CFE Exam Quiz 39

Fraud examination and forensic accounting are not the same disciplines. The differences between forensic accounting and fraud examination include:

– Fraud examinations can be conducted by either accountants or non-accountants, forensic accounting work can only be performed by accountants.
– Forensic accounting is litigation support work that involves accounting, while fraud examinations only involve anti-fraud matters.
– Many fraud examinations can be considered forensic accounting, but not all forensic accounting is fraud examination.

Each fraud investigation is different, and no single plan can cover every situation. Nevertheless, it helps to have a standard set of items from which to begin the planning process. Those responsible for developing an investigation plan should do the following when developing an investigation plan:

– Review what is known and gain a basic understanding of key issues.
– Define the goals of the investigation.
– Identify who to keep informed.
– Determine the scope of the investigation.
– Establish the investigation’s time frame.
– Address the need for law enforcement assistance.
– Define members’ roles and assign tasks.
– Address operational issues.
– Outline the course of action.
– Adapt the necessary resources to conduct an investigation.
– Prepare the organization for the investigation.

The basic goal for most fraud investigations is to determine whether fraud occurred, and if so, who perpetrated it. Fraud investigations might also be designed to achieve a number of different goals. These goals include:

– Prevent further loss or exposure to risk.
– Determine whether there is any ongoing conduct of concern.
– Establish and secure evidence that is necessary for criminal or disciplinary action.
– Minimize and recover losses.
– Review the reasons for the incident, investigate the measures taken to prevent a recurrence, and determine any action needed to strengthen future responses to fraud.
– Help promote an anti-fraud culture by making it clear to employees and others that management pursues all cases vigorously and takes appropriate legal or disciplinary action where it is justified.
– Protect the company’s legal privileges.

At the outset of a fraud examination, the investigation team and management must identify who should be kept informed about the investigation. As few people as necessary should be kept informed about an investigation, as a general rule.

As a general rule, as few people as necessary should be kept informed about an investigation. At the outset of a fraud examination, the investigation team and management must identify who should be kept informed about the investigation. Factors to consider when determining who should be kept informed include:

– The severity of the incident under investigation.
– The suspect’s role in the organization.
– The tasks that will be required to conduct the investigation.

During the planning process of a fraud investigation, all team members need to be clear about their roles and responsibilities and the investigation’s goals. Reasons for defining team members’ roles and assigning tasks during the planning process of a fraud investigation include:

– For efficient and effective coordination.
– To give the team members a purpose.
– To give team members checkpoints for measuring success.

The failure to define roles and responsibilities can have an adverse impact on an investigation. Without clear roles, the investigation might lead to incomplete or faulty results, the team might waste time and money and gaps in the investigation process might appear.

During the planning process, management must consider any operational issues, which might include:

– Gathering facts abroad.
– Recordkeeping practices abroad.
– Record content and format differences.
– Language translation.
– Cultural differences.
– International data privacy issues.
– Differing conceptions of privacy and discovery.
– Immigration regulations.
– Safety concerns, especially for global assignments.

A case plan is an outline of the course of action the team members expect to take throughout the investigation. Establishing a case plan helps the team stay on track and focus on the key issues.

Before beginning a fraud examination, the investigation team would develop a case plan that addresses every relevant issue. The case plan can encompass matters such as:
– The scope of the investigation.
– The goals of the investigation.
– Time parameters.
– Resources needed.
– Task assignments.
– The overall approach to conducting the investigation.

An investigation can be organized by breaking it down into smaller, more manageable components. There are many ways to organize an investigation’s components, but often, investigations are organized in the following ways:

– Chronologically
– Hierarchically
– By functional area
– By team member

A chronological investigation is divided into time-based phases that, when completed, are marked as milestones. A chronological structure is best suited for investigations where time sequence is essential in organizing tasks.

Big data are “high volume, high velocity, and/or high variety information assets that require new forms of processing to enable enhanced decision making, insight discovery, and process optimization.” Simply put, big data is information of extreme size, diversity, and complexity.

Some of the most valuable types of individuals’ nonpublic records include:
– Banking records
– Tax records
– Credit records of individuals (but not business credit reports, as this information is generally not protected)
– Phone records
– Credit card account records
– Personal health care records

Fraud can be discovered in several ways, such as via a tip or complaint, an auditing procedure, monitoring, or chance. However, most of all internal fraud investigations originate with a tip from an employee, customer, or vendor.

Fraud examinations involve efforts to resolve allegations or signs of fraud when the full facts are unknown or unclear. Fraud examinations seek to obtain facts and evidence to help establish what happened, identify the responsible party, and provide recommendations where applicable.

When conducting a fraud examination, the fraud examiner should assume litigation will follow, act on predication, approach cases from two perspectives, move from the general to the specific, and use the fraud theory approach.

A fraud examiner should conduct each fraud examination with the assumption that the case will end in litigation. This will ensure that the fraud examiner maintains accordance with the proper rules of evidence and remains well within the guidelines established by the legal systems.

Predication is the basis upon which a fraud examination, and each step taken during the fraud examination, is commenced. Predication is the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe that a fraud has occurred is occurring or will occur.

The fraud theory approach is an investigative tool designed to help fraud examiners organize and direct fraud examinations based on the information available at the time. The fraud theory approach provides that, when conducting investigations into allegations or signs of fraud, fraud examiners should make a hypothesis (or theory) of what might have occurred based on the known facts, test the theory and refine and amend it as needed.

The fraud theory approach involves the following steps:

– Analyzing available data.
– Creating a hypothesis.
– Testing the hypothesis.
– Refining and amending the hypothesis.

When evidence of misconduct arises, management must respond in an appropriate and timely manner. This is possible through having a fraud response plan. The fraud response plan should help organizations in various ways including:

– Manage their responses and create environments to minimize risk and maximize the potential for success.
– Allow management to respond to suspected and detected incidents of fraud in a consistent and comprehensive manner.
– Having a response plan in place sends a message that management takes fraud seriously.

Engagement letters or retainer agreements are beneficial for various reasons. These reasons include:

– To maximize a fraud examiner’s protection in the event of a client dispute or misunderstanding, making later disputes about the engagement’s terms easier to resolve.
– To help manage client expectations by making the assignment’s objectives clear.

Engagement letters should address a variety of items. Those items include the client’s identity, the scope of the services, the timing of the work, deliverables, payment terms and fee structure, communication with the client, non-guarantee, governing law, jurisdiction, termination, and a limitation of liability through indemnity clause.

The two primary forms of engagement letters are the long form and the short form.

The long form engagement letter spells out the details of what examination techniques the fraud examiner intends to follow.

The short form engagement letter does not spell out the details of what examination techniques the fraud examiner intends to follow.

The following basic parts make up an engagement letter:

– Opening
– Body (long or short)
– Terms
– Indemnity clause
– Close

The opening paragraph of the engagement letter would state the purpose of the engagement. It should be specific as to whether the letter is an engagement or a proposal letter.

In engagement letters, there should be an indemnity clause to protect the fraud examiner if the subject, a witness, or a third party sues the client and includes the fraud examiner as a party to the suit.