Fraud Auditing, Detection, and Prevention Blog

First, trivia questions and answers from last month’s blog:

What was the original name for the FBI?

Answer: B.O.I. Bureau of Investigation

What professions did J. Edgar Hoover like to hire for FBI agents?

Answer: Lawyers, reporters, and accountants

At the risk of repeating myself again, in last month’s blog I wrote: “Before you start reading, let me warn you! The report format I am suggesting is very different than a traditional audit report.” Well, a fraud audit finding is also very different. Before I start, let’s look at the format of an audit finding according to the IIA or the Yellow Book.

• Criteria (what should be)
• Condition (the current state)
• Cause (the reason for the difference)
• Consequence (effect)
• Corrective action plans/recommendations.
  
  

The objective of the audit finding is to improve internal controls. So, what is the objective of a fraud audit finding?

The objective of the fraud audit finding is to assist your attorney in evaluating the legal merits of your fraud audit findings. There is an old saying in the writing profession, “know your audience! With that said, avoid using legal terms or legal jargon in expressing your findings.

Elements of a Fraud Risk Statement

The starting point is the fraud risk statement. By using the five elements of a fraud risk statement you will provide the attorney with the required minimum information to formulate a legal opinion on the merits of your finding.

Person committing: Identify the person that you believe is committing the fraud risk statement. I would suggest that you use the title of the person committing the fraud risk statement rather than a person’s name. Then describe why you believe the person is linked to the entity and the fraud action.

Type of entity: Is the entity real or false, is the entity complicit or not complicit? Is the entity a vendor, customer, or employee? You should provide sufficient information to clearly communicate the type of entity. Then, list the facts that support your finding.

Fraud action statement: First describe what act was committed. Then describe how the person committed the fraud action statement.

Fraud conversion statement: Describe how the person obtained the monetary funds.

Fraud impact: Indicate the extent of the monetary losses. Then provide an exhibit listing the actual transactions that comprise the monetary losses.

Considerations in Writing the Fraud Audit Finding

It is important for you as the auditor to express your opinion and the facts that support your opinion. In offering your opinion, you will need to find words that express your degree of certainty.

I suggest that you start each fraud element with the phrase “there is (is not) credible evidence” then insert the relevant part of the fraud risk statement. Remember, we are not offering an opinion of guilt or innocence, but rather a statement of what occurred and the facts that support our opinion.

As a matter of style, we provide a separate opinion for each element of the fraud risk statement. In this way, legal counsel is better able to assess the weight of evidence that supports each element of your fraud risk statement.

There is credible evidence that the controller was responsible submitting the ABC invoices to the accounts payable function for payment.

 There is credible evidence that the ABC Company is a shell company.

 There is credible evidence that the items listed on the ABC invoice were never provided.

There is credible evidence that the accounts payable function issued company checks in the name of the ABC Company. Each check was endorsed “for deposit only” listing a bank account number at the Richie Rich bank.

 There is credible evidence that the payments totaling $500,000 were provided to the ABC Company.

Illustrations of a Fraud Audit Finding

After each statement, list the facts that support your observation. In writing the facts be concise and accurate with the words that you use. To illustrate:

There is credible evidence that the controller was responsible for submitting the ABC invoices to the accounts payable function for payment.

• All ABC invoices were approved in the name of the controller.
• We compared the handwriting of the approval signature on the ABC invoices to the handwriting of the controller obtained from other source documents not associated with the ABC Company.
• We believe the handwriting on the ABC invoices was comparable to handwriting on other samples from the controller.
• The accounts payable clerk recalls the controller submitting the ABC invoices directly to her and requesting expedited processing for payment.
• The ABC invoices were charged to the controllers’ budgetary general ledger account for consulting services.
• There is credible evidence that the ABC Company is a shell company.
• The address on the ABC invoices matched the address of a UPS store located at 934 Broadway, Any Town, NY.
• The UPS store serves as a mailbox delivery service.
• The address on the checks is 934 Broadway, Any Town, NY.
• The ABC Company was incorporated on July 19, 2020, in the state of NY.
• The NYS secretary state listing does not provide a list of the officers of the company.
• The NYS secretary state registration lists the corporate register as attorney  J. Smith.
• No purchase orders were issued to the ABC Company.
• The controller who approved the ABC invoices was unable to provide a physical location of the ABC Company other than the Broadway address.
• The ABC Company website shows the 934 Broadway Any Town, NY as the address of the company.
• I was unable to find or locate the ABC Company at either 934 Broadway or any other location in Any Town, NY.

Important Writing Tips

In writing your fraud audit finding, I offer the following guidance:

1. Be Accurate. The three elements are accuracy of facts, completeness of facts, and the manner in which the facts are written. First and foremost there should be no errors in the facts. Facts are not arguable. only the interpretation or relatedness of the fact to the opinions. The report should contain all the facts that are relevant to the case whether or not they are supportive of the case. How the fact is stated in the report is just as important as accuracy. Follow the old adage: check and then double-check.
2.  
3. Avoid bias. The method of writing should avoid using words that are biased or imply a bias.
4.  

1. Be objective. The writing style should not be influenced by emotion and personal opinion.
2.  

1. Be timely. Generally, "timely" indicates that a report is issued as quickly as possible. However, nothing is farther from the truth in a fraud audit report. The measure of timeliness should be based on the necessary time to gather all the available facts in a complete and accurate manner.
2.  

1. Provide clarity. Fraud cases tend to be complicated and involve an enormous amount of data and information. The job of the auditor is to summarize the information in an easy-to-read format. This month's trivia questions are associated with the ACFE.
2.  

• What was the original name of the ACFE?
• What was the original name of the ACFE monthly newsletter?
• Is there a designation, Lifetime CFE?
• What is your favorite Fraud Movie?
  
  

As always, a common question is: Do these fraud schemes really occur. So, next month I will provide examples of real-life fraud schemes that have been reported in the media.