Principles of Fraud Examination · Two cardinal sins of report writing: vagueness and wordiness...
Transcript of Principles of Fraud Examination · Two cardinal sins of report writing: vagueness and wordiness...
© 2017 Association of Certified Fraud Examiners, Inc.
Principles of Fraud
Examination
Signed Statements/Report Writing
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Practical Problem
▪ After a grueling seven-hour interview, your
suspect, Mike Floyd, finally breaks and
confesses to stealing $50,000 (in his
estimation).
▪ However, the experience seems to have
been too much for him. He begins
confessing all sorts of things.
▪ Read the rest of the scenario in your
workbook and consider the following
questions.
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Practical Problem
Questions:
1. How do you commit Floyd’s statements to
writing?
2. Do you include the exact amount he says he
has taken? Why or why not?
3. In his signed statement, should you include
the information about his drinking problem
and gambling debts? Why or why not?
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Practical Problem
4. Do you include the information about his
cheating on his wife and cheating on his
taxes in his signed statement? Why or why
not?
5. How should you address these items in the
written report?
6. Since Floyd confessed, is it appropriate to
state in your report that he is guilty of fraud?
Why or why not?
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Signed Statements
▪ Voluntariness of confession
▪ Intent
Instead of: Use:
Lie Knew as untrue
Steal/embezzle Wrongfully took
FraudKnowingly told an untrue statement
that was relied upon
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Signed Statements
▪ Approximate date(s) of offense
▪ Approximate amounts of losses
▪ Approximate number of instances
▪ Should list statement is voluntary
▪ Willingness to cooperate
▪ Excuse clause
▪ Confessor reads the statement
▪ Truthfulness of statement
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Key Points in Signed Statements
▪ There is no legal requirement that a
statement be in the handwriting or wording of
declarant.
▪ The statement’s wording should be precise.
▪ Declarants should read and sign the
statement without undue delay.
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Key Points in Signed Statements
▪ Don’t ask the confessor to sign, but show
them where to sign.
▪ Have two witnesses if possible.
▪ Have no more than one written statement for
each offense.
▪ Preserve pertinent notes.
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Creating the Report
▪ A good report:
• Conveys evidence
• Adds credibility
• Accomplishes
objectives of case
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Readers of Reports
▪ First rule of report
writing: Assume the
report will be read by
anyone and everyone.
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Readers of Reports
▪ Company insiders
(managers,
executives)
▪ Attorneys
▪ Defendants,
witnesses
▪ Press
▪ Juries
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Planning the Report
▪ Report should stand on
its own
▪ Should adequately
answer the questions
who, what, why, where,
when, and how
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Planning the Report
▪ Review all documents and evidence.
• Take notes of items to include in report.
▪ Create a timeline.
▪ Create a list of relevant individuals and their
roles.
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Outlining the Report
▪ Can be an invaluable
step
▪ Consider using
standard report format
I. Background
II. Executive summary
III. Scope
IV. Approach
V. Findings
VI. Summary
VII. Impact
VIII. Recommendations
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Suggested Standard Format
▪ Background
▪ Executive summary
▪ Scope
▪ Approach
▪ Findings
▪ Summary
▪ Impact
▪ Recommendations (optional)
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Background
EXAMPLE
On January 28, 20X4, the fraud examination unit at Bailey
Books, Inc. received an anonymous telephone call on its
fraud hotline from an unidentified man who claimed that he
was a former supplier to Bailey. The caller alleged certain
improprieties in the bidding and procurement process.
Based upon this initial predication, a fraud examination was
conducted, which included reviews of relevant records and
interviews of appropriate personnel.
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Executive Summary
EXAMPLE
The fraud examination commenced when Loren D. Bridges, CFE, received a call
from an unidentified man who said that he had been a long-term supplier to Bailey
for office supplies and paper. The caller said that ever since Linda Reed Collins
had taken over as purchasing manager, he had been gradually “squeezed out”
from doing business with Bailey.
Linda Reed Collins has been employed in the purchasing department of Bailey
Books for six years. She was promoted to purchasing manager effective November
8, 20X1.
The fraud examination team reviewed selected purchases from 20X1 to 20X3 and
conducted interviews of key participants and Bailey employees who we believed
might have information regarding the misappropriation of assets. The team
reviewed purchasing guidelines, personnel files of interviewees, and various
financial documents relating to both Bailey Books and Linda Reed Collins.
After obtaining sufficient documentation, the team interviewed Linda Reed Collins,
who gave a full signed confession of her misdeeds.
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Scope
EXAMPLE
The objective of the fraud examination team was to:
▪ Determine the existence of a possible misappropriation
of the assets of Bailey Books, Inc.
The examination is predicated upon an anonymous
telephone call alleging improprieties on the part of Linda
Reed Collins, Bailey’s purchasing manager.
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Approach
EXAMPLE
Fraud examination team members
▪ Loren D. Bridges, CFE, Bailey Books
▪ Tonya Vincent, CFE, Bailey Books
Procedures
As part of the examination of this matter, the team took the
following actions…
Individuals interviewed
The following individuals were interviewed in person by
members of the fraud examination team…
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Findings
EXAMPLE
Based on the documents reviewed, information collected, and
interviews conducted during the course of the fraud examination,
the team’s findings are as follows:
The documents and information reviewed and interviews conducted
by the fraud examination team during the course of the examination
indicate that Linda Reed Collins, together with James R. Nagel, did
knowingly embezzle approximately $197,773 from Bailey Books
over four years. During the fraud examination, the team used
financial documents and interviews to corroborate the statements of
an anonymous caller. The following is a summary of the evidence
and information supporting the fraud examination team’s findings …
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Summary
EXAMPLE
This report reflects that Linda Reed Collins, a purchasing
agent for Bailey Books, Inc., furnished a signed statement
on May 1, 20X4, indicating she had accepted at least
$197,773 in commercial bribes and other illicit income in a
conspiracy with James R. Nagel, an account representative
for Orion Corporation, St. Augustine, Florida.
The statements made by Collins are corroborated by the
documentary evidence and the interviews of other
witnesses as described herein.
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Impact
EXAMPLE
Over the course of four years, Linda Reed Collins, in
partnership with James R. Nagel, misappropriated an
estimated $197,773 from Bailey Books, Inc.
Additional amounts were lost due to Bailey’s overpaying for
merchandise sold to it by Mr. Nagel. Those amounts have
not been calculated.
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Recommendations
EXAMPLE
It is the policy of Bailey Books to report such matters to
the appropriate authorities and to assist in criminal
prosecution. A full review of internal controls should be
conducted to determine how such incidents can be
detected in the future.
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Visual Aids
▪ Can make the report
more effective
• Especially if text is
complex or number-heavy
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Tables
Narrative
Year 1, the account had
a beginning balance of $8,500,
withdrawals of $7,000, deposits
of $5,000, and an ending
balance of $6,500. Year 2 began
with a balance of $6,500, and
had similar withdrawals as the
prior year ($7,250). However,
deposits in the second year
totaled $18,500, and the balance
at the end of that year was
$17,750.
Table
Year 1 Year 2
Beginning Balance $8,500 $6,500
Withdrawals (7,000) (7,250)
Deposits + 5,000 + 18,500
Ending Balance $6,500 $17,750
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Common Mistakes
▪ No opinions of any kind should be included
in the written report.
▪ Specifically, opinions on guilt or innocence
should not be included.
▪ Keep a copy of all documents.
▪ Safeguard documents.
▪ No mention of opinion on signs of deception.
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Discovery of Investigative Reports
▪ There is no privilege per se for investigative
reports.
▪ Discovery can be minimized when the report
is prepared at the direction of an attorney so
that a claim can be made that the work done
was in anticipation of litigation and is
protected by the attorney-client and work-
product privileges.
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Style Pointers
▪ Two cardinal sins of report writing:
vagueness and wordiness
▪ Common breaches that result in these sins:
• Improperly placed or ambiguous modifiers
• Use of technical jargon, slang, and colloquialisms
• Use of unnecessary, high-flown verbiage
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Style Pointers
▪ Keep sentences under an average of 18 words
(15 in an email).
▪ Limit paragraphs to two or three sentences, no
more than seven typed lines.
▪ Avoid presenting more than seven bullet items
to the reader at any one time (preferably fewer
than seven).
▪ Avoid friendly language when conversing with
retaining counsel in writing.
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Developing a Good Report-Writing Style
▪ Do not underline text.
▪ Do not bold more than a few words per page.
▪ Be comfortable beginning sentences with and,
but, although, because, or I.
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Use Paragraphs to Guide the Reader
▪ First sentence should introduce the subject of
the paragraph.
▪ Start a new paragraph to move to a new topic.
▪ Each paragraph should stand alone, but should
support what came before it and what comes
next.
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Avoid Pointless Repetition
Before
I reviewed the list of checks that the controller
provided me. The list contained all of the checks
written to Romo Supply. The list had all of the
checks written during the last 24 months. Even a
cursory review of the list revealed that there were
numerous times when checks for the same
amount had been issued only weeks apart. Based
on this list, I asked for a list of the invoices
received from Romo Supply.
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Avoid Pointless Repetition
After
The controller provided me with a list of all checks
written to Romo Supply within the last 24 months.
I noticed that there were several instances where
two checks for the same amount had been written
just weeks apart. I next asked the controller to
provide me copies of all the invoices received
from Romo Supply.
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Be Clear
▪ Avoid vague and
confusing language:
• He is of average height.
• She is a moderate
smoker.
• He won by a huge
majority.
• The company had
considerably fewer thefts
this year.
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Define Technical Terms and Jargon
▪ Weak:
• The financial statement ratio analysis revealed that
the current ratio was fairly steady at around 2.5
between 1995 and 2004, with a slight downturn in
1999.
▪ Better:
• The financial statement ratio analysis revealed that
the current ratio (current assets/current liabilities)
was fairly steady at around 2.5 between 1995 and
2004, with a slight downturn in 1999.
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Explain the Meaning of Abbreviations
▪ Weak:
• The purchase of VSI insurance where the customer
fails to provide insurance under their contract is a
subsequent occurrence.
▪ Better:
• The purchase of VSI insurance (vendor’s single-
interest insurance) where the customer fails to
provide insurance under their contract is a
subsequent occurrence.