Fraud Risk Management · 2020-02-24 · receives fraud allegations and how to determine whether to undertake an investigation. Know how to develop a fraud investigation plan and form

© 2020 Association of Certified Fraud Examiners, Inc.

Fraud Risk Management

Responding to Discovered Fraud


Discussion Questions

1. Does your organization have formal procedures

for responding to discovered frauds? Who is

responsible for investigating such frauds? Are

identified instances of fraud within your

organization always reported to the authorities?


Discussion Questions

2. You are an internal auditor who has just

uncovered significant evidence that an

employee in the accounting department has

been embezzling money from the company.

What steps do you take in response to this

discovery?


Learning Objectives

▪ Understand what to do when an organization

receives fraud allegations and how to determine

whether to undertake an investigation.

▪ Know how to develop a fraud investigation plan

and form a fraud investigation team.

▪ Understand the steps and techniques involved

in conducting a fraud examination.


Learning Objectives

▪ Consider the risks that arise during a fraud

examination and how best to manage those

risks.

▪ Determine how and to whom to report the

results of a fraud examination.

▪ Consider necessary follow-up steps after the

conclusion of a fraud examination.


Introduction

▪ FRM program should include procedures for:

• Receiving and handling reports of fraud allegations

• Thoroughly investigating identified instances of fraud

• Swiftly and appropriately punishing perpetrators

• Remediating weaknesses that allowed fraud to occur


Fraud Risk Management Principle No. 4—

Fraud Investigation and Corrective Action

▪ The organization establishes a communication

process to obtain information about potential

fraud and deploys a coordinated approach to

investigation and corrective action to address

fraud appropriately and in a timely manner.


Fraud Investigation and Corrective Action—

Points of Focus

Establishes fraud investigation and

response protocols

Conducts investigations

Communicates investigation

results

Takes corrective action

Evaluates investigation performance


Receiving Fraud Allegations

▪ Potential fraud can come to the organization’s

attention in many ways, including:

• Tips from employees, customers, or vendors

• Internal audits

• External audits

• By accident



▪ Categorize issues.

▪ Confirm the validity of the allegation.

▪ Define the severity of the allegation.

▪ Escalate the issue as appropriate.

▪ Refer issues outside the scope of the program.

▪ Conduct the investigation.

▪ Resolve or close the investigation.



▪ Identify information to be kept confidential.

▪ Define how the investigation will be

documented.

▪ Manage and retain documents and information.

▪ Log allegations received.

▪ Track and manage cases.


Evaluating Fraud Allegations

▪ Does the alleged act involve violation of law,

rules, or company policy?

▪ Do any other departments need to be

consulted?

▪ Should external auditors be advised?

▪ Is the allegation required to be disclosed to the

board, audit committee, or any other party?


Evaluating Tips

▪ 40% of frauds are

detected by a tip.

▪ Not all tips are valid.


Developing the Investigation Plan

▪ Factors to consider:

• Time sensitivity

• Notification

• Confidentiality

• Legal privileges

• Compliance

• Securing evidence

• Objectivity

• Goals


Forming the Investigation Team

▪ The team might include:

• Legal counsel

• Fraud examiners

• Internal auditors

• External auditors

• Accountants or forensic

accountants

• HR personnel

• Security or loss

prevention personnel

• IT personnel

• Computer forensics

specialists

• Management

representatives


Conducting a Fraud Examination

▪ Cases are generally

handled in a uniform

fashion.

▪ Work from general to

specific.

▪ Assume the case will

end in litigation.


Tasks in a Fraud Examination

▪ Conducting interviews

▪ Examining documents

▪ Making observations

▪ Conducting computer forensic examinations

▪ Analyzing evidence

▪ Documenting the findings


Managing Risks During an Investigation

▪ Potential legal issues and constraints regarding:

• Rights and responsibilities of employees and

third parties

• Evidence

• Court assistance

• Integrity of investigation results


Rights and Responsibilities of

Employees and Third Parties

▪ Need to identify rights affected by investigation:

• Employees

• Union employees

• Third parties

▪ Might have a responsibility to investigate based

on duties of officers and directors


Collecting Evidence

▪ Some evidence must be voluntarily provided or

subpoenaed:

• Banking records

• Tax returns and related documents

• Credit reporting agency records

• Telephone records

• Credit card account records


Seeking Assistance from the Courts

▪ Civil litigation:

• Can be costly and time-

consuming

• Can be critical to obtaining

information and

compensation for fraud loss


Seeking Assistance from the Courts

▪ Advantages of criminal prosecution:

• It saves litigation expenses.

• The government has greater investigatory power.

• Criminal cases move more quickly.

• Conviction can establish facts to use in a civil trial.

▪ Disadvantages of criminal prosecution:

• There is less control over case decisions.

• The sentence cannot be requested or controlled.

• Criminal penalties might render defendant insolvent.


Monitoring the Integrity

of the Investigation

▪ Investigation information may be sought by

government agencies and civil litigants.

▪ Understand and use protection provided by

applicable legal privileges.


Reporting the Investigation Results

▪ Report findings to the party overseeing the

investigation.

• In general, the party to whom the report is made will

determine the appropriate form of the report.

▪ Retain reports for use in future fraud risk

assessments.


Disclosure to Law Enforcement

▪ It might be better to

voluntarily disclose a

violation to law

enforcement than waiting

for the agency to

discover the violation

and act.

▪ Voluntary disclosure can

result in leniency.


Responding to the

Investigation Findings

▪ Preserve evidence.

▪ Maintain confidence.

▪ Mitigate losses.

▪ Punish the perpetrator(s).

▪ File insurance claim.

▪ Undertake extended investigation.

▪ Remediate business processes and internal

controls.

Documents

Fraud Risk Management · 2020-02-24 · receives fraud allegations and how to determine whether to undertake an investigation. Know how to develop a fraud investigation plan and form