Fraud Investigation

Analysis and Expert Witness Testimony For:

  • Cash Diversion
  • Accounts Receivable Lapping
  • Inventory Thefts
  • Accounts Payable Vendor Frauds
  • Payroll/ Phantom Employees, Overpayments, Payroll Tax Embezzlement
  • Contract Fraud

What Is Fraud?  Black's Law Dictionary defines fraud as:

A generic term, embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trickery, cunning, dissembling, and any unfair way by which another is cheated.

Elements of Fraud - All of the following elements are necessary for an activity to be considered fraud:

  1. A false representation or willful omission was made regarding a material fact.
  2. The perpetrator knew that the representation was false or the omission was made and intended to mislead.
  3. The victim relied on the misrepresentation.
  4. The victim suffered damages, usually monetary, as a result of the misrepresentation.

The Fraud Triangle -Research focusing on fraud has been performed in the fields of criminology, psychology, accounting, auditing, and management. The research has identified three key factors that determine whether a person will commit fraud. The three factors, which comprise the fraud triangle, are Pressures to Commit Fraud facing the person, perceived Opportunities to Commit Fraud, and the person's Rationalization, or Integrity.

Pressures to Commit Fraud. Pressures that may motivate a person to commit fraud may be financial in nature, relate to a personal habit, or stem from work-related feelings. Financial pressures include factors such as debt arising from high medical bills, overuse of credit cards, divorce, investment losses, or sheer greed. Personal habits such as alcohol, drug, or gambling addiction or an expensive extramarital affair, may result in financial pressures to commit fraud in order to obtain funds to support the habit or pay debts resulting from it. Work-related factors include feelings of resentment because of being overworked, underpaid, or not promoted, that may prompt a person to get even with the employer by committing fraud against the employer. Family or peer-group expectations also may motivate a person to commit fraud.

Opportunities to Commit Fraud. Opportunities to commit fraud can arise when an employee or manager reaches a level of trust in an organization or when internal controls are weak or nonexistent. Then, the employee or manager will perceive that there is an opportunity to commit fraud, conceal it, and avoid detection and punishment. While opportunities to commit fraud in an organization may appear limitless, for any one employee, fraud opportunities are limited to the means available. For example, a shipping dock worker might have the opportunity to steal inventory but probably would not have the opportunity to manipulate accounts receivable to steal cash receipts.

Examples of conditions that can provide an opportunity for employee fraud in an organization include the following:

  • Inadequate segregation of duties.
  • Failure to inform employees about company rules and about the consequences of violating them or perpetrating fraud.
  • Rapid turnover of employees.
  • Constantly operating under crisis conditions.
  • Absence of mandatory vacations.
  • Failure to uniformly and consistently enforce standards and policies or to punish perpetrators.

Rationalization and Integrity. Personal integrity may be the most important factor in keeping a person from misappropriating assets or committing management fraud. There are many cases in which individuals with severe financial or personal pressures and the opportunity to misappropriate assets do not do so because of strong personal moral codes. In a recent survey, auditors ranked attitude factors (such as management honesty) as more important than situational factors as indicators of the possibility of management fraud. Some investigators believe a strong moral code can prevent individuals from using rationalizations to justify illicit behavior. Some typical rationalizations for misappropriation of assets include:

  • I am only borrowing the money and will pay it back.
  • Nobody will get hurt.
  • The organization treats me unfairly and owes me.*

*) PPC’s Guide to Litigation Services, Twelfth Edition, Sept. 2007, Thomson Tax & Accounting, Fort Worth, TX, Vo. 2, Chapter 8.