Vendor Fraud. Goals of Presentation. Detection and Investigation

Transcription

1 Vendor Fraud Detection and Investigation by CPAs Dan Dreibelbis Maryland Association of CPAs Goals of Presentation Alert CPAs to their ability to detect fraud Fraud detection is a responsibility for CPAs SAS 99 Fraud detection can be accomplished with a small investment in time. Vendor fraud is an area that is readily available to detection by CPAs When to request the assistance of attorneys Demonstrate analytical technique to detect fraud

2 Handout A Disbursement Register Review register and select the likely vendor involved in fraud Handout B Disbursement Register Sort by Vendor Select the likely vendor involved in fraud Explain why you selected vendor?

3 Why Vendor C? Vendor C s invoices are in Sequential number order Over a long period of time This pattern indicates Vendor C does not have other customers. Meet with executive mgt. to determine their knowledge of Vendor C. Obtain invoices documenting Vendor C charges. Obtain POs for Vendor C goods/services. Conduct vendor record checks

4 Vendor record checks should include: Credit reports D&B Corporate registration Internet searches for vendor, vendor s address, telephone numbers, website, Face Book, property records If you don t identify a physical address i.e., warehouse, office or home you may have a vendor fraud. Post Office Boxes are frequently used in fraud schemes.

5 Obtain checks or check images from client/bank get front and backs of checks. Check endorsements. Determine where the checks are being deposited bank, account #, and account name. Review with mgt. Check any personal or corporate endorsements with an internet search. Locate endorsee addresses, telephone numbers, names of officers and mgt. Check local newspaper stories for information about the vendor.

6 Meet with client attorney and mgt. Do we have a suspect at this point? This type of vendor fraud usually involves employees. Review suspect employee s HR file. Look for personal and legal problems that could cause financial demands on employees. Determine employees right to workplace privacy with client attorney. Determine if mgt. or CPA can search suspect employee s desk. What to look for: Expensive gifts from vendors. Schedules of fraudulent disbursements.

7 Search the employees computer files. Decide if CPA, client mgt. or computer forensic expert will complete the job. Look for s about fraudulent transactions with suspect vendor, large personal expenditures or vices gambling, illegal drugs, etc. Now What? Review invoices, internet searches, desk search and computer search with client attorney. Do we have evidence of a crime or indications of illegal activity. Look for spreadsheets accounting for the fraud. Decide on next course of action Take civil legal action? Alert law enforcement and request assistance?

8 Interview Suspect Employee The next step in vendor fraud is to interview the suspect employee: Law enforcement if you want to obtain a prosecution or Client attorney and CPA if you elect to handle with civil legal action. Interview Suspect Employee Rule #1 Prepare for the interview. Accounting work papers, internet searches and other investigative checks should be completed and reviewed with client attorney and CPA. Select a private location to conduct the interview. Interview should involve two people client attorney and CPA. You don t want a lot of people in the interview. Be careful everyone wants to be in the interview. Why do we recommend not taking mgt. into the interview?

9 Interview Suspect Employee Interview should be conduct in professional manner no shouting, yelling or the like. Introduce the CPA and the client attorney and why they want to talk to the employee. Ask the standard questions: Who, What, Where, Why, When and How. Interview Suspect Employee How did you meet Vendor C? When did you meet Vendor C? What services or goods does Vendor C supply? Who is the owner of Vendor C? Why do we order from Vendor C?

10 Interview Suspect Employee Initially questions should be very open ended and broad. Be non accusatory in questioning. Don t start out asking about invoice #1. Let the employee bring up topics he will introduce something you don t know or understand initially. As the interview continues tighten up the questions and become more specific. Admission Seeking Interview Take a break from interview for 5 10 minutes. Restart the interview with step #: 1. Direct positive confrontation. Accuse the employee of fraud if you have the evidence. 2. Theme development presenting a moral excuse for illegal behavior. The suspect took the money to pay his kids medical bills, owed money to the bank for the mortgage, or trapped by compulsive behaviors like alcohol, illegal drugs or gambling.

11 Admission Seeking Interview 3. Stop all denials by suspect. Repeat the accusation in Step 1. Use non verbal commands to stop the suspect from speaking. 4. Overcoming Objections. Objections are almost an admission. Less than a denial. Suspects are whining about their problem. Agree with the suspect and turn the objection around. You are right but you forgot to add.. Admission Seeking Interview 5. Procurement and retention of the suspect s attention. The guilty suspect will start to withdraw from the interview as they start to accept being caught. Eyes close, head drops, body collapses, etc. Don t let them withdraw. Stay physically close to suspect and keep taking.

12 Admission Seeking Interview 6. Handling the suspect s passive mood by repeating the ideas of the theme in step 2. Soft sell time use a calm quiet voice. You made a mistake. Let s work out the problem. Watch the body language. Does the suspect look defeated? Tears may appear at this time. Always remember tears are the last line of defense by a suspect. Don t give them any rest. Keep pushing them. Admission Seeking Interview 7. Presenting the alternative question or the good bad option. The alternative question gives a suspect two chances to admit their guilt. An example of the alternative question would be: Did you take the money to pay for your kids medical bills? OR did you take the money to fly to Las Vegas and gamble with you girlfriend?

13 Admission Seeking Interview 8. Relating the details of the fraud: If the suspect selected one of the alternative questions they should be ready to make an admission or confession. Have the suspect repeat the story several times verbally. Admission Seeking Interview Written Confession: Next step is to get them to put confession in writing. Their written confession will many times omit critical facts. Be prepared to write an interview report that covers the omitted facts. The written confession should be witnessed by two people. The statement should say the suspect made the confession without threats or promises of any kind and they were free to leave.

14 Report Prepare written report(s) and summarize your findings in layman s language. Save important original documents in a safe place. Invoices, s, letters, spreadsheets, etc. Present results to mgt. and firm s attorney and/or law enforcement. Summary Accounting techniques can be used to detect fraud. CPAs can conduct financial investigations using everyday accounting knowledge and techniques. Fraud investigations should be conducted with assistance and guidance of mgt. and client attorney.

15 Reference Material Criminal Interrogation and Confessions: Essentials of The Reid Technique by Fred E. Inbau, John E. Reid, Joseph P Buckley and Brian C. Jayne. ISBN 13: Fraud Examination Third Edition by W. Steve Albrecht, Conan C. Albrecht, Chad O. Albrecht and Mark F. Zimbelman. ISBN 13: