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Developed by the seasoned fraud investigation team at Ernst & Young in cooperation with the AICPA, The Guide to Investigating Business Fraud provides a clearly defined framework for approaching a fraud investigation from start to finish. Each chapter in this practical, comprehensive resource is written by subject matter experts in the issue under discussion. The chapters are designed so that they may be read individually as self-contained reference guides for specific topics of interest, or together as a holistic overview of a fraud investigation.
Through this guide, you will be able to examine the principles and techniques that lead experts through a fraud investigation and answer the following questions:
Features of this book include:
About the Editors
Click here for bios of the Ernst & Young professionals who contributed to this book.
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Preface
For the veteran fraud investigation professional, core concepts in business fraud investigations are embedded in everyday practice, firm policy, and procedure. Quite often, however, a fraud investigation reaches business professionals who are not familiar with how investigations are conducted, their role in an investigation, and possible outcomes. With frauds such as Enron, WorldCom, Tyco, Parmalat, Adelphia, Societe Generale, the Ponzi scheme recently perpetrated by Bernard Madoff, and the recent billion dollar fraud at Satyam in India, it has become even more important that business owners, controllers, and management understand how a fraud investigation is run. These cases are just a few examples of frauds that have occurred, resulting in devastating effects on their organization, employees, and investors. The continued onset of one of the worst global economic downturns in recent history has now created a robust environment for fraud. Based on these painful lessons learned in the past and the current environment, companies, regulators, and other key stakeholders are putting more emphasis into addressing their approach to fraud investigations and how they view fraud proactively and reactively. This book tackles the complex issues involved in fraud investigations and gives a detailed understanding of the many complex nuances that investigators and others who deal with fraud have to consider when faced with a fraud-related matter.
Background
The idea for this book was first conceived by the Fraud Investigation and Dispute Services practice within Ernst & Young. In developing the core concepts for this product, what emerged became not just another treatise on business investigation theory but a practical framework to approach a fraud investigation along a timeline. Several other published texts are devoted to this topic, but none of them approach this topic with a practical, business-minded approach. The Guide to Investigating Business Fraud is dedicated not only to the study of how business frauds are conducted but also to the understanding of how and why fraudulent activities occur.
Audience
The targeted audience for this book is, of course, business professionals who need to understand core fraud investigation topics, key considerations with-in a fraud timeline, and measurable outcome indicators at various stages in an investigation. Business professionals finding themselves involved in a fraud investigation at any level often need a broad understanding of how and why fraudulent activities occur. This text is written to serve as a reference for those professionals, as well as collateral employees who would benefit from understanding business fraud core concepts and considerations. Finally, students who enter accounting or business fields frequently will be enrolled in coursework that outlines business fraud. For those students, this text will serve as a primary source for understanding fraud and how business fraud investigations are conducted and the complexities that are dealt with when conducting these investigations.
Concept and Importance to the Profession
The fraud investigation framework found in chapter 1 of this text was one of the initial steps considered in the creation of this book. The ultimate benefit achieved by understanding the concepts in this book within this framework is coming away with a practical knowledge of how the various pieces of a fraud investigation work together and how those pieces change over the course of an investigation. The book is organized in a manner that is consistent with how issues arise during the course of an investigation.
It is critical that the reader understand that in these times, the demand for evidence-based practices and procedures is important for achieving desired outcomes in an investigation. This text has been designed and written by some of the leading experts in the fraud investigation field at Ernst & Young. These authors have conducted numerous investigations in different industries and countries throughout the world and, therefore, have dealt with the complex issues that arise during an investigation. We purposely selected subject matter experts within our practice to construct the various chapters included in this book. Their insights and abilities to relate this book to practical real-life scenarios and issues faced in an investigation make this book a tremendous guide to gaining a deeper understanding of the issues faced during an investigation.
Organization
The book is organized to look at the concept of fraud holistically and the issues that are dealt with in fraud and fraud investigations. We have organized our thoughts to address the previous concepts in the overall design of the book (figure 1-1).
| • | Chapter 1 introduces the reader to the core concepts in a fraud investigation, introduces the fraud investigation framework, and outlines the steps that must be addressed throughout the course of every fraud investigation As noted in this diagram, it really begins with identifying the type of fraud involved in an investigation. The three main areas of fraud are misappropriation of assets, fraudulent financial statements, and corruption. In an effort to select what we feel are the most relevant and current schemes under these three main categories, we have organized the next three chapters to address those particular schemes. |
| • | Chapter 2 deals with selected types of misappropriation of asset schemes. Misappropriation of assets entails any scheme that involves the theft or misuse of an organization's assets. These schemes could include fake vendors; theft of assets, such as cash, inventory, accounts receivable, and fixed assets; payroll; and travel and entertainment fraud. |
| • | Chapter 3 deals with fraudulent financial statement scheme issues and what happens when the financial statements need to be restated as a result of a fraudulent scheme. A fraudulent financial statement scheme is the falsification of an organization's financial statements or other nonfinancial statements prepared by the organization to make the organization appear more or less profitable. |
| • | Chapter 4 deals with the concepts involving Foreign Corrupt Practices Act (FCPA) violations, which are one of the most talked about and investigated forms of corruption in the market place today. It is gaining significant attention by the Securities and Exchange Commission and the Department of Justice and, therefore, is top of mind for companies trying to understand the issues involving compliance with this statute. This is one of the primary reasons we have focused a chapter specifically on this type of corruption scheme. Corruption relates to any scheme to which a person uses his or her influence to obtain unauthorized benefit contrary to that person's duty to their employer. These schemes could include FCPA violations, bid-rigging, and conflicts of interest. After gaining an understanding of the various types of fraud, the next area of an investigation is the planning and organizing of a fraud investigation when one of these fraud schemes is uncovered. |
| • | Chapter 5 deals with the first 48 hours of an investigation. This is an overview into the complex issues that an investigation creates and how critical the first 48 hours are to an investigation once a fraud has been identified or uncovered. |
| • | Chapter 6 deals with roles and responsibilities. Upon consideration of the complex issues in an investigation, it is helpful to determine the roles and responsibilities that different parties involved undertake. |
| • | Critical to any investigation is the collecting and processing of documentation critical to gaining an understanding of the issues involved. |
| • | Chapters 7-8 deal with the complex issues of sources of evidence (chapter 7), the areas of documentation on which the investigation needs to focus, and the elements of electronic evidence (chapter 8) that need to be considered and how to gather that information once this determination has been made. Another key element described in these two chapters is gaining an understanding of the concerns that investigators face when conducting investigations outside of the United States and the complexities that this places on the data collection efforts of the investigation team. |
| • | In addition to the data collection concerns, throughout the duration of the investigation, organizations, investigators, and other key stakeholders need to worry about who is involved and where the investigation is being conducted and the ramifications of those issues to the overall success of the engagement. |
| • | Chapter 9 deals with these cross jurisdictional issues. The globalization of business has increased the extent to which investigations are likely to be impacted by legal requirements from more than one legal jurisdiction. In addition, fraudsters have long known that moving their assets (and themselves) to a different location beyond the reach of the "long arm of the law" is an effective strategy. For ease of reference, we'll call these cross jurisdictional investigations. Differences and variations in laws, governing and regulatory bodies, accounting standards, business practices, governmental policies, litigation forums, and even language can make cross jurisdictional investigations quite complex. |
| • | Once an investigation has started, one of the considerations that is made is determining when or if outside counsel is involved. In chapter 10, we deal with the concepts of working with attorneys on an investigation. The circumstances brought forth in an investigation raise a variety of intertwined business, legal, and financial reporting challenges. An understanding of the underlying facts will be the foundation of decision making regarding the best course of action. Accounting, auditing, and finance skills will be needed to help develop an understanding of the facts and determine the best course of action from a business and financial perspective. At the same time, these circumstances will drive a need for sound legal advice, and oftentimes, outside counsel is retained by an organization to deal with these issues. |
| • | Another reason that makes investigations so difficult and the reason to obtain sound legal advice is that, oftentimes, parallel investigations are occurring on a particular matter. Chapter 11 deals with the complex issues of multiple investigations (for example, this might include multiple government regulators conducting an investigation at the same time). |
| • | Upon completion of an investigation, it is almost as important to determine how to report the results as it is to conduct the investigation and compile the results. Chapter 12 deals with reporting after the investigation has been performed and data have been gathered. The forensic accountants or those assigned within an organization to conduct an investigation have to determine how they want to compile and report the results of their findings. The objective of the written or oral report often is to present the findings and observations to the organization or the opposing party, or both, in a litigation matter. |
| • | Upon completion of the report and presentation of the findings, organizations have oftentimes not considered or are not aware of the investigative protocols or potential recovery options, such as insurance. Chapter 13 deals with the various considerations that organizations should consider in dealing with these recovery options. |
| • | Finally, once an investigation has been completed, board members, chairmen of the audit committee, or c-suite executives within an organization often try and determine what, if anything, the organization can proactively do to mitigate this occurrence or another occurrence of fraud within their organization in the future. Chapter 14 deals with the various elements of an antifraud program and what companies can do to mitigate against fraud and deal with fraud not only reactively but proactively. |
Distinctive Features
| • | A comprehensive look at fraud investigations from the earliest stages all the way to identifying areas for remediation and consideration of measures to prevent or detect fraud in the earliest stages. |
| • | A case study has been included to apply a hypothetical fraud scenario throughout the book to give a practical example to reiterate the concepts illustrated within the book. |
| • | Subject matter expertise for each chapter was identified from within the Fraud Investigation and Dispute Services practice of Ernst & Young, and these individuals were asked to construct their respective chapters based on their extensive experience conducting investigations across various industries and countries around the world. |
| • | The book is being published by the AICPA. Their collective knowledge on how best to construct and create a book and introduce it into the marketplace has taken a tremendous amount of information generated by Ernst & Young and polished it into a user friendly format that has not been created before, which is truly one of a kind thought leadership. |
| • | A key word list has been created to add clarity to the various terms and ideas discussed throughout this book. This list allows the users of this book to vary across different levels of experience in dealing with fraud and allows for a broader distribution of potential users. |
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