Fraud Risk Management · 2020-02-24 · receives fraud allegations and how to determine whether to...
Transcript of Fraud Risk Management · 2020-02-24 · receives fraud allegations and how to determine whether to...
© 2020 Association of Certified Fraud Examiners, Inc.
Fraud Risk Management
Responding to Discovered Fraud
© 2020 Association of Certified Fraud Examiners, Inc.
Discussion Questions
1. Does your organization have formal procedures
for responding to discovered frauds? Who is
responsible for investigating such frauds? Are
identified instances of fraud within your
organization always reported to the authorities?
© 2020 Association of Certified Fraud Examiners, Inc.
Discussion Questions
2. You are an internal auditor who has just
uncovered significant evidence that an
employee in the accounting department has
been embezzling money from the company.
What steps do you take in response to this
discovery?
© 2020 Association of Certified Fraud Examiners, Inc.
Learning Objectives
▪ Understand what to do when an organization
receives fraud allegations and how to determine
whether to undertake an investigation.
▪ Know how to develop a fraud investigation plan
and form a fraud investigation team.
▪ Understand the steps and techniques involved
in conducting a fraud examination.
© 2020 Association of Certified Fraud Examiners, Inc.
Learning Objectives
▪ Consider the risks that arise during a fraud
examination and how best to manage those
risks.
▪ Determine how and to whom to report the
results of a fraud examination.
▪ Consider necessary follow-up steps after the
conclusion of a fraud examination.
© 2020 Association of Certified Fraud Examiners, Inc.
Introduction
▪ FRM program should include procedures for:
• Receiving and handling reports of fraud allegations
• Thoroughly investigating identified instances of fraud
• Swiftly and appropriately punishing perpetrators
• Remediating weaknesses that allowed fraud to occur
© 2020 Association of Certified Fraud Examiners, Inc.
Fraud Risk Management Principle No. 4—
Fraud Investigation and Corrective Action
▪ The organization establishes a communication
process to obtain information about potential
fraud and deploys a coordinated approach to
investigation and corrective action to address
fraud appropriately and in a timely manner.
© 2020 Association of Certified Fraud Examiners, Inc.
Fraud Investigation and Corrective Action—
Points of Focus
Establishes fraud investigation and
response protocols
Conducts investigations
Communicates investigation
results
Takes corrective action
Evaluates investigation performance
© 2020 Association of Certified Fraud Examiners, Inc.
Receiving Fraud Allegations
▪ Potential fraud can come to the organization’s
attention in many ways, including:
• Tips from employees, customers, or vendors
• Internal audits
• External audits
• By accident
© 2020 Association of Certified Fraud Examiners, Inc.
Receiving Fraud Allegations
▪ Categorize issues.
▪ Confirm the validity of the allegation.
▪ Define the severity of the allegation.
▪ Escalate the issue as appropriate.
▪ Refer issues outside the scope of the program.
▪ Conduct the investigation.
▪ Resolve or close the investigation.
© 2020 Association of Certified Fraud Examiners, Inc.
Receiving Fraud Allegations
▪ Identify information to be kept confidential.
▪ Define how the investigation will be
documented.
▪ Manage and retain documents and information.
▪ Log allegations received.
▪ Track and manage cases.
© 2020 Association of Certified Fraud Examiners, Inc.
Evaluating Fraud Allegations
▪ Does the alleged act involve violation of law,
rules, or company policy?
▪ Do any other departments need to be
consulted?
▪ Should external auditors be advised?
▪ Is the allegation required to be disclosed to the
board, audit committee, or any other party?
© 2020 Association of Certified Fraud Examiners, Inc.
Evaluating Tips
▪ 40% of frauds are
detected by a tip.
▪ Not all tips are valid.
© 2020 Association of Certified Fraud Examiners, Inc.
Developing the Investigation Plan
▪ Factors to consider:
• Time sensitivity
• Notification
• Confidentiality
• Legal privileges
• Compliance
• Securing evidence
• Objectivity
• Goals
© 2020 Association of Certified Fraud Examiners, Inc.
Forming the Investigation Team
▪ The team might include:
• Legal counsel
• Fraud examiners
• Internal auditors
• External auditors
• Accountants or forensic
accountants
• HR personnel
• Security or loss
prevention personnel
• IT personnel
• Computer forensics
specialists
• Management
representatives
© 2020 Association of Certified Fraud Examiners, Inc.
Conducting a Fraud Examination
▪ Cases are generally
handled in a uniform
fashion.
▪ Work from general to
specific.
▪ Assume the case will
end in litigation.
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Tasks in a Fraud Examination
▪ Conducting interviews
▪ Examining documents
▪ Making observations
▪ Conducting computer forensic examinations
▪ Analyzing evidence
▪ Documenting the findings
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Managing Risks During an Investigation
▪ Potential legal issues and constraints regarding:
• Rights and responsibilities of employees and
third parties
• Evidence
• Court assistance
• Integrity of investigation results
© 2020 Association of Certified Fraud Examiners, Inc.
Rights and Responsibilities of
Employees and Third Parties
▪ Need to identify rights affected by investigation:
• Employees
• Union employees
• Third parties
▪ Might have a responsibility to investigate based
on duties of officers and directors
© 2020 Association of Certified Fraud Examiners, Inc.
Collecting Evidence
▪ Some evidence must be voluntarily provided or
subpoenaed:
• Banking records
• Tax returns and related documents
• Credit reporting agency records
• Telephone records
• Credit card account records
© 2020 Association of Certified Fraud Examiners, Inc.
Seeking Assistance from the Courts
▪ Civil litigation:
• Can be costly and time-
consuming
• Can be critical to obtaining
information and
compensation for fraud loss
© 2020 Association of Certified Fraud Examiners, Inc.
Seeking Assistance from the Courts
▪ Advantages of criminal prosecution:
• It saves litigation expenses.
• The government has greater investigatory power.
• Criminal cases move more quickly.
• Conviction can establish facts to use in a civil trial.
▪ Disadvantages of criminal prosecution:
• There is less control over case decisions.
• The sentence cannot be requested or controlled.
• Criminal penalties might render defendant insolvent.
© 2020 Association of Certified Fraud Examiners, Inc.
Monitoring the Integrity
of the Investigation
▪ Investigation information may be sought by
government agencies and civil litigants.
▪ Understand and use protection provided by
applicable legal privileges.
© 2020 Association of Certified Fraud Examiners, Inc.
Reporting the Investigation Results
▪ Report findings to the party overseeing the
investigation.
• In general, the party to whom the report is made will
determine the appropriate form of the report.
▪ Retain reports for use in future fraud risk
assessments.
© 2020 Association of Certified Fraud Examiners, Inc.
Disclosure to Law Enforcement
▪ It might be better to
voluntarily disclose a
violation to law
enforcement than waiting
for the agency to
discover the violation
and act.
▪ Voluntary disclosure can
result in leniency.
© 2020 Association of Certified Fraud Examiners, Inc.
Responding to the
Investigation Findings
▪ Preserve evidence.
▪ Maintain confidence.
▪ Mitigate losses.
▪ Punish the perpetrator(s).
▪ File insurance claim.
▪ Undertake extended investigation.
▪ Remediate business processes and internal
controls.