The Guide to Investigating Business Fraud

Publisher: AICPA
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Developed by the seasoned fraud investigation team at Ernst & Young in cooperation with the AICPA, The Guide to Investigating Business Fraud provides a clearly defined framework for approaching a fraud investigation from start to finish. Each chapter in this practical, comprehensive resource is written by subject matter experts in the issue under discussion. The chapters are designed so that they may be read individually as self-contained reference guides for specific topics of interest, or together as a holistic overview of a fraud investigation.

Through this guide, you will be able to examine the principles and techniques that lead experts through a fraud investigation and answer the following questions:

  • How do experts examine and work a fraud case?
  • How do you reason and make decisions at critical times during an investigation?
  • How do you evaluate a case and interact with colleagues?
  • How do you handle preventative antifraud programs?

Features of this book include:

  • Fraud expert authors share their veteran, practical knowledge within a fraud investigation framework
  • The latest tools and techniques show you how to address new fraud schemes and challenges
  • A comprehensive case example, followed throughout the text, calls attention to how fraud investigation principles can be applied in practice and how they affect businesses every day
  • Two-color feature boxes, figures, and tables call attention to the core concepts that are key to understanding how business fraud works

About the Editors
Click here for bios of the Ernst & Young professionals who contributed to this book.

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For the veteran fraud investigation professional, core concepts in business fraud investigations are embedded in everyday practice, firm policy, and procedure. Quite often, however, a fraud investigation reaches business professionals who are not familiar with how investigations are conducted, their role in an investigation, and possible outcomes. With frauds such as Enron, WorldCom, Tyco, Parmalat, Adelphia, Societe Generale, the Ponzi scheme recently perpetrated by Bernard Madoff, and the recent billion dollar fraud at Satyam in India, it has become even more important that business owners, controllers, and management understand how a fraud investigation is run. These cases are just a few examples of frauds that have occurred, resulting in devastating effects on their organization, employees, and investors. The continued onset of one of the worst global economic downturns in recent history has now created a robust environment for fraud. Based on these painful lessons learned in the past and the current environment, companies, regulators, and other key stakeholders are putting more emphasis into addressing their approach to fraud investigations and how they view fraud proactively and reactively. This book tackles the complex issues involved in fraud investigations and gives a detailed understanding of the many complex nuances that investigators and others who deal with fraud have to consider when faced with a fraud-related matter.


The idea for this book was first conceived by the Fraud Investigation and Dispute Services practice within Ernst & Young. In developing the core concepts for this product, what emerged became not just another treatise on business investigation theory but a practical framework to approach a fraud investigation along a timeline. Several other published texts are devoted to this topic, but none of them approach this topic with a practical, business-minded approach. The Guide to Investigating Business Fraud is dedicated not only to the study of how business frauds are conducted but also to the understanding of how and why fraudulent activities occur.


The targeted audience for this book is, of course, business professionals who need to understand core fraud investigation topics, key considerations with-in a fraud timeline, and measurable outcome indicators at various stages in an investigation. Business professionals finding themselves involved in a fraud investigation at any level often need a broad understanding of how and why fraudulent activities occur. This text is written to serve as a reference for those professionals, as well as collateral employees who would benefit from understanding business fraud core concepts and considerations. Finally, students who enter accounting or business fields frequently will be enrolled in coursework that outlines business fraud. For those students, this text will serve as a primary source for understanding fraud and how business fraud investigations are conducted and the complexities that are dealt with when conducting these investigations.

Concept and Importance to the Profession

The fraud investigation framework found in chapter 1 of this text was one of the initial steps considered in the creation of this book. The ultimate benefit achieved by understanding the concepts in this book within this framework is coming away with a practical knowledge of how the various pieces of a fraud investigation work together and how those pieces change over the course of an investigation. The book is organized in a manner that is consistent with how issues arise during the course of an investigation.

It is critical that the reader understand that in these times, the demand for evidence-based practices and procedures is important for achieving desired outcomes in an investigation. This text has been designed and written by some of the leading experts in the fraud investigation field at Ernst & Young. These authors have conducted numerous investigations in different industries and countries throughout the world and, therefore, have dealt with the complex issues that arise during an investigation. We purposely selected subject matter experts within our practice to construct the various chapters included in this book. Their insights and abilities to relate this book to practical real-life scenarios and issues faced in an investigation make this book a tremendous guide to gaining a deeper understanding of the issues faced during an investigation.


The book is organized to look at the concept of fraud holistically and the issues that are dealt with in fraud and fraud investigations. We have organized our thoughts to address the previous concepts in the overall design of the book (figure 1-1).

•  Chapter 1 introduces the reader to the core concepts in a fraud investigation, introduces the fraud investigation framework, and outlines the steps that must be addressed throughout the course of every fraud investigation As noted in this diagram, it really begins with identifying the type of fraud involved in an investigation. The three main areas of fraud are misappropriation of assets, fraudulent financial statements, and corruption. In an effort to select what we feel are the most relevant and current schemes under these three main categories, we have organized the next three chapters to address those particular schemes.
•  Chapter 2 deals with selected types of misappropriation of asset schemes. Misappropriation of assets entails any scheme that involves the theft or misuse of an organization's assets. These schemes could include fake vendors; theft of assets, such as cash, inventory, accounts receivable, and fixed assets; payroll; and travel and entertainment fraud.
•  Chapter 3 deals with fraudulent financial statement scheme issues and what happens when the financial statements need to be restated as a result of a fraudulent scheme. A fraudulent financial statement scheme is the falsification of an organization's financial statements or other nonfinancial statements prepared by the organization to make the organization appear more or less profitable.
•  Chapter 4 deals with the concepts involving Foreign Corrupt Practices Act (FCPA) violations, which are one of the most talked about and investigated forms of corruption in the market place today. It is gaining significant attention by the Securities and Exchange Commission and the Department of Justice and, therefore, is top of mind for companies trying to understand the issues involving compliance with this statute. This is one of the primary reasons we have focused a chapter specifically on this type of corruption scheme. Corruption relates to any scheme to which a person uses his or her influence to obtain unauthorized benefit contrary to that person's duty to their employer. These schemes could include FCPA violations, bid-rigging, and conflicts of interest. After gaining an understanding of the various types of fraud, the next area of an investigation is the planning and organizing of a fraud investigation when one of these fraud schemes is uncovered.
•  Chapter 5 deals with the first 48 hours of an investigation. This is an overview into the complex issues that an investigation creates and how critical the first 48 hours are to an investigation once a fraud has been identified or uncovered.
•  Chapter 6 deals with roles and responsibilities. Upon consideration of the complex issues in an investigation, it is helpful to determine the roles and responsibilities that different parties involved undertake.
•  Critical to any investigation is the collecting and processing of documentation critical to gaining an understanding of the issues involved.
•  Chapters 7-8 deal with the complex issues of sources of evidence (chapter 7), the areas of documentation on which the investigation needs to focus, and the elements of electronic evidence (chapter 8) that need to be considered and how to gather that information once this determination has been made. Another key element described in these two chapters is gaining an understanding of the concerns that investigators face when conducting investigations outside of the United States and the complexities that this places on the data collection efforts of the investigation team.
•  In addition to the data collection concerns, throughout the duration of the investigation, organizations, investigators, and other key stakeholders need to worry about who is involved and where the investigation is being conducted and the ramifications of those issues to the overall success of the engagement.
•  Chapter 9 deals with these cross jurisdictional issues. The globalization of business has increased the extent to which investigations are likely to be impacted by legal requirements from more than one legal jurisdiction. In addition, fraudsters have long known that moving their assets (and themselves) to a different location beyond the reach of the "long arm of the law" is an effective strategy. For ease of reference, we'll call these cross jurisdictional investigations. Differences and variations in laws, governing and regulatory bodies, accounting standards, business practices, governmental policies, litigation forums, and even language can make cross jurisdictional investigations quite complex.
•  Once an investigation has started, one of the considerations that is made is determining when or if outside counsel is involved. In chapter 10, we deal with the concepts of working with attorneys on an investigation. The circumstances brought forth in an investigation raise a variety of intertwined business, legal, and financial reporting challenges. An understanding of the underlying facts will be the foundation of decision making regarding the best course of action. Accounting, auditing, and finance skills will be needed to help develop an understanding of the facts and determine the best course of action from a business and financial perspective. At the same time, these circumstances will drive a need for sound legal advice, and oftentimes, outside counsel is retained by an organization to deal with these issues.
•  Another reason that makes investigations so difficult and the reason to obtain sound legal advice is that, oftentimes, parallel investigations are occurring on a particular matter. Chapter 11 deals with the complex issues of multiple investigations (for example, this might include multiple government regulators conducting an investigation at the same time).
•  Upon completion of an investigation, it is almost as important to determine how to report the results as it is to conduct the investigation and compile the results. Chapter 12 deals with reporting after the investigation has been performed and data have been gathered. The forensic accountants or those assigned within an organization to conduct an investigation have to determine how they want to compile and report the results of their findings. The objective of the written or oral report often is to present the findings and observations to the organization or the opposing party, or both, in a litigation matter.
•  Upon completion of the report and presentation of the findings, organizations have oftentimes not considered or are not aware of the investigative protocols or potential recovery options, such as insurance. Chapter 13 deals with the various considerations that organizations should consider in dealing with these recovery options.
•  Finally, once an investigation has been completed, board members, chairmen of the audit committee, or c-suite executives within an organization often try and determine what, if anything, the organization can proactively do to mitigate this occurrence or another occurrence of fraud within their organization in the future. Chapter 14 deals with the various elements of an antifraud program and what companies can do to mitigate against fraud and deal with fraud not only reactively but proactively.

Distinctive Features

•  A comprehensive look at fraud investigations from the earliest stages all the way to identifying areas for remediation and consideration of measures to prevent or detect fraud in the earliest stages.
•  A case study has been included to apply a hypothetical fraud scenario throughout the book to give a practical example to reiterate the concepts illustrated within the book.
•  Subject matter expertise for each chapter was identified from within the Fraud Investigation and Dispute Services practice of Ernst & Young, and these individuals were asked to construct their respective chapters based on their extensive experience conducting investigations across various industries and countries around the world.
•  The book is being published by the AICPA. Their collective knowledge on how best to construct and create a book and introduce it into the marketplace has taken a tremendous amount of information generated by Ernst & Young and polished it into a user friendly format that has not been created before, which is truly one of a kind thought leadership.
•  A key word list has been created to add clarity to the various terms and ideas discussed throughout this book. This list allows the users of this book to vary across different levels of experience in dealing with fraud and allows for a broader distribution of potential users.


Table of Contents

  • Chapter 1: Basics of Investigations
    • Introduction
    • The Current Context of Business Fraud Investigations
    • Business Fraud Investigation Practice
    • The Calm Before the Storm--What Can a Company's Management Do to Be Prepared for an Investigation?
    • The Fraud Investigation Framework
      • Defining Fraud
      • Types of Fraud
      • Phases of the Investigation
    • The Fraud Triangle
    • Constituency Considerations
    • Conclusion
  • Chapter 2: Misappropriation of Assets
    • Introduction
    • Cash Frauds
      • Larceny
      • Skimming
      • Fraudulent Disbursement
    • Non-Cash Fraud
      • Payroll Fraud
      • Inventory Fraud
      • Intangible Asset Fraud
    • Asset Misappropriation Detection, Prevention, and Deterrence
    • Beyond Traditional Fraud Detection Analytics
      • Structured Data
      • Unstructured Data
      • Practical Applications for Model-Based Analytics in Structured Financial Data
      • Practical Applications for Unstructured Data Analytics Using the Fraud Triangle and Text Mining
    • Conclusion
  • Chapter 3: Financial Statement Restatements: Protocols and Process
    • Introduction
      • What are Financial Statement Restatements?
      • Why do Intentional Misstatements and Fraud Occur?
      • What Parties are Involved in a Financial Statement Restatement
    • Common Types of Financial Statement Issues
      • Revenue Recognition
      • Costs and Expenses
      • Reserve Manipulation
      • Unrecorded Financial Statement Activities
    • The Financial Restatement Process
      • Defining the Project Scope
      • Evidence Collection: Establish the Facts
      • Analyze the Evidence
      • Evidence Retrieval and Reporting: Quantifying the Amounts Involved
      • Solving the Problem--Before, During, and After the Restatement
    • Impact of Financial Statement Restatements
      • Financial Penalties and Related Costs
      • Reduction in Market Capitalization
      • Commercial and Operational Impacts
      • Personal Effect on Employees
    • Conclusion
  • Chapter 4: Foreign Corrupt Practices Act Investigations
    • Introduction
    • History
    • FCPA Overview
      • Antibribery Provision
      • Books and Records Provision
      • Facilitating Payments Exception and Affirmative Defenses
    • Penalties and Enforcement
    • Conducting the Investigation
      • Industry Considerations
      • Local Business Practices and Laws
      • No Materiality Threshold
      • Substantiation and Valuation of Services Provided
      • Accounting Requirement Violations
      • Sarbanes-Oxley Related Disclosures
      • Voluntary Disclosure
      • Whistle-blowers
    • Acquisition Considerations
    • Internal Control and Compliance
    • Conclusion
  • Chapter 5: The First 48 Hours of an Investigation
    • Introduction
    • Anticipating the Decisions to Be Made After an Allegation Arises
    • Identifying Allegations
    • Initial Triage
    • Safeguarding People and Business Operations
      • Safety of Employees and Other People
      • Securing Business Operations and Assets
      • Managing Corporate Crises
    • Reporting Obligations
    • Organizing Investigations
      • Routine Investigations
      • Major Investigations
    • Securing and Gathering Evidence
      • Early Interviews of Employees and Other People
      • Document Preservation Orders and Similar Instructions to Employees
      • What to Preserve or Collect
      • Custodians From Whom to Collect
      • Securing Paper-Based Books, Records, and Documents
      • Securing Electronic Evidence
    • After the First 48 Hours
      • When the Allegation Is Found to Be Without Merit
      • When the First 48 Hours are Just the Beginning
    • Conclusion
  • Chapter 6: Roles and Responsibilities: How Different Stakeholders Work During Investigations
    • Introduction
    • Internal Stakeholders
      • Board of Directors
      • The Audit Committee
      • Company Management
      • General Counsel
      • Internal Auditors
    • External Stakeholders and Advisors
      • External Legal Counsel
      • Forensic Accountants
      • External Auditors
      • Regulators
    • Conclusion
  • Chapter 7: Sources of Evidence
    • Introduction
    • Electronic Evidence
      • E-mail Correspondence
      • Electronic Financial and Accounting Records
    • Hard Copy Evidence
      • Hard Copy Financial and Accounting Records
      • Contracts and Other Operational Records
      • Other Hard Copy Documents
    • Other Sources of Evidence
      • Oral Evidence
      • Publicly Available Information
      • Other Third Parties
    • Access to Documents
    • Legal Considerations
    • Conclusion
    • Appendix A: Examples of Sources of Public Information
    • Appendix B: Examples of Public Records Relevant to Investigations
  • Chapter 8: Electronic Evidence
    • Introduction
    • Sources of Electronic Evidence
      • Categories
      • Location and Storage
      • The IT Function
      • Privacy and Confidentiality
    • Professional Standards
      • Professional Competence
      • Due Professional Care
      • Planning and Supervision
      • Sufficient Relevant Data
    • The Electronic Evidence Review Process
      • Identification
      • Preservation and Collection
      • Process and Analyze
      • Search
      • Review
      • Production
    • Conclusion
  • Chapter 9: Cross-Jurisdictional Issues in the Global Environment
    • Introduction
    • The Global Environment and Issues
      • Data Privacy and Moving Data Across Jurisdictions
      • Anticorruption
      • Anti-Money Laundering
    • Monetary Judgments, Arbitral Awards, and Restitution Orders
      • Monetary Judgments
      • Arbitral Awards
      • Restitution Orders
    • The Differences in Foreign Countries' Legal Systems and the Legal Orders Available
      • Legal Privilege
      • Letters Rogatory
      • Insolvency and Receivership
      • Orders Generally Available in the Commonwealth
      • Alternative Dispute Resolution
    • Coordinating With Government or Local Authorities
    • Effective Utilization of Resources
    • Conclusion
  • Chapter 10: Working With Attorneys: The Relationship With Counsel
    • Introduction
    • Working Together
    • Roles and Engagement Structure
    • Considerations in Working With Attorneys
    • The Investigation Setting
      • Evaluating Known Facts
      • Determining Whether an Investigation is Necessary
      • Oversight of Investigations
      • Selecting an Investigator
      • Establishing the Scope of the Investigation
      • Sources and Preservation of Information
    • Executing the Investigation
    • Dealing With Investigation Stresses
      • Scheduling
      • Knowledge Transfer
    • Working With Attorneys in a Litigation or Dispute Setting
      • The Accountant's Role as Expert
      • When the Opinion is Not as Desired
      • Assisting in the Discovery of Opponents and Third Parties
      • Preparing for the Discovery of the Expert
      • Preparing the Expert Report
      • Quality Control Procedures
      • Privilege
    • Preparing to Give Testimony
    • Conclusion
  • Chapter 11: Working With Regulators and Parallel Investigations
    • Introduction
    • Internal Investigations
      • Identifying Violations, Preventing Further Damage, and Determining Liability
      • Appointing Special Committees
      • Reviewing a Case With Regulators
      • Advising Employees About Investigations
      • How Interviews are Recorded
      • Providing Documents: A Critical Process?
      • Sarbanes-Oxley Requirements
    • Parallel Investigations
      • Internal or Independent Investigation: A Key Decision
      • Securing Information
      • Document Preservation: Policy and Practice
      • Protecting Attorney-Client Privilege
      • Protecting Proprietary Data
      • Encouraging Employee Cooperation
      • Providing Legal Counsel to Employees
      • Planning for Public Statements
      • Restatements: Managing the Process
    • Disciplinary Action
    • Conclusion
  • Chapter 12: Reporting on Fraud
    • Introduction
    • Reporting Standards
    • Guidelines for the Preparation of the Report
      • Work Product and Report Formats
      • General Written Report Format
      • Federal Rule 26 Reports
      • Written Work Product Other than a Report
      • Maintaining Confidentiality of Work Products
      • Indicating Document Status
      • Working Paper Documentation
      • Review of Reports and Work Products
    • Guidelines for Deliverables to the Client
      • Communicating the Conclusion of the Engagement
      • Report Audience
      • Limiting the Use of Reports
      • Issuance of Report
      • Sending Electronic Reports
      • Reissuance of Reports
    • Conclusion
    • Appendix A: Decision Tree to Determine the Application of Professional Standards
    • Appendix B: Professional Standards Application for the Grand Forge Company Case Study
    • Appendix C: Engagement Quality Procedures: An Example
    • Appendix D: Engagement Quality Review Form for Engagement Reports or Work Reports
  • Chapter 13: Recovering from Fraud: Fidelity Claims and Directors and Officers Claims
    • Introduction
    • Fidelity Insurance Coverage: Types and Claims
      • Financial Institution Bond
      • Insuring Agreements and Riders
      • General Agreements
      • Conditions and Limitations
      • Exclusions
      • Commercial Crime Policy
      • Fidelity Claims: The Process
      • Comparing Fraud Investigation Reports to Other Types of Claims
      • Phases of a Fraud Investigation
    • D&O Insurance Liability Insurance Protection
      • Wrongful Acts Committed by D&O
      • D&O Coverage
      • Risk Management Using D&O Coverage
      • The D&O Claims Process
      • Areas of Dispute in D&O Claims
    • Conclusion
  • Chapter 14: Antifraud Programs
    • Introduction
    • Antifraud Program Basics
      • Setting the Proper Tone at the Top
      • Proactive
      • Reactive
    • Ownership of the Antifraud Program
    • Benefits of an Antifraud Program
    • Conclusion


About the Publisher


About the AICPA The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 412,000 members in 144 countries, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination, and offers specialty credentials for CPAs who concentrate on personal financial planning; forensic accounting; business valuation; and information management and technology assurance. Through a joint venture with the Chartered Institute of Management Accountants, it has established the Chartered Global Management Accountant designation, which sets a new standard for global recognition of management accounting.

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