EXAM 3 Flashcards
Ch 9 - Evidence-Based Fraud Examinations
The Fraud Triangle and the Courts
The Fraud Triangle and the Courts
As John Gill noted, the antifraud professional needs to
“st___ to the f___s when you t____y,” which are provided by the t____e of fr___ a___.
“stick to the facts when you testify,” which are provided by the triangle of fraud action.
The Fraud Triangle and the Courts
From this structure the professional can identify evidence that supports 1) hy_____s (a.k.a. f____ th___s) and answer the important questions of 2) “w__, w___, w___, w___, and h__” (w__ had a___s, h__ was it co___d and c___d, w___ did the m__y go, etc.).
This approach 3) d__ n__ require that the professional answer the question of 4) “w__” that are associated with 5) p____e and ra____n
1) hypotheses (a.k.a. fraud theories) 2) “who, what, when, where, and how” (who had access, how was it committed and concealed, where did the money go, etc.)
3) does not
4) “why”
5) pressure and rationalization
The Fraud Triangle and the Courts
The primary lesson: 1) ___e that your w___ is g____d in the evidence. This means that reported 1.1( fi____s are supported by f___, d___, or in____n that you in___ v____y to the e___t possible.
This approach ensures 2) r____t, re__e c___ns that can be presented with a re__e degree of scientific certainty.
Without the 3) p___r c___ls and e___e (e.g., psychologist), professionals should 4) a___ co___g on m____s associated with the perpetrators 5) p____e or r____n.
1) Ensure that your work is grounded in the evidence
1.1) findings are supported by facts, data, or information that you independently verify to the extent possible
2) relevant, reliable conclusions
3) proper credentials and experience
4) avoid commenting on motives
5) pressure or rationalization.
Module 1—Fraud Examinations: Who, What, Where, When, How,
and Why: Evidence-Based Examinations
Evidence-Based Examinations
To complete an examination, the fraud examiner or forensic accountant needs to answer the essential questions of 1) w__, w__, w___, w___, h___, and w___—with ev____e.
1) who, what, where, when, how, and why—with evidence.
Evidence-Based Examinations
In addition, the answers need to be woven into a 1) co___t s___y.
2) C___l t___g and a____l r___g suggest that the fraud examiner or forensic accountant will have to make some 3) in___al co___ns to pull the various pieces of evidence and the answers to those questions into a compelling case
1) coherent story
2) Critical thinking and analytical reasoning
3) intellectual connections
Evidence-Based Examinations
However, evidence-based decision making suggests that examiners need to 1) g___d their st___e in the evidence.
A 2) st___e gr___d in the evidence is much more convincing to 3) pr___s, at___s, j___s, and j__s.
1) ground their storyline
2) storyline grounded
3) prosecutors, attorneys, judges, and juries.
The Hypothesis-Evidence Matrix
In_____e e___e is a f___t of li__ and an o__-g___ ch__e to examiners.
Incomplete evidence is a fact of life and an on-going challenge to examiners.
The Hypothesis-Evidence Matrix
How does the fraud examiner deal with situations where the evidence is less than perfect?
The answer is that fraud and forensic professionals always face the prospect of less-than-perfect evidence, and they address 1) p___l ev____y sh___gs or h___s in the 1.1) st____e through their c____on of the al____e h____es (al___e fr__ th__s).
In Chapter 1, this approach is referred to as the analysis of competing hypotheses and the specific tool is the 2) Hy___s-Ev__e M__x.
1) potential evidentiary shortcomings or holes
1.1) storyline through their consideration of the alternative hypotheses (alternative fraud theories)
2) Hypothesis-Evidence Matrix.
The Hypothesis-Evidence Matrix
Professionals in this field need to understand that 1) n__ o__ is b__r at generating 2) al___ve t___es of the case than opposing 3) at____s.
1) no one is better
2) alternative theories
3) attorneys.
Define Predication
the totality of 1) ci___ces that would lead a reasonable, 2) pr___y trained, and pr__t in____al to believe that a fraud has 3) o__d, is oc___g, or is a___t to o___r
1) circumstances
2) professionally trained, and prudent individual
3) occurred, is occurring, or is about to occur
Predication
Essentially, predication is the 1) st____g p___t for a f___al fr__d ex___on.
And predication is needed 2) p__r to investigation
1) starting point for a formal fraud examination
2) prior
Predication
S____n in the a___e of any corroborating circumstantial e___e is n__ a su___nt b__s for conducting a fr___ ex___on
Suspicion in the absence of any corroborating circumstantial evidence is not a sufficient basis for conducting a fraud examination
Predication
Typically, a few 1) r__ fl__s are n__ in themselves su___t as a b___s for a fraud examination. Especially when dealing with 2) fi___l st__nt fraud, where a 3) m___ty threshold is required, red flags require additional 4) a__t w__k.
A major obstacle is that many red flags have 5) r__le e__ns and d__ n___ result in the dis___y of a___t mis____n, cor___n, or at__ed fraudulent financial reporting.
1) red flags are not in themselves sufficient as a basis
2) financial statement
3) materiality
4) audit work
5) reasonable explanations and do not result in the discovery of asset misappropriation, corruption, or attempted
The Fraud Triangle: Opportunity, Perceived Pressure, and
Rationalization
The Fraud Triangle: Opportunity, Perceived Pressure, and
Rationalization
The profile of the typical fraudster is basically that of the 1) av___e c___n.
Notwithstanding predatory fraudsters, most are not habitual criminals, and very few have any criminal history.
1) average citizen.
The Fraud Triangle: Opportunity, Perceived Pressure, and
Rationalization
Further, common fraud perpetrators often are well-educated and respected members of their community, regularly attend community events, are often married, and have children.
Thus, the critical question remains: what causes good people to turn bad
The Fraud Triangle: Opportunity, Perceived Pressure, and
Rationalization
Three characteristics are needed to enable fraud: (The Fraud Triangle)
o O____ity
o Pe____ p___e
o Ra____n
o Opportunity
o Perceived pressure
o Rationalization
The Fraud Triangle: Opportunity, Perceived Pressure, and Rationalization
Types of Evidence
* Evidence of fi____l pr____s
- Evidence of v__s or si__r pr__ms
- Evidence of or___nal
pr___e to a___ve fi___al go__s - Evidence of the ch___e of getting __y with the f__d
- Evidence of ex___e e__
- Evidence of fa__y or p__r pr___e
- Evidence of financial pressures
- Evidence of vices or similar problems
- Evidence of organizational
pressure to achieve financial goals - Evidence of the challenge of getting away with the fraud
- Evidence of excessive ego
- Evidence of family or peer pressure
Evidence of financial pressures
-li___g b___d one’s m___
-g___d su___al d___t
-a p___r cr___t r___g
-living beyond one’s means
-greed substantial debt
-a poor credit rating
Evidence of vices or similar problems
-ga___g
-dr___s
-a___ry
-gambling
-drugs
-adultery
Evidence of organizational pressure to achieve financial goals
-bu___t pr___re
-b___s op____ties
-ma___g st___k pr__e
-budget pressure
-bonus opportunities
-maintaining stock price
The Fraud Triangle
It is important to understand that because 1) pr___e is fu___lly a factor un___e to the in___l, only 2) in___ct ev____ce can be gathered, and even that evidence is g___ly ci___ial.
1) pressure is fundamentally a factor unique to the individual
2) indirect evidence can be gathered, and even that evidence is generally circumstantial.
The Fraud Triangle
Because most fraudsters have 1) n__ cr___al hi___y and d__ n__t think of the___es as cr___ls, fraud perpetrators typically have to develop some 2) ra___on for their action
1) no criminal history and do not think of themselves as criminals
2) rationalization
The Fraud Triangle
Rationalization is a 1) ma___d, somewhat ar___y ju___on for otherwise un___al or i___l be__r
1) manufactured, somewhat arbitrary justification for otherwise unethical or illegal behavior
M.I.C.E
Another approach to capturing the motivation of the typical fraudster is encapsulated in the acronym M.I.C.E.
M___
I___
C___
E__/En___t
Money
Ideology
Coercion
Ego/entitlement
M.I.C.E
Money and ego are 1) s___-ex___y and are the two 2) m__ co___y ob___d m___s.
The roots of most fraud are 3) g__ (m__) and p___ (e__).
1) self-explanatory
2) most commonly observed motivations
3) greed (money) and power (ego)
M.I.C.E
1) I____ is often an 2) o___d ch____ic associated with t__r e__on schemes
1) Ideology
2) observed characteristic associated with taxpayer evasion schemes
The Problem of Intent: Examinations Centered on the Elements of Fraud
The Problem of Intent: Examinations Centered on the Elements of Fraud
The fraud triangle provides the necessary conditions for fraud to occur.
However, the examiner has to provide evidence of 1) i__t.
Intent, like all aspects of the examination, must be 2) gr___d in the ev___e.
1) intent
2) grounded in the evidence.
The Problem of Intent: Examinations Centered on the Elements of Fraud
The difference between a mistake and a fraud is 1) i___t.
If the fraud examiner or forensic accountant cannot prove intent, a civil or criminal conviction for fraud most likely cannot be sustained.
1) intent.
The Problem of Intent: Examinations Centered on the Elements of Fraud
An important element of intent can be inferred from 1) re___ve si__r a__s.
1) repetitive similar acts.
The Problem of Intent: Examinations Centered on the Elements of Fraud
More importantly, once the fraud examiner or forensic accountant has evidence that the alleged perpetrator
(1) c___d the a__
(2) b___d from that a__ (co___n)
(3) c____d his or her a___es
it becomes difficult for the alleged perpetrator to make the case that he or she did not intend to do something that would cause harm or injury
(1) committed the act
(2) benefited from that act (conversion)
(3) concealed his or her activities
The Problem of Intent: Examinations Centered on the Elements of Fraud
Related to 1) co___n, there is a debate in the profession about whether 2) tr___g m___y to a perpetrator’s b___k ac___t is suf___t ev___ce of co____n, or whether the fraud examiner or forensic accountant needs to show how the 3) i___-be___en mo__ was used.
1) conversion
2) tracing money to a perpetrator’s bank account is sufficient evidence of conversion
3) ill-begotten money was used.
The Complete Story
To be successful, the investigator must be able to 1) ex__n to prosecutors, attorneys, juries, judges, and other actors in the investigative process, 2) the ou__ of the in___n: w__, w__, w__, w__, and h__—a co___e s__y
1) explain
2) the outcome of the investigation: who, what, when, where, and how—a complete story
The Complete Story
Although fraud examination and forensic accounting use evidence-based 1) de___n ma__g, cr__l th___g sk___ls and ca___l analysis are essential to un___g what the nu__s mean
1) decision making, critical thinking skills and careful analysis are essential to understanding what the numbers mean
Module 2—Evidence
Evidence
Without ev___e, there is no p__, and neither cr___l co__ns nor ci__ ve__s are possible.
Without evidence, there is no proof, and neither criminal convictions nor civil verdicts are possible.
Define Evidence
Working definition:
Anything ___y ad___d at t___l that is re__t to the ca__.
Anything legally admitted at trial that is relevant to the case.
Evidence
The rules of evidence have been developed and refined over hundreds of years and are captured in the 1) Fe__l R__s of E___e, as well as by the S___s (where l__ generally m__ l those at the f__l l__l).
These intricate rules have the objective of ensuring that only 2) re___t and pr___ve ev___ce is admitted in co___
1) Federal Rules of Evidence, as well as by the States (where laws generally model those at the federal level)
2) relevant and probative evidence is admitted in court
What are the 3 types of evidence?
o T__ny
o R__
o De___ve
o Testimony
o Real
o Demonstrative
Evidence
Federal Rules of Evidence
Perhaps even more important, the rules of evidence seek to ensure that 1) i___t, u___le, and pr___ial ev__e is ex__d from the courtroom.
The objective is to handle court cases
(1) f__y
(2) ex___y
1) irrelevant, unreliable, and prejudicial evidence is excluded from the courtroom
(1) fairly
(2) expeditiously
Evidence
- Evidence must be 1) r__nt, ma__l, and c__nt
- To be admitted at trial, evidence must be 2) au___ed
- Once authenticated, evidence must be 3) u__d
1) relevant, material, and competent
2) authenticated
3) unaltered
Evidence
To maintain the integrity of evidence, it should generally be
- U___d from its o___al co___n.
- Logged for a c___n of ev___e or similar records to demonstrate ch__ of c__y.
- Stored in l___d c___s, preferably f____f.
- Secured with u__ed a__s p___d, in the case of el___nic files.
- B___d-u__ c___s, ele___c and h__d-copy, should be maintained in a s__e lo___n.
- In___d, so that it can be lo__d when n___y.
- Unaltered from its original condition.
- Logged for a chain of evidence or similar records to demonstrate chain of custody.
- Stored in locked cabinets, preferably fireproof.
- Secured with unauthorized access prevented, in the case of electronic files.
- Backed-up copies, electronic and hard-copy, should be maintained in a separate location.
- Inventoried, so that it can be located when necessary.
Fraudster’s Perspective
- White collar crime is around in both g___ and b___ ec___c times
- In good economic times, white collar crimes are ea__ to ex___e and co__l
- White collar crime is around in both good and bad economic times
- In good economic times, white collar crimes are easier to execute and
conceal
Fraudster’s Perspective
- In bad economic times, white collar crimes become un_____le
- A bad economy brings white collar crimes to the s___e
- In bad economic times, white collar crimes become unsustainable
- A bad economy brings white collar crimes to the surface
Evaluating the Quality of Evidence: Relevance, Reliability, and
Validity
Define Relevance
means that the i___on will make a dif___ce to a de___n m__
means that the information will make a difference to a decision maker
Evaluating the Quality of Evidence: Relevance, Reliability, and
Validity
Define Reliability
refers to the so___e pr__ng the in___n
refers to the source providing the information
Measures of Reliability
- Reliable: Source’s reliability is un____d
- Usually reliable: The m___y of p__t in___n has p___n to be re___
- Unreliable: Source’s re__ has been s___ic
- Unknown: Reliability of source u___
What are each of their ratings?
- Reliable: Source’s reliability is unquestioned (Rank A)
- Usually reliable: The majority of past information has proven to be reliable
(Rank B) - Unreliable: Source’s reliability has been sporadic
(Rank C) - Unknown: Reliability of source unknown
D
Interviews in Cases of Suspected Fraud or Corrupt
- Interview in order of least c__le to most c__e
o First, interview t___d p__y wi__s
o Next, interview co___ative w___s
o If further investigation is warranted, interview
suspected c__-co___s in al___d of___
- Interview in order of least culpable to most culpable
o First, interview third party witnesses
o Next, interview corroborative witnesses
o If further investigation is warranted, interview
suspected co-conspirators in alleged offense
