips, complaints, and audit enquiries etc., However, fraud examiners should not conduct an investigation without proper predication.
Some examples of predication may be like:
1. Not able to obtain timely reports from a personnel, department, location, division or subsidiary.
2. An investment is made in a location or product, and early performance reports are troubling despite our upfront due-diligence efforts.
3. Internal audit team has reported some serious discrepancies.
4. A particular manager insists that we use a certain vendor which strikes as a red flag.
5. We noticed that a new customer has made a Rs. 3, 00,000 purchases this month, but the identity of the supplier is not reached. The management might ask us to conduct a survey about theissue and report.
6. One of the employees was reported to be living in the standards beyond his financial status.
7. One of the high level executives has died all of a sudden immediately after he took some serious action on a sub-ordinate of his.
8. The management received some anonymous tips from its competitors or business partners or some public acquaintances.
9. Conflict of interest issues like – one of the employees has seen a late-night television commercial for a new restaurant in the town where the general manger or an executive might be the owner of such restaurant.
STARTING AN INVESTIGATION:
EARLY ADMINISTRATIVE MATTERS:
a) Relationship review and conflict check: There might be some relationship issues in victim organization where some of the employees are close relatives of the possible suspect. There might be friends, love interests, family relations etc., An investigator before carrying forward his investigation, has to conduct a thorough back ground check of the employees and the management personnel. This helps him in gathering some serious information which helps him in his investigation. Often there might be some possible red flags waving around the relationships too.
b) Engagement letter: It is always better to resolve the engagement issues like details of fee, communication issues and consultancy matters before accepting the investigation at first.
c) Secure Yourself: Secure yourself with compliance to the local laws and formalities before starting your work. There might be some cases which you might need help of a legal practitioner in tackling some legal issues put up by the suspect.
d) Whistleblower Protection: Whistleblower is a person who informs that a fraud had been perpetrated. Confidentiality of the particulars of the whistle blower is a serious issue. Often there are cases where there was a loss of life of the whistleblower from the suspect. Some of the instances are like in the case of S.Manjunath, a 27 year old Lucknow IIM graduate working as a sales officer with Indian Oil Corporation, paid with his life for attempting to ensure that people do not get adulterated fuel. Like wise in the case of 30 year old engineer’s tragic death in Bihar in the construction of the giant Golden Quadrilateral road project.
INVESTIGATION PROCESS:
GATHERING EVIDENCE:
It is always better to start an investigation by gathering available evidence as immediately as the case comes to us. The main objective is to secure as much information, evidence and detailing as possible before the perpetrator destroys it. There are often many cases reported where even the perpetrator destroyed the files at the cost of the entity. Believe the fact that perpetrator has also some acquaintance behind him to serve private information of management. In gathering evidence, the investigator can take the help of a computer forensics expert. Because often in many cases, where fraudster thinks that he had deleted information from computer hard disks, there has been cases where a computer forensics expert recovered most of the information with his expertise in the field. So investigator may take his help. There are also some common recovery software like RECUVA, which helps in recovering the deleted files. Digital data analysis is also an important aspect which is important in gathering evidence for the purpose of investigation.
HELP OF COMPUTER SOFTWARE:
If there is a computer based software taking care of the internal control in an organization, the investigator’s work becomes easier because the software provides him some useful information like –
- In cases of authority misuse, usually there will be high number of transaction just below the authorized limit. Software helps in compiling such information just on a click of a mouse.
- High number of manual disbursements in spite of fully computerization of transactions.
- Frequently occurring large round-off amounts.
- Unusual patterns of write-offs or adjustments.
- Evidence of payment of duplicate invoices.
- Identification of suspicious addresses when comparing data.
COORDINATION:
There are certain issues like –
- How often should the team meet?
- Desirable frequency of internal reports.
- Communication mode.
- Confidentiality of the evidences and information.
SURVEILLANCE:
Depending on the type of case being investigated, surveillance of people can be a particularly effective way of gathering information. Many states require those who are engaging in surveillance to be licensed private investigators, so it is important to make sure that you are following thelaws before you start watching people.
Surveillance in general means observing people, places, and movements. It is common to videotape almost in all surveillance work these days, but that is optional. An investigator could engage in surveillance and just take notes or rely on her or his memory of the events. Videotaped evidence is more difï¬cult to refute, which is why it is so common to capture these things on video.
COMPUTER FORENSICS:
A computer forensics expert is typically well-versed in securing digital evidence to preserve it for future courtroom activity, as well as recovering data that may have been accidentally or purposely deleted or destroyed. Even when someone intends to delete ï¬les from a computer, pieces of evidence may remain on that computer for a long time. Harvesting these bits of data may be critical to a fraud investigation.
RATIO ANALYSIS:
Ratio analysis as a tool helps in detecting financial statement fraud in the most of the cases. Usually the period, in which a financial statement fraud is perpetrated, the ratios will deviate from their ideal figures, par se, normal figures in maximum cases. They also help in arriving at the time period in which the actual fraud was taken place.
INTERVIEWING TECHNIQUES:
Interviewing is a process of obtaining the required information and evidence with the help of a series of questions posed on the persons involved with the victim organization.
Interviews are the most effective tool for an investigator. Interviews provide a platform for the interviewer to face the possible suspects face to face and gather evidence with his tactical questions.
Some techniques that have to be followed while interviewing can be as illustrated –
- It is always better to prepare some questions before start of an interview. However, when circumstances force, an investigator should be always ready to ask questions on situational demands.
- Interview only one person at a time. It should never happen that a person’s response influences others.
- Try to allow the interviewee ample time to respond. Do not force him to hurry.
- Do not reveal too much evidence to the interviewee.
- “Can you explain?” questions always reap good benefits than “Do you Know?” type questions.
- Take help of a gadget or an assistant in recording the interview proceedings for investigative process.
- Confirm the answers given by the interviewees with customers, vendors and other stakeholders.
- Try to avoid “yes” or “No” questions as far as possible. These questions will help the possible suspect in escaping and coping with a fraudulent issue.
- Conduct the interview in a separate room far from disturbance and window peepers.
- There is no need to assure the interviewee about keeping him unpunished if he discloses the truth. Because in most of the cases, suspects initially co-operate, but later they tend to escape once they get secured.
- Avoid arriving at the conclusion without proper series of interviews
- Do not promise confidentiality
- Do not negotiate with interviewee.
- Do not hold the respondent to hold against his or her will. If he wants to leave, let him leave.
Sample Interviewing questions:
1. How you came to know about the fraud?
2. Whom do you think might the possible perpetrator and why?
3. Can you explain how the cash payments to the invoices are made in your organization?
DOCUMENT REVIEW:
It is the physical examination of the records and the documents. It is an essential tool in investigating billing schemes, expense disbursements frauds, check frauds, etc., It requires thorough examination and professional judgment.
Document review can be critical to a case. Relatively inexperienced people may overlook a feature of a document, while an experienced forensic accounting investigator will view that feature as a potential red flag.
CLOSING AN INVESTIGATION:
WHEN TO CLOSE AN INVESTIGATION?
It is not advisable to continue investigation when there is no chance or very less chance of recovering the losses which needs more financial sources to investigate the same. Fraud investigator has to make this professional judgment based on his experience and expertise whether to continue or to close, and report the same to the management. But, on the other hand, if the management wants to continue the investigation even after the knowledge of these constraints, it is not advisable to say NO.
CONCLUSION:
These are some few sample techniques of an Investigation. Note that Investigation is a process and not a function to have a single formulated plan. Investigation takes transformation into new techniques and methods as the time progresses. So you have to act now –
“If you aren’t, the fraudster will gladly find, and exploit, your weakness for you”.
Because, as P.T.Barnum says,
“There is a sucker born every minute”.
Subramanya Bhagirath K
CA Final Course
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