Expert Fraud Investigation

A fraud investigation is aimed at examining evidence to determine if a fraud occurred, how it happened, who was involved, and how much money was lost. Investigations occur in cases ranging from embezzlement, to falsification of financial statements, to suspicious insurance claims. Expert Fraud Investigation: A Step-by-Step Guide provides all the tools to conduct a fraud investigation, detailing when and how to investigate. This guide takes the professional from the point of opening an investigation, selecting a team, gathering data, and through the entire investigation process. Business executives, auditors, and security professionals will benefit from this book, and companies will find this a useful tool for fighting fraud within their own organizations.

Preface xv

Acknowledgments xvii

Chapter 1 Finding Fraud 1

Signs of Fraud 1

Looking for Suspects 9

Evaluating Fraud Tips 11

Should You Investigate? 12

Confronting Suspects 13

Skills of a Fraud Investigator 14

Differences between Audits and Investigations 16

Conducting a Fraud Investigation 19

Notes 19

Chapter 2 Beginning the Investigation 21

Assessing the Engagement 22

Making Recommendations 26

Budgeting and Cost Control 28

Fees 30

Billing Practices 35

Engagement Letters 36

Chapter 3 Managing the Case 39

Assembling the Team: Where to Start 40

Assembling the Team: Company Insiders 41

Assembling the Team: Key Participants 43

Assembling the Team: Outside Consultants 44

Importance of Credentials 45

Management and Supervision of Staff 46

Work Programs and Checklists 47

Document Management 48

Preserving Evidence 50

File Maintenance 52

Investigative Software 54

Professional Standards 54

When to Stop Investigating 57

Chapter 4 Searching for Fraud 59

Analytical Review 60

Key Financial Ratios 61

Write-offs, Adjustments, and Miscellaneous 65

Manual Disbursements 67

What about Financial Statement Audits? 68

Looking for Fraud in Little Things 70

Chapter 5 Sources of Information 73

Who Acquires Information 73

Internal Records 75

Private Records 77

Public Records 82

The Internet and Search Engines 91

Chapter 6 Investigative Techniques 93

Corporate Background Checks 94

Individual Background Checks 94

Searching for Friends, Family, and Associates 95

Surveillance 96

Digital Data Analysis 97

Computer Forensics 99

Interviewing Witnesses and Suspects 99

Confirmation with Customers and Vendors 104

Creativity and the Fraud Investigator 106

Chapter 7 Investigation of Asset Misappropriation Schemes 107

Cash Receipts Schemes 108

Disbursement Schemes 113

Noncash Schemes 129

Chapter 8 Investigation of Financial Statement Fraud 133

Revenue Overstatement 134

Channel Stuffing 137

Round-Tripping 138

Asset Overstatement 139

Liability and Expense Understatement 143

Reserve Manipulation 147

Misrepresentation or Omission of Information 148

Improper Recording of Mergers and Acquisitions 149

Off-Balance-Sheet Items 150

Accounting Involves Judgment and Estimates 151

Earnings Management 152

Note 152

Chapter 9 Investigation of Corruption Schemes 153

Bribes 154

Kickbacks 155

Extortion and Conflict of Interest 156

Related-Party Transactions 156

Money Laundering 158

Foreign Corrupt Practices Act (FCPA) 160

Prevention and Detection 161

Note 162

Chapter 10 Investigation of External Fraud Schemes 163

Corporate Espionage 163

Investment Schemes 165

Pyramid or Ponzi Schemes 167

Securities Fraud 169

Hidden Income or Assets 170

Insurance Fraud 173

Bankruptcy Fraud 174

Note 175

Chapter 11 Reporting and Litigation 177

Stick to the Facts 178

Keep It Simple 178

Background Information 179

Investigation Procedures 181

Opinions 182

Attachments 183

Draft Reports 184

Unfavorable Opinions 185

Follow-up to the Fraud Investigator’s Work 186

Being an Expert Witness 189

Preparing for Testimony 189

Deposition Testimony 191

Trial Testimony 194

Note 195

Chapter 12 Other Issues 197

Moving Forward as a Company 197

Preventing Future Frauds 199

Marketing a Fraud Investigation Practice 201

Competing with Other Firms 202

Conducting a Global Investigation 203

Professional Liability Issues 204

Reducing Fraud with Investigations 206

Note 207

Appendix 209

Index 215

Tracy L. Coenen, CPA, MBA, CFE is a fraud expert and President of Sequence Inc., a forensic accounting firm with offices in Milwaukee and Chicago. She conducts financial investigations for private and public companies, reports her findings to executives and boards of directors, and testifies in court as an expert witness. She has provided fraud-related commentary to television and print media. Her commentary has been featured on NBC news and on CNBC's personal finance show, On the Money, and her comments have been printed in the Wall Street Journal, USA Today, BusinessWeek.com, CBSNews.com, and Entrepreneur.com, among others. Tracy writes articles on fraud for national business publications including Fraud Magazine. Expert Fraud Investigation

A Step-by-Step Guide

A sharp, savvy examination of financial fraud, Expert Fraud Investigation: A Step-by-Step Guide is one of the few books to take the leap from theoretical discussion to the actual nuts and bolts of performing an investigation. Fraud expert Tracy Coenen offers an insider look at many of the most common types of fraud cases and points out some of the best methods for analyzing the books and records to search for proof of fraud.

An invaluable tool to help professionals understand how financial fraud occurs in an organization and what to do when it is found or suspected, all the guidance needed to uncover corporate fraud is here, from the point of opening an investigation, selecting a team, through the entire investigative process, including:

• The most common fraud schemes

• The difference between audits and investigations

• Effectively managing the investigation

• Looking for fraud in little things

• Using public and private records in investigations

• Getting creative as a fraud investigator

• Uncovering asset misappropriation schemes, financial statement fraud, corruption schemes, and external fraud schemes

• How to prevent fraud from happening in the first place

Does your organization need to conduct a fraud investigation? Who needs to be involved? Expert Fraud Investigation gives you access to all the necessary background on fraud, the various types of fraud investigations, as well as the legalities involved. Making a difficult undertaking more manageable, this essential book arms you with the tools to take your organization step by step through the process of an effective fraud investigation.

Praise for Expert Fraud Investigation

"Fraud is a constant evil that attacks businesses, consumers, and government. The financial and reputational impact of fraud can be devastating, but education and awareness are key weapons in the war on this crime. With this new book, Tracy Coenen delivers an excellent primer on the many fraud schemes as well as practical investigative techniques to detect and prevent fraud."
—Martin T. Biegelman, Director of Financial Integrity, Microsoft Corporation

"The lack of effective fraud training by auditors made my job easier as the criminal CFO of Crazy Eddie. I was lucky, since Tracy Coenen was too young to be a forensic accountant back in my criminal days. Acclaimed forensic accountant Tracy Coenen's fraud investigation book will cause many criminals to take early involuntary retirement or be forced out of business."
—Sam E. Antar, WhiteCollarFraud.com

"In Expert Fraud Investigation, Tracy Coenen does an excellent job of educating the reader on a wide variety of fraud schemes and providing a step-by-step process on how to conduct a fraud investigation. This is a must-read for anyone who wants to learn more about the basics of how to prevent, detect, and investigate fraud."
—Cynthia Cooper, Author of Extraordinary Circumstances: The Journey of a Corporate Whistleblower