center23002457459410012100center818008745855Manav [email protected] MalhotraManav1.malhotra@in.ey.comcenter7000074841109410010000center300003207385Principles of Fraud Examination 9410036300Principles of Fraud Examination 213360838209410012100IntroductionFraud is a very steep problem at a global level these days.
Fraud is typically considered as a white collar crime and the process of examination involves investigation and analysis of complicated financial records. Fraud examination “”refers to a process of resolving allegations of fraud from inception to disposition, and it is the primary function of the anti-fraud professional”. Fraud examinations are focused on determining whether the fraud has occurred and, if so, then to gather evidence of the crime.Fraud examination is non-recurring and scope specific. It might be required by law.
An obligation to investigate can arise from statutes, regulations, contracts, or common law duties. Fraud examination became the need of the hour in the USA afterward the mishap of 9/11. Fraud examiners were then recognized by FBI to help them in combating the frauds. For instance, an establishment’s directors and officers owe a common duty of care to their association and shareholders, and therefore, when qualms of fraud arise, it might be essential for them to conduct an examination to confirm that they have complete knowledge of such issues affecting the company.It is a practical orientation as to how to prevent, detect and investigate fraud within a business. It can be used to classify the different types of fraud as well as to construct an environment in which fraud is minimized. However, dealing with complex issues of fraud, regulatory compliances and business disputes can diminish an organization in its efforts to prosper.Categorization of Fraud ExaminationFraud is hidden: Unlike other offenses, part of the method of fraud is to conceal its existence.
Like hiding data which is suspicious. Reverse proof: When an examiner is to prove that fraud has been occurred, the proof must include attempts to prove that the fraud is not occurred. The existence of fraud: In resolving fraud issues, the examiner must postulate a theory of guilt or innocence in order to attempt to prove his theory. 2286001949459410012100Fraud Tree:Occupational Frauds are caused by members of an organization such as an employee, manager or even an owner of such an organization that might cause severe damage to the organization. Majorly, occupational frauds can be categorized as under:-403860176530002286001949459410012100Fraud Examination – Objective:Fraud examination can be defined as the procedure of determining allegations of fraud from inception to disposition. Fraud examination is used for much more than just reckoning out who committed the crime of fraud, but more specifically, fraud examination involves procurement of pieces of evidence and captivating statements, writing reports, testifying to findings, and assisting in the detection and prevention of fraud.
In specific, fraud examination can address a number of organizational objectives such as, classifying improper conduct, classifying the personnel responsible for fraudulent conduct, preventing the fraud occurrence, spreading the message throughout the organization that fraud will not be tolerated, determining the amount of potential accountabilities or losses that might exist, serving to facilitate the recovery of losses, discontinuing future losses, modifying other potential consequences and consolidation of internal control weaknesses. Steps in Fraud Investigation1729740229870Identity Type of Fraud00Identity Type of Fraud2484120344170001729740134620Create an Investigation PlanPlan00Create an Investigation PlanPlan248412022606000172974016510Interview or Re-Interview Victim00Interview or Re-Interview Victim2484120147320001729740270510Securing Evidence00Securing Evidence2286001981209410012100Fraud Examination can be divided into three basic aspects:Fraud Detection: The term “Fraud Detection” is normally perceived in Banking ; Financial Sectors, insurance, government agencies and several other Law Enforcement bodies. The important aspect of the fraud detection is to protect the clients and enterprises information, their assets, accounts, and transactions, via a real-time examination of actions by the users and other defined entities. It includes connecting all the data points in order to ascertain the potential fraudulent behaviour. Fraud Investigation: A fraud investigation helps to come to a conclusion whether a fraud has taken place or not and also gathers the evidence in order to protect the victims involved.
Fraud investigations involve the occurrence of a fraud which basically involves an intention to deceive the other party. Fraud Investigation also benefits the companies’ as to how to manage the risk, measure the financial inferences of the disputes and investigate alleged misconduct. Fraud Prevention: Fraud Prevention is a process which doesn’t have a starting or the ending point. Rather, it is an ongoing cycle which involves different stages such as monitoring, detection, decisions, case management and learning. In order to prevent an array of fraud attacks, an organization must follow three key steps, they are as follows:Capture and unify all available data types across the channels and incorporate them into an analytical process. Continually monitor transactions and apply behavioural analytics to enable real-time decision making.
Employ layered security techniques. Fraud comes in many forms but primarily takes three form like Asset misappropriation, corruption, and financial statement fraud. In order to be safe, the organizations, whether large or small should have a plan in place. Knowing your employees, making employees aware, Implementing Internal Controls, etc. be some of the ways in which a company may be able to keep a check on different kinds of frauds. 2286002286009410012100Fraud Examination Methodology: Evaluation of the accessible data: Evaluation procedures involves inspecting, cleaning, modifying, and presenting the data with the motive of discovering useful information, apprising conclusions, and supporting the decision-making while also keeping in mind the possibility of fraud resulting from the anonymous allegations. Generating a hypothesis: The hypothesis is unvaryingly a “worst-case” scenario which is based on the allegation, and what is the worst possible outcome? Fraud examiners create hypotheses for any specific allegation (e.g.
, a bribery or kickback scheme, embezzlement, clash of interest, or financial statement fraud). When the hypotheses is complete, fraud examiners recognize that each and every specific scheme has its own unique characteristics that constitute the badges or “red flags” of fraud.Testing the hypothesis: Testing a hypothesis involves building a “what-if” scenario. In the hypothesis testing, an analyst firstly examines the statistical sample, with the goal of accepting or rejecting a null hypothesis.
If it isn’t true, the analyst formulates a new hypothesis to be tested, repeating the process until data reveals a true hypothesis.Refining and amending the hypothesis: After the testing is done by the examiner, then comes to the step of Refining and amending the hypothesis. If during the testing phase, the fraud examiner discovers that all facts do not fit a particular scenario then the hypothesis is again reviewed and retested.
Various types of organizational frauds like:Cash Larceny which is an occupational Fraud which involves the theft of money that has been already appeared in the company’s ledger. Skimming fraud which is known as off-book frauds, meaning thereby, the removal of cash before recorded in the company’s account.2209802514609410012100Case Studies:Like the famous Enron company case, as being one of the companies which fell down too fast due to mismanagement, conflict of interest, lack of fundamental ethical values and accounting fraud.Satyam Computer Services was the biggest accounting fraud case which gained recognition to the forensic accounting as the profession. In this we can again acknowledge that company’s ethics were compromised and fraud occurred. So we need to have a check internally and externally as well from time to time in order to secure the company from occurrence any possibility of fraud.
Nirav Modi and Kingfisher cases both can be classified into financial fraud categories as in the Nirav Modi case forensic financial analysis was conducted of the books and records of the mortgagors, merchant chronicles, bank chronicles, and all other relevant information of other entities constant with the investigation, and trace the movement of monies gained under the suspected fraud circumstances against the PNB to the debtors, and connected entities and individuals. While in the Kingfisher’s case was a serious financial fraud investigation was done as Kingfisher fraudulently induced banks to convert part of debt into preference shares by deceptive projects. Further even all the corporate ethics were compromised. Conclusion:Persons who indulge in committing fraud do not discriminate.
It can ensue in large or small companies in several industries and geographic locations. Professional fraud can result in an enormous financial loss, legal costs, and ruined reputations that can eventually lead to the downfall of an organization. Having the proper plans in place can meaningfully reduce fraudulent activities from occurring or cut losses if a fraud already occurred. Making the company policy known to employees is one of the best ways to deter fraudulent behaviour.
