I found that the price the company has been paying for their widgets doubled In a year’s time. In addition, they are now being purchased entirely from a new vendor. After I check the fair market price for these widgets, however, It appears that they are only worth half of what the company Is paying. This Is one of the red flags for fraud. As an auditor It Is my lob to ensure to the best of my ability that the financial statements are not materially misstated due to fraud. In order to prove a fraud has occurred, the auditor has to do more than just show that money was lost, taken, or financial data misstated.
They have to prove that there was intent. This involves more than Just a investigation into the books and the numbers. This process is referred to as fraud examination. Many people in this line of work are both Spa’s and Cafe’s. They must have understanding of criminology, investigative techniques, and the law in addition to tradition accounting knowledge. As an investigator, it is not uncommon to be accused of various wrongdoing yourself during the Investigation process. This includes but Is not limited to invasion of privacy, libel and slander, and public disclosures of facts.
This makes knowledge of the criminal side and Investigative techniques even more valuable because the fraud examiner must sometimes defend him/herself. For this reason, a fraud examiner always assumes at the start of an investigation that at the end it will result in litigation. There is an accepted approach for these types of investigations called the fraud theory approach. It contains four sequential steps. The first of these steps is analyzing the data. In the case of our suspicious widgets, we would gather all the appropriate documentation related to those transactions.
Then, we would conduct ratio analysis and perform audit tests. The second of the four steps is to develop a fraud theory. In our example, the most likely situations are that someone is misappropriating cash, or a purchasing agent Is taking kickbacks to favor a vendor with unusually high priced widgets. Clues for kickbacks Include paying higher than market prices for goods, favoritism toward one vendor to the exclusion of other, Increasing levels of purchasing and billings, absentia inventories, lack of controls over the purchasing function, and excessive spending or indebtedness by a purchasing agent.
If the above clues do not end up being present or pointing to a kickback scheme, the fraud examiner should consider a billing scheme in our case. We should look for a shell company formed by the fraudster. If it is fake, it likely will not be listed in the phone book or have a credit rating. Another strong sign of this scheme type is a lack of controls over vendors. The same person should never be in charge of both approving new vendors and approving the payments to the vendors. The next step is the refining our data.
The Investigator will need to have solid reason to suspect a fraud before moving onto this step. The first thing to do here Is Interview everyone that works closely with the suspected fraudster. There may be only one chance to Interview the suspect, so you want to gather all the evidence interview third-party witnesses first-?followed by corroborative witnesses. Finally you interview the suspect. At this point the fraud theory should be confirmed because we seek an admission. This confirmation is the final step.
