Fraud Investigation

There has been a fraud in my company, said a client to me with his nostrils flaring, eyes red and temples pumping as he entered my office. I told him to relax and sit down. Gave him a glass of water and then asked him to tell me the complete story, EXACTLY as it happened.

My friend then told me that he thinks their accountant has been stealing from the petty cash and payroll. I stopped him right there and asked him if he just thinks or whether he has some proof of this allegation. He responded by saying that he has some proofs, but they are not conclusive and that is why he wants me to investigate. And I did.

This is a common story in our daily lives. Be it a large company, a small/medium business, a shop or a non-profit organization etc., we come across incidents like this and have been or have suspected people of committing fraud. But in most cases, we forget the difference between fraud and negligence and between negligence and incompetency. There are very fine lines between all of these and I will endeavor to make those lines a bit thicker in the coming paragraphs.

The main difference between a fraud and negligence/incompetency is the intention of the person who committed it. No matter how big the mistake, if the mistake was not intentional then it cannot be termed as a fraud. However, contrary to popular belief, a fraud is not always committed to gain a financial benefit but can also be committed to gain a non-financial benefit or revenge or personal satisfaction. Consider the famous fraud triangle below:

A fraud is committed due to any of the below reasons i.e.:

Pressure:

Meaning the individual has financial or family or social pressures and therefore he/she is unable to live within his means. As a result, he/she need to enhance their financial resources via fraud. Examples are wanting to live a lavish lifestyle based on own wants or spouse or kids or other family members’ pressure, having a friends/family circle which is more well to do, having bad habits like gambling or risky business bets which lead to loans or debts etc.

Rationalization:

Meaning that the individual tries to rationalize or justify his/her fraudulent actions by blaming it on some maltreatment, injustice or insult e.g. no bonus or increment, personal insults, lack of good environment, others doing it and getting away with it etc.

Opportunity:

Meaning that the individual just happened to be in a situation or position which gave him ample chance to commit a fraud and feel that he/she can get away with it. E.g. having multiple roles without segregation of duties (being the preparer, reviewer and approver of transactions), having access to inside/confidential information, having super user access rights etc.

They say that the best person to catch a thief is another thief. But in practical life (where it is preferred that we do not commit frauds to learn how to detect or catch a fraud) it means that you have to put yourself in the position of the other person and think how they think. Therefore, it is important that we understand the motives, thought process and underlying situation of a fraud to effectively catch the fraudster. A general way of doing that is the Funnel Approach.

A Funnel Approach simply means that we start wide with every part of that area/process /department included in the scope, because we may just have a red flag or a whistle blower or unconfirmed evidence (like my friend had), and then narrow our way down to the actual issues. That is why there is no sampling approach in a fraud investigation, no random selection, no guess work. We look at everything and anything that may be remotely related to the matter.

That is one reason Fraud Investigations are so time consuming and costly. Other reason is that you cannot have junior staff or inexperienced professionals conduct an investigation, because they simply would not be able to join the dots or analyze the information or may even be pressurized by the persons involved in fraud. You need seasoned professionals, who have done it countless times and can interpret the mannerisms, responses and body language of people.

That leads me to the most important part of a fraud investigation. Without this part, a fraud investigation becomes merely a glorified audit or detailed review of documentation and records. That part is “interviews”. During a fraud investigation, any person who is directly or remotely linked with the area under investigation has to be interviewed. And then there can be multiple rounds of interviews which help the investigators in linking the information found from the records with the statements of the people. This is one area where people cannot escape because there is always some misstatement or mismatch which leads to an opening.

But interviewing is an art in itself and we (fraud investigators) go through extensive trainings not to mention the on-job experience of every new interview, to enable us to get the required information out of people. I have seen many people collapse, breakdown, cry their heart out or go crazy during interviews.

A lot of people ask me the difference between a fraud and forensic investigation. My simple answer to them is that in essence they are the same thing. The only difference is, if you want to make it sound different, that in a forensic investigation you may use, or leverage technology heavily as compared to a fraud investigation which uses just the basic Microsoft Office tools and internet research. And we indeed have come a long way in forensic technology, some of which are:

Recovery of deleted data/emails and their detailed analysis
Lie detection tools
Ageing of documents
Handwriting assessments
Big data analysis and trend establishment; and
Video/sound analysis

But before we all get excited about fraud or forensic investigation, one word of advice. Make sure that you consult with your Legal Counsel before you initiate any process like that. And even during the process, the Legal Counsel should be consulted whenever required and, if need be and confidentiality permits, Human Resource should also be involved.

The reason is that any fraud investigation can end up in a civil court, criminal court or labor court, as the case may be. And therefore, a good fraud investigator always prepares his/her report in a manner that if that time comes, the report should be able to stand the scrutiny of the court. And since there can be legal, reputational and financial repercussions for the organization, it is advisable to know the risks beforehand so that they can be properly mitigated.

In the end, the famous saying that prevention is better than the cure comes to mind. So, all organizations (big and small) are encouraged to invest in an internal control environment and landscape which would reduce the likelihood of a fraud to a very low level and help the business owners sleep better.

*The writer is a Partner in Peter & Co. Chartered Accountants and has 16 years of experience in internal and external audits, fraud investigations and enterprise risk management projects in the Middle East and Pakistan with some of the leading organizations in the region.