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Fraud Investigation

Fraud Examination

Early Fraud Detection


Three Primary Ways to
Detect Fraud
1. By chance
2. By providing whistleblowing systems
3. By data mining

The CFE gathers evidence of


the ELEMENTS of Fraud

Conversio
n
Element
s
Of
Fraud
Concealme
Theft
nt
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Early Fraud Detection


Mining Company Databases
Mining databases for suspicious trends, numbers, and other
anomalies.

Whistle-blowing Systems
A reporting hotline or online system that allows others to call in
or submit an anonymous tip of a fraud suspicion

Examples:
Internal systems/hotlines
The Association of Certified Fraud Examiners
Allegience

When would we actually begin a


Fraud Examination?
When there is PREDICATION of fraud

Circumstances, Taken as a Whole,


that Leads a Reasonable Prudent
Professional to Believe a Fraud is
Occurring, or Has Occurred, or
Will Occur
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What Are the Considerations in


Deciding to Investigate?
1.
2.
3.
4.
5.
6.
7.

Perceived strength of the predication


Perceived cost of the investigation
Exposure or amount that could have been taken
Signal that investigating or not investigating will
send to others in the organization
Risks of investigating or not investigating
Public exposure or loss of reputation from
investigating or not investigating
Nature of the possible fraud
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Interview
Suspect

The CFEs Evidence Square

Testimoni
al
Evidence

Documenta
ry Evidence

Physical
Evidence

Personal
Observati
on

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The CFEs Evidence Square


Testimoni
Gathered from
al
Individuals,

Includes
Interviewing,
Interrogation &
Honesty Tests

Fingerprints,
Weapons, Stolen
Property Often
Involves Forensic
Analysis

Physical

2Documentary
Gathered from
Papers, Computers &
Written & Printed
Sources

Personal
Observation

Collected by the
Investigator, includes
Invigilation,
Surveillance and
Operations
AccountingCovert
537

Fraud Investigation
Testimonial Evidence
Evidence gathered from individuals

Techniques:
Interviewing
Interrogation
Honesty tests

Fraud Investigation
Documentary Evidence
Gathered from paper, computers, and other written or
printed sources
Techniques:

Document examination
Data mining
Public records searches
Audits
Computer searches
Net worth calculations
Financial statement analysis
Corporate databases
E-mail servers

Fraud Investigation
Physical Evidence

Fingerprints
Tire marks
Weapons
Stolen property
Identification numbers
Marks on stolen objects
Other tangible evidence

Techniques:
Forensic analysis by experts

Fraud Investigation
Personal Observation
Evidence that is sensed (seen, heard, felt,
etc.) by the investigators

Techniques:
Invigilation
Surveillance
Covert operations

Evidence Gathering
Surveillance & Undercover Operations
Invigilation
Physical Evidence
Documents paper and electronic

Chain of custody rules


Access subpoena, search warrant, voluntary
Forgery or alteration
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Sources of Information
Public Records

Government
Federal
State
Local

Private
Sources
Utility Records
Previous
Acquaintances
Trash Cover
Credit Agencies
Financial
Institutions

Online
Databases
Subscription
Per-Search
Fee
Free

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Internet
Searches
Google
Altavista
Etc.

Income Reconstruction Methods


Direct Method
Calculating income from information obtained in
books and records, usually looking for unreported
income
Examples: non reported sales or transfers of real
estate, cars, or insured items, and non reported
transactions represented by invoices

Indirect Method
This is to be used when the books are not adequate,
or unavailable.

Indirect Methods of
Reconstructing Income

Net Worth Method


Sources and Applications of Funds
Percentage Markup Method
Bank Deposit Method
Unit Volume Computation

Net Worth Calculation


1. Assets Liabilities = Net Worth
2. Net Worth Prior Years Net
Worth =
Net Worth Increase
3. Net Worth Increase + Living
Expenses
= Income
4. Income Funds from Known
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Sources

How can information be obtained


from a source
1. Pencil & Paper
Test

2. Graphology
3. Voice Stress
Analysis &
Polygraphs
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Interviewing

Most Common Technique


Question & Answer Format
Structured Has a Purpose
Low Cost
Effective if Done Well
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Fraud Investigation
Fraud Examination

Fraud Investigation

The Fraud Element Triangle: Theft Act


Catch perpetrators in the embezzlement act or
to gather information about the actual theft acts

The Fraud Element Triangle: Concealment


Focus on records, documents, computer
programs and servers, and other places where
perpetrators conceal or hide their dishonest
acts

Fraud Investigation
The Fraud Element
Triangle: Conversion

Search for ways the


perpetrators spent or used
their stolen assets.

Conducting a Fraud Investigation


1. Undertaken only to establish the truth
2. Experienced and objective investigators
3. Confidentiality
4. Need to know
5. Evidence independently corroborated
6. No questionable investigative techniques
7. Fair and objective communication

Interviews Obtain
1. Information that Establishes Essential
Elements of the Crime

2. Leads for Developing the Case or


Gathering Other Evidence

3. Cooperation of Witnesses & Victims


4. Information on Personal Background &
Motives of Witnesses
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What information do you need to


plan the interview?
About The Offense
Legal Nature

About The Interviewee

Personal Background

Date, Time, Place


Manner in which Crime
was Committed
Possible Motives

Age
Education
Marital Status

All Available Evidence

Attitude Toward
Investigation

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Interviewers Demeanor
Sit Fairly Close, Stay Seated
Dont Talk Down
Be Sensitive & Business Like
Do Not Dominate Interview
Do Not Use Jargon
Do Not Use Paper & Pencil, Keep Out of
Sight

Express Sincere Appreciation


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Interview Language
Short Questions, Stay on One Topic
Seek Narrative Answers
No Leading Questions
Get the Facts for Opinions
Keep Interviewees on Track
Stay on Topic
Concentrate on Answers
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List 5 Types of Questions


1. Introductory
2. Information
3. Closing
4. Assessment
5. Admission Seeking

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What is the reaction sequence?


1. Denial Acts as a psychological buffer,
2.
3.
4.
5.

subject doesnt acknowledge stress


Anger All directions, result of frustration
Rationalization or Bargaining Justify
dishonest actions, A mistake was made.
Depression Sad and withdrawn
Acceptance Realistic understanding of
what happened, resolve & move on, best
time for interviews
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Why is the reaction sequence


important to a fraud examiner?
The suspect may go through this sequence

in the course of an interview.


Other people in the organization may go
through this sequence in the course of the
investigation.
Being aware of these emotional stages will
help the fraud examiner to identify them
and take the more productive actions.
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End
Fraud Investigation
Fraud Examination

Discuss Pencil & Paper Tests


Honesty
Codes of Ethics
50% to 90%

Co
Et d e
hi of
cs

Accurate

Easy to Tabulate
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Graphology
The study of handwriting

for the purpose of character


analysis.

Increased Utilization
Banking, Manufacturing & Insurance
Fraud Examiners Skeptical
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Voice Stress Analysis & Polygraphs


Used to Determine If Someone Is Telling

the Truth Or Lying


Pulse, Blood Pressure, Respiration, etc.
Frightens Innocent People
Not Effective for Psychopathic Liars
Voluntary
Administration Affects the Quality of
Results Accepted
Accounting 537

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