Question

FRAUDD EXAMINATION

Case 4

Stephanie Adkins is an accountant who is trained in forensic accounting. She is an experienced fraud investigator. She was recently hired by Lake Side Hotels, a closely-held corporation, to investigate a company manager who is suspected of taking kickbacks from vendors.

Stephanie gave Lake Side her standard engagement letter stating that the scope of the engagement would be limited to investigating only one suspect. It did not guarantee findings or results.

According to the provisions of Stephanie’s engagement, she was to communicate directly with Bernie James, the company’s controller, and Amanda Peterson, the outside attorney.

At the first meeting of this team, Bernie indicated that Lake Side had received four separate anonymous tips about possible kickbacks. All the tips indicated that Laurie Miller, an evening manager, was taking kickbacks from food vendors. One tip named a particular vendor, the Mid States Beef Source, a company that supplies meat to the hotel’s restaurants.

Stephanie asked if Bernie had any documentation that supports Laurie Miller’s possible involvement in kickbacks. Bernie had no documentation but hoped Stephanie could help them substantiate the information from the anonymous tips. He was concerned that kickbacks would hurt the hotel financially.

Amanda, the outside attorney, said that she had already talked to several hotel employees and was convinced that Laurie was guilty.

Kickback schemes can be difficult to uncover, so Stephanie wanted to proceed cautiously.

Bernie wanted to confront Laurie immediately. He was convinced she would confess if he told her that he had evidence against her.

Stephanie asked what evidence Bernie had. Bernie said, “Only the anonymous tips, but I know she will confess if we bluff.” It was against Stephanie’s professional principles to lie and she said so.

“Detectives do it all the time on cop shows,” Bernie said. Stephanie insisted she would need to run the investigation her way or she wouldn’t be able to undertake this engagement.

In relation to this scenario, write responses to the following:

What steps might Stephanie follow to proceed with her investigation?

What mistakes, if any, have already been made in the investigation?

Answer 1

The step below apply to administrative investigations by international development agencies that lack law enforcement powers to compel evidence from third parties by subpeona or otherwise.

Preliminary Matter

It is essential that every investigator or prosecutor develop and follow a "theory of the case" when investigating complex corruption and fraud offences. The case theory approach to complex investigations is second nature to most investigators, at least the successful investigators, but is misunderstood or neglected by others, with disastrous results. It is similar to the scientific method of experimentaion, and involves the following steps

• Analyze the available data to create an hypothesis;
• Test it against the available facts;
• Refine and ammend it until reasonably certain conclusion can be drawn;

Learn the elements of proof for the suspected offenses

Memorize the element of proof for each of the suspected offenses, based on the theory of the case, and use them to organize the investigation and test the sufficiency of the evidence. An investigator should know the every stage of the case what evidence he needs to obtain to prove an offense. Again, many investigators neglect this fundamental rule, with the result that too little is evidence is collected.

Carefully organize and maintain the evidence

Use charts and graphs, spreadsheets and summaries as necessary to organize and analyze complex data , but be careful not to overdo this exercise at expense of having time to pursue leads and pursue the theory of the case. Make it sure that all evidence is properly logged in , secured and accounted for, including electronis evidence, and that the source of the evidence is recorded.

Prepare the case choronology

Preparing a chronology of the events- putting the important facts in the order they occurred- is always helpful, particularly to prove knowledge and intent and to see how a case unfolds. Concisely record the date, the event of document, and the source of information in seperate columns. Include important meetings, telephone calls, email communications, travel, key documents and potentially important events. After that the following should follow

A) Begin the case: If the case start with a complaint or report, fully debrief the complainant, getting as much detail as possible

B) Evaluate the allegations or suspicions: Determine whether the allegations or suspicions- the "red flags" are specific and serious enough to justify an investigation, which can be time consuming, disruptive and costly.

C) Conduct due diligence background checks: Check on-line and other records on the suspect firms and individuals to evaluate the allegations and to look for other evidence of fraud or corruption.

D) Complete the internal stage of the investigation: Complete the collection of documents, data and interviews within the investigating organizations.

E) Check for prediction and get organized: Review the results of the investigation to date to determine if there is adequete "prediction" - a sufficient factual basis - to proceed.

F) Begin the external investigation: Conduct interviews of outside the investigateing organization, proceeding from the disinterested, cooperative witnesses to "facilitators" to co-conspirators to the subject.

G) Prove illicit payments: Determine the best strategy to prove illicit payments; out from the point of payment, or back from the point of receipt and begin the tracing process.

H) Obtain the cooperation of an inside witnesss: This could be an honest inside observer or a lesser participant in the offense, such as middleman or the smaller or several bribe prayers. Decide the best strategy to obtain his or her cooperation.

I) Interview the primar subject: In a corruption case, conduct a thorough interview of the primary subject, usually the suspected bribe recipient.

J) Prepare the final report: Decide what action to recommend based on the results of the investigation- an administrative sanction or criminal referral.

Internal fraud investigations can pose numerous challenges. Here are the mistakes can be happen while investigating which may be costly too for the investigating purpose.

Making a rush to judgement: The fact may appear to clearly show that the targeted individual has perpetrated internal fraud. However, regardless of how compelling the facts may be, your company must conduct an appropriately reigorous investigation.

Letting word of an investigation get out: The existence of an internal fraud investigation should only be shared with those with a "need to know". Divulging information beyond these individual can doom an investigation to failure.

Proceeding without notifying legal counsel and HR professionals: Employees have certain rights and if they are violated, it can directly affect the results of the investigation and it can also create considerable legal risk for the company.

Failing to maintain a document trail: Even a simple fraud will likely involve documentary evidence. No matter how straightforward the fraud may appear at the time, it is critical that the investigation case files contain all relevant information complied by the company during the investigation.