Principles of Fraud Examination · Two cardinal sins of report writing: vagueness and wordiness...

© 2017 Association of Certified Fraud Examiners, Inc.

Principles of Fraud

Examination

Signed Statements/Report Writing

© 2017 Association of Certified Fraud Examiners, Inc. 2 of 27

Practical Problem

▪ After a grueling seven-hour interview, your

suspect, Mike Floyd, finally breaks and

confesses to stealing $50,000 (in his

estimation).

▪ However, the experience seems to have

been too much for him. He begins

confessing all sorts of things.

▪ Read the rest of the scenario in your

workbook and consider the following

questions.


Practical Problem

Questions:

1. How do you commit Floyd’s statements to

writing?

2. Do you include the exact amount he says he

has taken? Why or why not?

3. In his signed statement, should you include

the information about his drinking problem

and gambling debts? Why or why not?


Practical Problem

4. Do you include the information about his

cheating on his wife and cheating on his

taxes in his signed statement? Why or why

not?

5. How should you address these items in the

written report?

6. Since Floyd confessed, is it appropriate to

state in your report that he is guilty of fraud?

Why or why not?


Signed Statements

▪ Voluntariness of confession

▪ Intent

Instead of: Use:

Lie Knew as untrue

Steal/embezzle Wrongfully took

FraudKnowingly told an untrue statement

that was relied upon


Signed Statements

▪ Approximate date(s) of offense

▪ Approximate amounts of losses

▪ Approximate number of instances

▪ Should list statement is voluntary

▪ Willingness to cooperate

▪ Excuse clause

▪ Confessor reads the statement

▪ Truthfulness of statement


Key Points in Signed Statements

▪ There is no legal requirement that a

statement be in the handwriting or wording of

declarant.

▪ The statement’s wording should be precise.

▪ Declarants should read and sign the

statement without undue delay.


Key Points in Signed Statements

▪ Don’t ask the confessor to sign, but show

them where to sign.

▪ Have two witnesses if possible.

▪ Have no more than one written statement for

each offense.

▪ Preserve pertinent notes.


Creating the Report

▪ A good report:

• Conveys evidence

• Adds credibility

• Accomplishes

objectives of case


Readers of Reports

▪ First rule of report

writing: Assume the

report will be read by

anyone and everyone.


Readers of Reports

▪ Company insiders

(managers,

executives)

▪ Attorneys

▪ Defendants,

witnesses

▪ Press

▪ Juries


Planning the Report

▪ Report should stand on

its own

▪ Should adequately

answer the questions

who, what, why, where,

when, and how


Planning the Report

▪ Review all documents and evidence.

• Take notes of items to include in report.

▪ Create a timeline.

▪ Create a list of relevant individuals and their

roles.


Outlining the Report

▪ Can be an invaluable

step

▪ Consider using

standard report format

I. Background

II. Executive summary

III. Scope

IV. Approach

V. Findings

VI. Summary

VII. Impact

VIII. Recommendations


Suggested Standard Format

▪ Background

▪ Executive summary

▪ Scope

▪ Approach

▪ Findings

▪ Summary

▪ Impact

▪ Recommendations (optional)


Background

EXAMPLE

On January 28, 20X4, the fraud examination unit at Bailey

Books, Inc. received an anonymous telephone call on its

fraud hotline from an unidentified man who claimed that he

was a former supplier to Bailey. The caller alleged certain

improprieties in the bidding and procurement process.

Based upon this initial predication, a fraud examination was

conducted, which included reviews of relevant records and

interviews of appropriate personnel.


Executive Summary

EXAMPLE

The fraud examination commenced when Loren D. Bridges, CFE, received a call

from an unidentified man who said that he had been a long-term supplier to Bailey

for office supplies and paper. The caller said that ever since Linda Reed Collins

had taken over as purchasing manager, he had been gradually “squeezed out”

from doing business with Bailey.

Linda Reed Collins has been employed in the purchasing department of Bailey

Books for six years. She was promoted to purchasing manager effective November

8, 20X1.

The fraud examination team reviewed selected purchases from 20X1 to 20X3 and

conducted interviews of key participants and Bailey employees who we believed

might have information regarding the misappropriation of assets. The team

reviewed purchasing guidelines, personnel files of interviewees, and various

financial documents relating to both Bailey Books and Linda Reed Collins.

After obtaining sufficient documentation, the team interviewed Linda Reed Collins,

who gave a full signed confession of her misdeeds.


Scope

EXAMPLE

The objective of the fraud examination team was to:

▪ Determine the existence of a possible misappropriation

of the assets of Bailey Books, Inc.

The examination is predicated upon an anonymous

telephone call alleging improprieties on the part of Linda

Reed Collins, Bailey’s purchasing manager.


Approach

EXAMPLE

Fraud examination team members

▪ Loren D. Bridges, CFE, Bailey Books

▪ Tonya Vincent, CFE, Bailey Books

Procedures

As part of the examination of this matter, the team took the

following actions…

Individuals interviewed

The following individuals were interviewed in person by

members of the fraud examination team…


Findings

EXAMPLE

Based on the documents reviewed, information collected, and

interviews conducted during the course of the fraud examination,

the team’s findings are as follows:

The documents and information reviewed and interviews conducted

by the fraud examination team during the course of the examination

indicate that Linda Reed Collins, together with James R. Nagel, did

knowingly embezzle approximately $197,773 from Bailey Books

over four years. During the fraud examination, the team used

financial documents and interviews to corroborate the statements of

an anonymous caller. The following is a summary of the evidence

and information supporting the fraud examination team’s findings …


Summary

EXAMPLE

This report reflects that Linda Reed Collins, a purchasing

agent for Bailey Books, Inc., furnished a signed statement

on May 1, 20X4, indicating she had accepted at least

$197,773 in commercial bribes and other illicit income in a

conspiracy with James R. Nagel, an account representative

for Orion Corporation, St. Augustine, Florida.

The statements made by Collins are corroborated by the

documentary evidence and the interviews of other

witnesses as described herein.


Impact

EXAMPLE

Over the course of four years, Linda Reed Collins, in

partnership with James R. Nagel, misappropriated an

estimated $197,773 from Bailey Books, Inc.

Additional amounts were lost due to Bailey’s overpaying for

merchandise sold to it by Mr. Nagel. Those amounts have

not been calculated.


Recommendations

EXAMPLE

It is the policy of Bailey Books to report such matters to

the appropriate authorities and to assist in criminal

prosecution. A full review of internal controls should be

conducted to determine how such incidents can be

detected in the future.


Visual Aids

▪ Can make the report

more effective

• Especially if text is

complex or number-heavy


Charts and Graphs


Flowcharts


Scatter Charts


Geospatial Maps


Tables

Narrative

Year 1, the account had

a beginning balance of $8,500,

withdrawals of $7,000, deposits

of $5,000, and an ending

balance of $6,500. Year 2 began

with a balance of $6,500, and

had similar withdrawals as the

prior year ($7,250). However,

deposits in the second year

totaled $18,500, and the balance

at the end of that year was

$17,750.

Table

Year 1 Year 2

Beginning Balance $8,500 $6,500

Withdrawals (7,000) (7,250)

Deposits + 5,000 + 18,500

Ending Balance $6,500 $17,750


Link Network Diagrams


Link Analysis Map


Common Mistakes

▪ No opinions of any kind should be included

in the written report.

▪ Specifically, opinions on guilt or innocence

should not be included.

▪ Keep a copy of all documents.

▪ Safeguard documents.

▪ No mention of opinion on signs of deception.


Discovery of Investigative Reports

▪ There is no privilege per se for investigative

reports.

▪ Discovery can be minimized when the report

is prepared at the direction of an attorney so

that a claim can be made that the work done

was in anticipation of litigation and is

protected by the attorney-client and work-

product privileges.





Style Pointers

▪ Two cardinal sins of report writing:

vagueness and wordiness

▪ Common breaches that result in these sins:

• Improperly placed or ambiguous modifiers

• Use of technical jargon, slang, and colloquialisms

• Use of unnecessary, high-flown verbiage


Style Pointers

▪ Keep sentences under an average of 18 words

(15 in an email).

▪ Limit paragraphs to two or three sentences, no

more than seven typed lines.

▪ Avoid presenting more than seven bullet items

to the reader at any one time (preferably fewer

than seven).

▪ Avoid friendly language when conversing with

retaining counsel in writing.


Developing a Good Report-Writing Style

▪ Do not underline text.

▪ Do not bold more than a few words per page.

▪ Be comfortable beginning sentences with and,

but, although, because, or I.


Use Paragraphs to Guide the Reader

▪ First sentence should introduce the subject of

the paragraph.

▪ Start a new paragraph to move to a new topic.

▪ Each paragraph should stand alone, but should

support what came before it and what comes

next.


Avoid Pointless Repetition

Before

I reviewed the list of checks that the controller

provided me. The list contained all of the checks

written to Romo Supply. The list had all of the

checks written during the last 24 months. Even a

cursory review of the list revealed that there were

numerous times when checks for the same

amount had been issued only weeks apart. Based

on this list, I asked for a list of the invoices

received from Romo Supply.


Avoid Pointless Repetition

After

The controller provided me with a list of all checks

written to Romo Supply within the last 24 months.

I noticed that there were several instances where

two checks for the same amount had been written

just weeks apart. I next asked the controller to

provide me copies of all the invoices received

from Romo Supply.


Be Clear

▪ Avoid vague and

confusing language:

• He is of average height.

• She is a moderate

smoker.

• He won by a huge

majority.

• The company had

considerably fewer thefts

this year.


Define Technical Terms and Jargon

▪ Weak:

• The financial statement ratio analysis revealed that

the current ratio was fairly steady at around 2.5

between 1995 and 2004, with a slight downturn in

1999.

▪ Better:

• The financial statement ratio analysis revealed that

the current ratio (current assets/current liabilities)

was fairly steady at around 2.5 between 1995 and

2004, with a slight downturn in 1999.


Explain the Meaning of Abbreviations

▪ Weak:

• The purchase of VSI insurance where the customer

fails to provide insurance under their contract is a

subsequent occurrence.

▪ Better:

• The purchase of VSI insurance (vendor’s single-

interest insurance) where the customer fails to

provide insurance under their contract is a

subsequent occurrence.

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Principles of Fraud Examination · Two cardinal sins of report writing: vagueness and wordiness...

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