CFE Exam Quiz 15

Typically, team members are expected to have skills relevant to the conduction of a fraud investigation. These skills vary and include:
1. Accounting and audit knowledge
2. Knowledge of the industry
3. Knowledge of the organization
4. Knowledge of the law and the rules of evidence in the jurisdiction where the fraud occurred
5. Knowledge of privacy issues in the jurisdiction where the fraud occurred and where the investigation will occur
6. An understanding of psychology and motivational factors
7. Interviewing skills—in the relevant language(s)
8. Communication skills
9. Computer skills

Fraud examination can generate numerous legal questions/concerns. Therefore, it is absolutely necessary for legal counsel to be involved in all cases. Otherwise, the investigating institution risks exposing itself to even greater risks than the threat it is investigating.

It is crucial to have legal counsel involved in, and in most cases, leading fraud examinations, at least with regard to the legal aspects of the process (e.g., reporting results, preserving confidentiality, avoiding lawsuits, or terminating employees for wrongful misconduct).

Accounting and audit knowledge is necessary to most fraud examinations; therefore, a team might include accountants or auditors, whether internal or external. Auditors can support the investigation with information on company procedures and controls. Internal auditors are often used to review internal documentary evidence, evaluate tips or complaints, estimate losses, and provide assistance in technical areas of the company’s operations.

A forensic accountant can provide various services ranging from audits and accountant performance reviews to examinations of financial documents for fraud, misconduct, or industry standard violations. These experts can mine and analyze large amounts of data to identify potentially irregular transactions and high-risk relationships.

As a result of the passage of the Sarbanes-Oxley Act in the United States and similar legislation in many other countries, audit committees are taking a more active role in internal investigations.

As a result of the passage of the Sarbanes-Oxley Act in the United States and similar legislation in many other countries, audit committees are taking a more active role in internal investigations. This has occurred, in part, because such legislation mandates that audit committees for publicly traded companies be directly responsible for two key components of an effective fraud prevention program—outside audits and internal reporting mechanisms.

When conducting a fraud examination, fraud examiners should determine whether a technical specialist is needed. Also, when the suspect employee is particularly powerful or popular, it might be useful to employ outside specialists who are relatively immune from company politics or threats of reprisals.

The dos for selecting team members include: 1. Consider the team’s size.
2. Check for conflicts of interest between internal and external team members.
3. Ensure that there are no reporting issues (e.g., a team member feels pressure to report all details of the investigation to his direct manager, even though his manager does not have a need to know).
4. Select team members that fit the investigation’s demands and objectives.
5. Recruit team members with the skills needed to conduct the investigation.
6. Recognize the unique knowledge, experience, and skills that each team member can contribute.
7. Contemplate the ways that each potential member will fit into the team.
8. Select people who will work well with other team members.

When evidence of fraud arises, management must designate someone to lead the investigation. A leader should have investigative experience and knowledge of legal and compliance requirements regarding the specific issues involved. The leader should be independent of the activity affected by the alleged fraud and have the means to recruit resources necessary to conduct the investigation, sufficient authority and access to gather any necessary information, and the ability to communicate with senior management.

The probate court conducts an investigation to verify any debts owed by an individual’s estate and sees to the dispersal of assets after all debts are paid.

The debts left in an individual’s estate will give the investigator information on the following:
1. Names of individuals with an interest in the deceased’s estate
2. The subject’s financial position at the time of death

The dispersal of assets will reveal:
1. The names and addresses of heirs to the deceased
2. Some indication of the value of the property willed to them Bankruptcy Records

The information available in bankruptcy records varies, but here are some common items:
1. The bankruptcy filing document
2. Claim documents by creditors listing the amounts that the debtor allegedly owes
3. A final accounting that shows which claims were paid
4. A descriptive list of the debtor’s property at the time of filing (e.g., real estate, personal property, investments, accounts receivables, etc.)
5. Filings that describes the debtor’s income and expenditures
6. The bankruptcy plan (some jurisdictions allow bankrupt parties to reorganize businesses or participate in a debt reduction plan, as opposed to liquidating all assets)
7. Details from a fraud examination if the bankrupt party was suspected of bankruptcy fraud.

The bankruptcy filing document, which might include the subject’s government identification number; street address and primary place of business; location of principal assets of business; type of business; name of legal representative; estimated amount of assets; estimated number of creditors, liabilities, and employees; financial data; and a list of corporate shareholders.
The bankruptcy plan is a content of the bankruptcy record and so is the bankruptcy filing document.

Property records can identify unknown assets or reveal property transfers to relatives, friends, or other legal entities. Information contained in these reco rds can include property address, owner name, purchase price at last transaction, legal description, value, mortgage information, lien holder, contractors who have worked on the property (if a mechanic’s lien has been filed), and deed type.

The following information is often present in real property records:
1. Documents pertaining to real estate transactions—including deeds, grants, real estate transfers and mortgages, releases of mortgages, powers of attorney, and leases that have been acknowledged or approved
2. Mortgages on real property
3. Security interests or liens on property
4. Wills admitted to probate  Official bonds
5. Notices of attachment on real estate
6. Land cadaster (a registry of land surveys that specifically detail each plot of real estate in an area and may contain information about value, ownership rights, and other details)
7. Papers in connection with bankruptcy

Circumstantial evidence is evidence that tends to prove or disprove facts in issue indirectly, by inference. In the case of a kickback allegation, cash deposits of unknown origin deposited to the suspect’s account around the time of the suspect transaction could be considered circumstantial evidence.

Documentary evidence can be obtained in a number of ways. The preferred method is to obtain evidence by consent, if both parties agree.

The purpose of maintaining a chronology is to establish the chain of events leading to the proof. The chronology might or might not be made a part of the formal report; at a minimum, it can be used for analysis of the case and placed in a working paper binder.

Establish a database early in the investigation and code all documents if there is a large amount of information to process. This database can be manual or computerized and accessed by keywords or Bates Stamp numbering. The coding system should provide meaningful and comparable data; therefore, the database should, at a minimum, include the following fields of information: the date of the document, the individual from whom the document was obtained, the date obtained, a brief description, and the subject to whom the document pertains.

Forged, altered, fabricated, and other suspicious documents are regularly encountered in fraud cases. Fraud examiners are not expected to be document experts. They should, however, be aware of ways to spot counterfeit documents and have knowledge of the capabilities and limitations of forensic examinations.

Forensic examinations conducted as a part of a fraud investigation can contribute to its success in several ways:
1. Expert examination results can assist in developing and proving the fraud theory.
2. Expert examination results can corroborate or refute statements by witnesses or fraud suspects.
3. Having the results of expert examinations before interviews can provide significant leverage for the fraud examiner during interviews with fraud suspects, even resulting in admissions of guilt from suspects who are confronted with the factual evidence.
4. Forensic handwriting examinations and comparisons can result in the positive identification of the writer or signer of a document. Because writing is a conscious act, the identification might serve to prove that a particular act is intentional or willful.
5. Forensic experts may testify at trial to explain evidence discovered through their analysis.

The following forensic examinations could be of particular value when a fraud involves documents:
1. Detecting forged signatures
2. Identifying the writers of signatures, handwriting, and hand printing
3. Detecting altered documents
4. Detecting and restoring erasures and eradications
5. Determining when a document was or was not prepared
6. Detecting counterfeited documents and examining printed documents
7. Detecting and restoring faint indented writings
8. Comparing paper and inks
9. Determining whether two sheets of paper came from the same tablet or pad of paper
9. Examining paper folds and sequence of folds
10. Comparing torn or cut paper edges
11. Restoring charred and partially burned documents

Paper evidence received should be marked so that it can later be identified and the most common way to do this is with the date and initials of the person obtaining it. If it is not practical to mark the document, or if marking it would damage the document, then it should be placed in an acid-free envelope that has been marked and sealed. Note that you write on the envelope before placing the document in; this is to avoid creating indentations on the original document.
Do not fold, staple, use paper clips, crumple, or do anything else that would change an item’s original condition. Store photocopies and laser-printed documents in paper folders or envelopes, not transparent plastic envelopes; such envelopes can result in the copies sticking to the plastic and destroying some document features.

The chain of custody is both a process and a document that memorializes who has had possession of an object and what they have done with it.

To establish the chain of custody, fraud examiners must make a record of when they receive an item or when it leaves their care, custody, or control. This is best handled by a memorandum with the custodian of the records when the evidence is received. The memorandum should state:
1. What items were received
2. When they were received
3. From whom they were received
4. Where they are maintained

Detailed analyses are made of document features for proof of changes or modifications. Instruments used include sensitive measuring devices, low-power magnifying glasses, several types of microscopes, ultraviolet and infrared lighting, optical filters, micro and macro photography, computerized image-enhancement systems, sensitive instruments to detect faint indented writings, and numerous others. Various chemical analyses are also conducted.

Fraud examiners are not document experts; however, an observant examiner might be able to recognise some of features that characterise fraudulent documents. For example: signature forgeries can be identified by simple side by side comparison of suspect and genuine signatures; differences in whiteness, density, thickness, opacity and paper finer patterns might make substituted sheets apparent; lastly, careful observation under bright light and at different angles might reveal ink differences.
Charred documents need the attention of trained forensic experts to extract information from them.

Fraud examiners must remember that advanced age, poor health, temporary injury, and the use of drugs and alcohol can result in discrepancies in signature and this might be misleading to the examiner.

No one signs their signature or writes exactly the same way twice because writing is a human act of coordinated mental and muscular activity, not the precise, repetitive action of a machine. However, individual writers have their own specific range of natural variation. If fraud examiners find two signatures that are exactly alike, then at least one is a forgery, probably a tracing.

A forgery can be defined as “any writing prepared with the intent to deceive or defraud.” Most forgeries are signatures. Forgery can be done by simulation, by tracing, or by freehand preparation.