Question

Chapter Nine Homework

Page 284, Case Number 49

As a certified fraud examiner, Laura Wu has been retained by an attorney to investigate an overstatement of revenue fraud at Unlimited Growth Ltd. All sales to the company are on credit (i.e., there are no cash sales). Laura has found an entry in the records debiting accounts receivable and crediting the Sales account on the last day of the fiscal year.

a. Would confirmations help her gather evidence in preparing for prosecution of financial statement fraud? Why?

b. Laura employed a novice fraud examiner to help her in the investigation. After an employee of Unlimited Growth had prepared the confirmation letters (using the positive “in-blank” type), her novice fraud examiner reviewed the letters and asked another employee (who had worked at Unlimited Growth for 12 years and had a character that was beyond reproach) to mail them for him. The confirmations were all returned, and all recipients had indicated that the information provided in the letter agreed with their records. Should Laura be concerned about the process her fraud examiner used and the results?

Answer 1

A) Yes, ofcourse confirmations will help Laura gather evidence in preparing for prosecution of financial statement fraud since as it is mentioned she has found an entry in the records debiting accounts receivable and crediting the Sales account on the last day of the fiscal year where all the sales are performed on credit.

B) The following steps need to be folloewed while examining a fraud in an organisation.

STEP ONDE: Begin the case

If the case starts with a complaint or report, fully debrief the complainant, getting as much detail as possible. If the case starts with the discovery of a red flag, match the red flag to the potential scheme and then look for other red flags of the suspected schemes. An automated, “proactive” search for fraud indicators might be effective if the necessary data is available.

STEP TWO 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.

If you determine that a complaint or report warrants further investigation, try to make a quick, preliminary assessment of the accuracy of the complaint. For example, if the complainant alleges that he or she was unfairly disqualified from a tender, examine the relevant project files to attempt to determine if this may have occurred. Use this information to prepare for the follow up interview of the complainant.

STEP THREE 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, such as the presence of shell companies as subcontractors, prior debarments of a contractor or evidence that a project official is living beyond his means.

STEP FOUR Complete the internal stage of the investigation

Complete the collection of documents, data and interviews within the investigating organization, e.g.,

    Look in the bidding documents for evidence of corrupt influence through the manipulation of the “SPQQD” factors – Selection, Pricing, Quantity, Quality and Delivery;
    Carefully examine bids and proposals, CVs and other documents submitted by a suspect firm for possible fraudulent representations;
    Access, with the proper authority, the relevant e-mail and computer hard drive information;
    Determine if an early interview of the subject is warranted.

See basic but important advice on how to interview a cooperative witness.

STEP FIVE Check for predication and get organized

Review the results of the investigation to date to determine if there is adequate “predication” – a sufficient factual basis – to proceed. Decide or refine your initial “Case Theory” and organize the evidence according to the elements of proof of the potential claims. If law enforcement assistance is needed (e.g., to subpoena documents, exercise search warrants or to request international legal assistance) take steps to ensure that there is sufficient “probable cause” to obtain such cooperation.

STEP SIX Begin the external investigation

Conduct interviews of witnesses outside the investigating organization, proceeding from the disinterested, cooperative witnesses to “facilitators” to co-conspirators to the subjects. Request or compel documents from third parties and the suspect contractors through negotiated agreements, the exercise of contract audit rights or, if available with law enforcement assistance, subpoenas or search warrants.

STEP SEVEN Prove Illicit Payments

Determine the best strategy to prove illicit payments: out from the point of payment (by examining the contractor’s records), or back from the point of receipt (from the suspect employee’s records) and begin the tracing process. If it is not possible to prove the corrupt payments directly, try to prove them circumstantially by showing the subject displayed unexplained sudden wealth or expenditures.

STEP EIGHT Obtain the cooperation of an inside witness

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

STEP NINE Interview the primary subject

In a corruption case, conduct a thorough interview of the primary subject, usually the suspected bribe recipient.   Ask about his role in the suspect contract award and relevant financial issues, such as his sources of income and expenditures. Decide if there is sufficient evidence to obtain a confession; if not, try to get helpful admissions and identify possible defenses (different objectives require different tactics.)   Record the interview, if possible, and request all relevant financial and other records. In a fraud case, interview the person most knowledgeable and responsible for the suspected false statement or fraudulent document. Again, decide if there is sufficient evidence to obtain a confession and, if not, try to get helpful admissions and identify possible defenses. These typically include that any false statement was an honest mistake, or that another person was responsible for a fraudulent document. Record the interview if possible.

STEP TEN Prepare the final report

Decide what action to recommend based on the results of the investigation – an administrative sanction or criminal referral, for example – and prepare a concise final report, organized according to the elements of proof for the relevant offenses.

Since the above steps were effectively hence it can be said with confide that Laura performed the correct procedure to examine a fraud and results delivered were in alliance with the princples.