Finding Fraud

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Finding Fraud In this chapter:

  • Signs of Fraud
  • Looking for Suspects
  • Evaluating Fraud Tips
  • Should You Investigate?
  • Confronting Suspects
  • Skills of a Fraud Investigator
  • Differences between Audits and Investigations
  • Conducting a Fraud Investigation  

How does management know if it is necessary to investigate a suspected fraud? From the book:

When an internal fraud occurs at a company, the natural reaction is to assume that an investigation must be started immediately. After all, it is important to determine who was involved, exactly how the fraud was committed and covered, and what evidence exists to prove the fraud. Intuitively, that makes sense. In reality, it’s not always the way things go. Whether a fraud is fully investigated often depends on the estimated size of the fraud and the size of the company in question. It does not always make sense for a company to investigate a fraud because of the cost involved.

For a public company, an internal fraud is probably always going to be investigated to some degree, and the larger the fraud, the larger the investigation. Many regulations must be followed, and it’s imperative that financial statements be restated if necessary. To determine the amount of the fraud, the effect on the financial statements, and whether the financial statements need to be restated, an in-depth investigation is usually required.

But for private companies, it is not so certain that an investigation must be done. There are a variety of reasons why. It is important to first understand that the recovery of the proceeds of fraud is typically very small. The Association of Certified Fraud Examiners (ACFE) reports that in more than 65% of cases, 25% or less of the amount stolen is recovered. So to undertake an investigation with the intention of recovering significant money from the thief is probably misguided. If a victim company is fortunate enough to have insurance coverage for the fraud, an investigation must be initiated to help compile a proper insurance claim with supporting documentation.

Yet there are times when an investigation should be done, even if money is unlikely to be recovered. Management may conduct an investigation because they are not sure who was involved in the fraud and need to identify all responsible parties. They may also be unsure of the exact methods used in the commission of the fraud, and an investigation will help nail down this aspect. Fraud investigations play an important part in fraud prevention efforts; finding out exactly how a fraud was perpetrated and who was involved can go a long way toward preventing future frauds.