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Chapter 7: INVESTIGATING THEFT ACT
Deciding when to Investigate
Investigation of a fraud only proceeds when there is predication (= there are symptoms or indications (red flags) that a fraud may be occurring, such as tip/complaint) Once there is predication, must decide whether to investigate (who make decision? auditors, security personnel, HR personnel, Law enforcement officials, or attorneys, etc.) Generally, once there is predication, the best policy to investigate fraud is to determine who, why, how, and how much questions of the fraud. Once decide to investigate, investigators must decide what methods to use to gather evidence and whether or not to work with law enforcement. Some of the factors that are considered in deciding whether or not to investigate are the following: Perceived strength of the predication (does it seem real, does it have specificity or is it a general accusation, etc.?) Perceived cost of the investigation Exposure or amount that could have been taken The signal that investigation or non-investigation will send to others inside and outside the organization Risks of investigating and not investigating Public exposure or loss of reputation from investigating and not investigating Nature of the possible fraud
Risk
The risks are much higher for not fully investigating a potential fraud perpetrated by the CEO of an organization than it would be to not investigate a fraud perpetrated by a lower-level employee. frauds perpetrated by CEOs are usually larger than frauds committed by lower- level employees, frauds perpetrated by CEOs often affect the company’s financial statements, and the CEO sets the tone in the organization, and bad modeling of the CEO is often mimicked by others.
Fraud triangle plus inquiry approach to investigations
Steps
Generally, once there is predication, the best policy is to investigate the potential fraud to determine the who, why, how , and how much questions of the fraud. Once the decision has been made to investigate, investigators must decide what methods to use to gather evidence and whether or not to work with law enforcement. In deciding which methods to use, investigators should focus on the strongest type of evidence for the specific fraud. Important to remain objective.
Beginning an Investigation
Investigations should usually begin by using techniques that will not arouse suspicion and will not wrongly incriminate innocent people. When starting an investigation: Involve as few people as possible Avoid words such as “investigation” (“audit” and “inquiry” are more appropriate) Use techniques that will not likely be recognized As the inquiry proceeds, investigative methods will work inward toward the prime suspect.
Symptoms observed Pressures of possible perpetrators Rationalization of perpetrators Key internal controls that had to be compromised for the theft to occur The advantage of using a vulnerability chart is that it forces investigators to explicitly consider all aspects of a fraud and consider who was most likely to be the perpetrator, if there really was one. Example of Vulnerability Chart
The Act Investigation Methods (activities that directly investigate the fraud act)
Theft act investigation methods are those activities that directly investigate the fraud act, such as: Surveillance and covert operations (surveillance: watching or recording the physical facts, acts, or movements, which are part of the theft act of a fraud) Invigilation Obtaining physical evidence
Gathering electronic (computer) information Surveillance and Covert Operations Surveillance or observation means watching and recording (on paper, film, or other electronic device) the physical facts, acts, and movements, which are part of the theft act of a fraud. The three types of surveillance are: Stationary or fixed point Moving or tailing Electronic surveillance Some form of surveillance is often used in investigating most frauds, including even financial statement frauds. Stationary or fixed point the investigator should locate the scene that should be observed, anticipate the action that is most likely to occur at the scene, and either keep detailed notes on all activities involving the suspect or record them on video Moving or tailing much more risky than stationary surveillance tailing should only be done by experienced professionals or law enforcement officers Electronic surveillance may have limited value in the investigation of employee frauds and many other white-collar crimes because of concerns regarding employees’ privacy in the workplace Normally legal as long as they do not invade a person’s reasonable expectation of privacy under the Fourth Amendment to the Constitution, which protects the right of a person against unreasonable searches Legal counsel and human resource personnel should always be consulted before any form of surveillance takes place With developments in technology, many companies are using database searches and artificial intelligence systems to provide surveillance or filter huge amounts of data and identify suspicious transactions
When using invigilation, management must decide on the precise nature of the increased temporary controls necessary to remove fraud opportunities. Past records should be analyzed in order to establish a normal operating profile for the unit under review. Invigilation should be used wisely and with caution because it can backfire in some cases. Can be expensive Invigilation diagram:
