3 Steps to Investigate Fraud

Theft sometimes happens from inside an organization. When a business owner suspects that an employee is stealing assets or manipulating financial results, it’s time to call an outside expert to help investigate matters. Here are three steps forensic accounting experts follow to build a fraud case that can stand up in court.

Conducting interviews

Skilled interviewers trained in fraud detection know how to spot fraud warning signs, detect deception and pin down suspicions by talking with suspects and their co-workers. The specific information an expert asks employees depends, in part, on the circumstances and individuals involved.

Experts generally ask members of management direct questions about such issues as:

  • Possible fraud ploys (or allegations of fraud),
  • The company’s fraud risks, and
  • Programs and controls that have been implemented to mitigate specific fraud risks or to otherwise help prevent, deter and detect fraud.

An expert may interview not only a company’s management and audit committee, but also anyone who can provide information helpful in identifying risks of financial fraud. Thus, interviewees might include employees at all levels who are involved in initiating, recording or processing complex or unusual transactions, as well as operating personnel not directly involved in the financial reporting process.

The interview process usually starts with introductions and rapport-building. The expert may explain the purpose of the interview and ask questions to which the answers are already known, so he or she can observe the subject’s demeanor and degree of candor.

Then the expert transitions to more specific questions. He or she encourages the interviewee to do most of the talking — and may even use silence as a tool, as people being interviewed frequently try to fill conversation gaps. The employee may disclose information unintentionally, provide clues or suggest an unplanned, but fertile, line of questioning.

Before ending the interview, the expert will confirm the information elicited. He or she also will ask open-ended questions about other individuals to interview and areas to explore.

Gathering evidence

Another key task experts perform during a fraud investigation is collecting evidence from the company’s internal sources. Examples include personnel files, phone and email records, security camera recordings, and physical and IT system access records.

Locating this evidence may require the expert to perform computer forensic examinations. For example, experts may access the accounting system to search for suspicious journal entries, credits and reversals, and overridden controls. They may also consider external sources of evidence, such as public records, customer and vendor information, media reports, and private detective reports.

Analyzing the facts

Forensic accounting specialists have been trained on how to review and categorize internal and external evidence, conduct computer-assisted data analysis, and test various hypotheses. Rather than rely on gut instinct, your expert will formally document every step in the investigation and follow formal procedures to ensure a comprehensive investigation.

When the expert is finished conducting interviews and gathering evidence, he or she will report any findings. You may determine the appropriate format for the report and how distribution will be affected by the need to protect legal privileges and avoid defamation.

To catch a thief

Proving fraud can sometimes be like finding a needle in a haystack, especially if the thief did a good job hiding his or her electronic or paper trail. Botched investigations may prevent the victim-organization from recouping losses and prosecuting the perpetrator. So, it’s important to hire an experienced forensic accounting expert to build a solid case.

For more information, please contact: Sarah Jennings, CPA, CFE, CAE at SJenning@manercpa.com or 517-886-9502

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