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Fraud Investigation Methods

Fraud is very much like a disease. It causes harm, even death. However, most people never worry about it unless it affects them. Only then do the regrets about smoking or drinking too much surface, wishing you had taken that health check much earlier. Fraud can destroy businesses and ruin careers. Very often a suicide is driven by the knowledge that you have allowed the fraudster to ruin others, and it has on occasion rocked the very foundations of some countries economies.

A fraud can be uncovered in a number of different ways. A good example is by a whistle blower who who might inform his managers that a colleague has been fraudulently stealing from the company. Such a corporate fraud will need to be investigated in order to prevent further losses, find out how it happened in the first place and to try to recover the stolen assets. Other frauds come to light when business owners review results at the end of an accounting period and discover that something is amiss. Frequently a fraud will only come to light when a company enters insolvency proceedings and is subjected to the scrutiny of the Insolvency Practitioner. Sometimes it might be the fraud that has caused the company to fail.ACFE-seal-color

A specialist fraud investigator is needed when financial anomalies are discovered and it is very common for the victim company to enlist the assistance of a qualified forensic accountant experienced in fraud investigation. Such a person will be accredited to investigate a fraud and may be a Chartered Accountant or a Certified Fraud Examiner with possibly other qualifications – together with many years of experience dealing with such fraud cases.

Every fraud is different. There are different characteristics to be found between bank fraud, supplier fraud and mortgage fraud. Even within these categories there are many possibilities because the fraudster is very resourceful in seeking out new and different weaknesses in a business. Therefore, one of then most important attributes a good fraud investigator can have is a flexible approach, an inquiring mind and a tenacious approach to the work he specialises in.

Rather than jumping feet first into an investigation the fraud investigator will approach the corporate fraud by first determining what the victim organisation wants to achieve. The last thing a publicly quoted company will want is adverse publicity as this might affect its share price badly. Therefore, there may be constraints on the scope of any investigation and the victim might be prepared to accept a lesser solution to its problem rather than receive the publicity.

Normally the priority will be to get the money back or the victim company might want to make an example of the fraudster as a lesson to others. If it only wants to get its money back it may not want law enforcement involved. A police fraud investigation might disrupt the business or cause its reputation to be damaged and there is no guarantee that the business will achieve any of its own priorities. For example a bank might want to sack the employee and stem the leak of losses, and not want the general public to know that it had allowed a fraudster to work in its midst.

The forensic accountant or certified fraud examiner (a member of the Association of Certified Fraud Examiners) will want to agree the desired outcome of the matter with management and develop a fraud investigation strategy based upon the organisation’s own fraud response plan. It may be possible to interview the whistle blower early on to get a quick “heads up” into what was going wrong before beginning a detailed analysis of the accounting records, interviewing staff and making other expensive enquiries often outside the organisation. In some circumstances it may be necessary to carry out a preliminary covert fraud review, in the evening or during the weekend when employees are not present.

For the actual mechanics of the investigation the forensic accountant will most likely want to follow the trail of the stolen money. “Follow the money” will be the primary goal in such a forensic audit as this will provide not only a chance of getting the money back, but also evidence of why and how the fraud took place.

The losses need to be quantified exactly, with evidence showing how they occurred. In a fraud, this evidence is crucial as the complexity of financial transactions can obscure what has happened and cause the matter to become protracted. If the victim is unable to demonstrate the loss clearly, the perpetrator is more likely to escape punishment or having to return what he has stolen. Any forensic accountant’s report must be able to distill the facts and demonstrate the problem in a simple and coherent way.

This is because the expert accounting evidence must be presented clearly, for use in negotiations, arbitration or otherwise used in litigation. It may also assist in any criminal action that might take place, either alongside the civil fraud investigation or in response to a report submitted after the forensic fraud investigation. Sometimes, the police will not investigate a matter unless there is a clear presentation of the situation such as normally produced during a forensic examination of the accounting records following a fraud.

The seriousness of fraud must never be underestimated, as it is complacency that is usually to blame for allowing a fraudster to flourish. Never allow trust in fellow colleagues or other businessmen to cloud your judgement. Neglecting to impose your framework of anti fraud controls just because everything is going well is an open invitation to the fraudster.