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Recreating the Crime through the Numbers: A Guide to Fraud Investigation, Part 1

Recreating fraudulent employee activity can be difficult, but with a well-organized approach, a Certified Fraud Examiner (CFE) may be able to determine how, and to what extent, fraud has occurred. In this two-part blog post, I will discuss the basic procedures employed in fraud investigation and provide some real-world examples of their applications. While the procedures are fairly universal, it is important to note that no two frauds are alike, and these procedures may not be useful in every investigation.

Interviewing

Generally, the first step in an investigation is to interview employees of the compromised organization and unearth what, if any, information they know. It is important to document as many details as possible in order to aid in the actual discovery phase of the investigation. At this time, questions such as “If you were to commit fraud within the organization, how would you do it?” can become very useful. These types of inquiries allow for open-ended responses and provide employees opportunities to brainstorm where weaknesses exist within their organizations, which is extremely helpful in developing future fraud prevention mechanisms.

While it is imperative to get the assistance of individuals who participate in the day-to-day activities of an organization, it can be difficult to get employees to open up regarding the aforementioned question. However, when they do provide answers, it can lead to a wealth of information. I commonly ask this question as a part of audit engagement SAS 99 interviews (required fraud interviews) and have been able to determine deficiencies in controls and provide management with recommendations on how to improve controls to ensure that fraud can be prevented before it actually occurs.

Additionally, interviewing can help determine whether any employees were aware of the fraudulent activity that was occurring, and to what extent they may have potentially been involved. Based on interviews with employees, it may help identify people that have an incentive to steal from the organization . If it is possible to get employees to open up regarding their personal lives, it may become apparent that employees are experiencing outside pressures that could motivate them to commit these crimes.

Reviewing Internal Controls

Upon completion of the interview phase, I determine whether the evidence suggests a poor internal control environment. This can be accomplished by determining the flow of transactions within the organization and by performing walk throughs of these transactions. At this stage of the investigation, I am trying to determine if there are any “holes” in internal controls that would allow an employee to commit a fraud without being caught before the transaction is completed.

Proper segregation of duties is an often-overlooked control. For example, employees who have the capability of writing checks should not be able to directly receive the bank statements of the organization before they are reviewed by someone independent of the check writing process. If this control is not in place, it would be possible for the employee to write a check, obtain a signature, alter the check to be payable to them (or to someone that they know), and then cash the check. Once the bank statements arrive, either electronically or in paper form, the employee is able to remove the evidence of the cancelled check where the payee was manipulated and either restore it to its original version, or alter the document in some other fashion to ensure that they will not be caught.

If controls are not properly designed and working effectively, organizations are vulnerable to many types of fraudulent activity. Fraud schemes are only a Google search away and can be a tool that can be easily accessed by employees.

Once the interviewing process has concluded and the controls have been reviewed, I will brainstorm possible ways the fraud could have occurred and then formulate a hypothesis of how I believe the fraud occurred. The next post will detail how this hypothesis is formed, and how an investigation is concluded.

If you have any questions around the initial steps in fraud investigation, fill in the form below and a member of our team will be in touch.

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