1. Causational Factors and the Investigation of Fraud
Presented by
John L. Gudavich, MA, CFE
President
J. Lewis & Associates Consulting

2. What is Meant by “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

3. Activities Fundamental to Fraud Prevention?
Create and Maintain a Culture of Honesty & Integrity
Assess the Risk of Fraud & Develop Concrete Responses to Minimize Risk & Eliminate Opportunity

4. The Negative Affects of Fraud.
Legal Conviction
Humiliation
Lost Assets
Lost Time
Taxes & Restitution Payments
Negative Publicity
Legal Fees
Embarassment

5. How Does an Organization Encourage Dishonesty?
Poor examples by management
Quotas or meeting targets
Rewarding individuals not groups
Competition among employees
Tyco - Kazlowski Example

6. What Expectations Should Management Communicate?
Appropriate Values & Ethics
Fraud Awareness & Training
Consistent Punishment of Violators

7. Factors Associated with High Levels of Fraud
Top management doesn’t care about or pay attention to appropriate behavior
Lack of recognition of job performance
Perceived inequities in the organization
Autocratic rather than participative management
Low organizational loyalty
Unreasonable budget expectations

8. Factors Associated with High Levels of Fraud
Unrealistically low pay
Poor training and promotion opportunities
High turnover and absenteeism
Lack of clear organizational responsibilities
Poor communication practices within the organizations

9. Elimination of Fraud Opportunity
Accurately Identify Sources and Measures of Risk through Threat Assessments
Implement Appropriate Fraud Prevention & Detection Controls
Create a System of Widespread Monitoring by Employees
Install Independent Checks, Including an Effective Audit/Investigative Function

10. Who Detects Most Frauds?
Employees & Managers NOT Auditors Detect Most Frauds
Research Shows…

11. What Does Sarbanes-Oxley Say about Employees Reporting Fraud?
It recognizes the value of having a system for employees and others to report wrong doing
Establish “Fraud, Waste and Abuse Hotlines”
Section 307 requires a “whistle-blower” system to be in place
Section 806 prohibits retaliation against “whistle-blowers” or others

12. The Critical Element Needed To Begin a Fraud Investigation
Management Support and Approval

13. Guidelines for Conducting a Fraud Investigation
Perform Steps in Logical Order
Conduct Thorough Investigation
Protect Confidentiality

14. 7 Steps for Conducting a Fraud Investigation
Undertake to Establish the Truth of the Matter Under Consideration
Don’t Jump to Conclusions - Investigator or Auditor Needs Experience & Objectivity
Keep Information to Yourself, Keep Speculation to Yourself
Keep Those Who Need to Know Informed

15. 7 Steps for Conducting a Fraud Investigation
Independently Corroborate Information
Employ Experts and Consultants if needed
Use Investigative Techniques that Are Legally Sound & Fair
Report All the Facts Fairly & Objectively- Point to the Guilty & Exonerate the Innocent

16. Evidence
1. Gathered from Individuals, Includes Interviewing, Interrogation & Honesty Tests
2. Gathered from Papers, Computers & Written & Printed Sources
3. Fingerprints, Weapons, Stolen Property Often Involves Forensic Analysis
4. Collected by the Investigator, Includes Invigilation, Surveillance and Covert Operations

17. Investigative Steps
Gather Testimonial Evidence - Obtained from Individuals through Interviews and Interrogation of:
Senior Management Officials
Middle Management
Employees
Expert Witnesses
Vendors
Customers

18. Investigative Steps
Gather Documentary Evidence - Business Records, Computer Records from a variety of sources
Internal Agency Records
Vendor Records
Customer Records

19. Obtaining Documentary Evidence
Investigative Steps
Obtaining Documentary Evidence
Use Internal Authority granted by Management
Develop Internal/External Sources
Use Contract Provisions
Criminal Investigation – Use Subpoenas or obtain Warrants
Civil Investigation – Use Discovery and Civil Subpoenas

20. Investigative Steps
Physical Evidence -Fingerprints, Stolen/Damaged Property, Checks, Receipts, Bank Records, Contracts, etc.
Evidence can be obtained from internal agency sources or other Business Sources
Evidence can be obtained through Civil Procedures
Some evidence may need to be obtained by Law Enforcement Professionals

21. Types of Evidence
Best Evidence – Known as primary evidence such as original documents, equipment, etc.
Circumstantial Evidence – Known as Indirect Evidence and based on inference
Conclusive Evidence – Evidence so strong it overshadows any other evidence to the contrary
Critical Evidence – Evidence strong enough that its presence could tilt a decision makers mind

22. Types of Evidence
Corroborating Evidence – Evidence that differs from, but strengthens or confirms other evidence
Credible Evidence – Evidence that is worthy of belief; trustworthy evidence
Demonstrative Evidence – Evidence that one can see and inspect usually offered to clarify testimony. Often termed illustrative, real or tangible evidence

23. Types of Evidence
Forensic Evidence – Evidence arrived at by scientific means
Expert Evidence – Evidence about a scientific, technical or professional issue presented by a qualified expert witness
Photographic Evidence – Photographs taken by competent authority which can be attested to as being true and unchanged

24. Report Preparation
Culmination of all work to prove the fraud and identify those responsible
Begins with Predication
Identifies “Who, What, When, Where and How of the Fraud
Identifies “Elements of Proof” to substantiate the Fraudulent Activity
Attach and List all Evidence to support findings
List locations of evidence that cannot be attached to the report

25. Seek Remedial Action Administrative Action Civil Remedies
Criminal Prosecution

26. What Action Do Most Businesses Take After Discovering a Fraud?
Pursue No Legal Action
Pursue Civil or Administrative Remedies
Pursue Criminal Remedies
Fact
More Than 80% of Organizations Do #1

27. Organizations Contribute to Fraud
Termination without Prosecution and Publicity of the Fraud Allows:
Individuals do it all over again someplace else.
Employees get the message that you can get away with fraud without suffering any penalty.

28. Summary Be Proactive Never Disregard the Obvious
Take Action quickly to Stop Fraudulent Activities
Conduct thorough Audits/Investigations
Don’t limit the scope of your activities
Take Affirmative Action
Publicize the Findings and Action Taken

29. Investigating Fraud
QUESTIONS?