Advanced Accounting: Northcentral University: Post Master's Certificate: Bayo Cary: Advance Accounting: Fraud Resolution: Case Study: Walgreens Gainesville, FL USA Under-cover Fraud Investigation Bayo Cary

April 17, 2015

Post Master’s Certificate Degree: Northcentral University: Business Administration: Specialization: Advanced Accounting

Miss Bayo Elizabeth Cary, A.A., B.A., M.L.I.S.

Home/Cell: 001-352-262-9733 Toll Free U.S.A.: 1-888-571-0119 Fax: 1-352-433-1875

Email: bayo.cary@yahoo.com Google Blogger: bayocary.blogspot.com Twitter: @bayocary1

Mailing Address:

Miss Bayo E. Cary

1005 NW 39^th Avenue

Gainesville, FL 32609

Assignment 8: Fraud Resolution: Fraud Prevention and Detection: Final Assignment

Write a paper to provide a detailed explanation of how the knowledge gained in this course provided you with an understanding of the different types and varieties of fraud and how they affect you, your company, and community and society as a whole. How would you define instances of fraud and then if fraud occurred, how would you mitigate and report the situation to help bring about resolution?

The knowledge gained in this course, fraud: prevention, detection, and resolution, prepared me for work, as an under-cover fraud investigator, at my first job in the United States, since 2008. I was recently hired by the hiring manager at Walgreens, located at 13^th Street, and 39^th Avenue, in Gainesville, FL. I used, my letter of recommendation, from the instructor for my course: Dr. Wendy Achilles, to land the job. I worked for two days only, on April 15, and April 16, 2015, prior to compiling, my conclusions, and final report.

Ms. Patty, Cell: 386-965-2259, the hiring manager, at Walgreens, located at 13^th street, and 39^th Avenue, in Gainesville, FL, U.S.A.: Store: 12316 Phone: 352-327-9805, hired me, as an under-cover fraud investigator, in the position of an employee, to find out, why her store, was losing sales, and why her cosmetics department, was not selling many products. I went into the store, the first day of work, and engaged in the legally required training, to work in the store, and then, I was placed on the front door cash register, with: Meme, and Daniel, to complete my training, in how to use, a Walgreens cash register.

The first day of work, went really well. There were a number of customers, who came into the store, to purchase, a large variety of products. I was surprised, however, at how many people came into Walgreens, to purchase cigarettes, and to receive large amounts of cash back. The cigarettes, are very expensive. People who bought cigarettes from Walgreens-on my first day of work, spent almost $ 100.00 dollars U.S.D., sometimes-on cigarettes, if they purchased, an entire carton. One customer, insisted that he open his smokeless cigarette in the store to test it, and began-against Walgreens company policy, to smoke, his smokeless cigarette, in the store. Then too, there were several customers, who made very small purchases, to receive: $ 50.00 dollars U.S.D., cash back-when, the total cash back, per purchase limit at the Walgreens where I worked, was: $ 20.00 dollars U.S.D., per purchase.

I had fun working with both: Meme and Daniel, and I successfully mastered the Walgreens cash register. The second day, that I came into work, I was scheduled to work at the cosmetics counter, with a woman named: Lucy. Lucy, I was told, is head of cosmetics, at the Walgreens, where I was working. I was told, by Kat-the onsite assistant manager, that Lucy was supposed to train me in cosmetics, because Lucy, was the best sales person, at her job, and therefore, the head of the cosmetics department. When I initially met Lucy, on my second day of work, for training to work at the cosmetics counter, I thought she might be Latina-however, later on, I had a very different opinion.

Lucy had a very heavy accent. It was very difficult to understand her English, when she spoke. The English was broken-meaning that Lucy spoke, with every other word, instead of using proper English syntax and semantics. Lucy, had a long list of jobs, that had to be completed, on the 16^th day of April, 2015, and told me, that she wanted me to assist with the assignments, and that she would train me for the position, at the cosmetics counter, while I helped her with the long list of tasks, that she had to accomplish. Carla, one of the managers at Walgreens that morning, told me, that I would be on the cash register again-like I had been the previous day, except, that I would be assisting customers, from the cosmetics counter cash register instead.

Lucy began telling me what to do, to assist with the long list of tasks, which had to be completed. However, when I had a question, Lucy refused to answer me, or to provide me with any direction, or training. Lucy assigned, a particularly hard task for me-to hang, and re-hang display boxes, that came from a marketing group, to display some of the new products, in the store. Due to the fact, that Lucy was not willing, and/or not able, to provide me with the instructions and directions, to complete the task, that she assigned for me, I had to ask Carla-one of the managers on duty-how to complete the task.

Lucy, was very aggressive with the customers in the store. She was not providing me with any training, and, she was almost chasing after customers, to provide service for them, at the cosmetics counter. Lucy told me, that it was store policy, to bring customers over from the front check-out, if there was no one behind the front cashier counter, to ring the customers up, at the cosmetics counter. Lucy also told me, that it was store policy, to encourage all customers purchasing cosmetics items, to have their purchases rung up, in the cosmetics department.

Lucy had a box of coupons, under the cosmetics counter, that were supposed to be next to products in the store, that were for sale on the cosmetics isle, and in other store locations, and she would tell customers, if you come over to cosmetics, to ring up your sale, I might be able to offer you a discount, with a coupon. In addition, Lucy had a box, behind the counter, of sample size: shampoo, body wash, tooth paste, and other items, that Walgreens intended, would be given away to customers for free-that, Lucy only gave to customers, if they made a purchase. Finally, along with the free samples of hygiene products, behind the cosmetics counter, there was also an open package, of adult diapers.

I tried on several occasions, to assist customers, and to ring them up, at the cosmetics counter. However, Lucy, who had other tasks to complete in the store, would not allow me to assist customers-although, I had no problem working the cash register, on my own. Lucy, was refusing to train me, and, she would send me off, to work on one of her assignments-with no directions, while she logged on to the cosmetics counter cash register, and rung up all of the customers. When I walked away from the cosmetics counter, I could not hear what Lucy was saying to the customers, however, I noticed, very disgruntled expressions, from several of the customers, that Lucy assisted.

Then, Lucy intentionally jammed the cash register drawer shut, at the cosmetics counter, after she made a sale. I watched her tapping the computer screen, of the cash register, and she was hitting the wrong buttons, in order to re-open, the cash register drawer. I, therefore, told Lucy how to re-open, the cash register draw, to deposit, the money from the sale she just made. Lucy was obviously upset with me, for providing her with the correct instructions, on how to place the money from the sale, into the cash register drawer-and this bothered me some. I saw a: “Red Flag.”

I decided, at that point, that I did not want to work, at the same cash register, as Lucy. I immediately suspected Lucy for acts of fraud, in the workplace, because it was an extremely suspicious act, when she jammed the cash register draw shut, and then pretended, like she had no idea, how to open the cash register draw back up. I knew, right then, and there, that I would have to report Lucy, to Ms. Patty, the hiring manager, and to Kat, the assistant manager, for suspected acts of fraud, in the workplace.

However, before I went to Kat, the assistant manager on duty, to complain about what Lucy had just done, I asked Lucy, about what else had to be done, on the list of assignments, that had to be completed, on the 16^th of April, 2015. I pointed to some words on the page, of the list of assigned tasks, and asked Lucy, why baby med.s, were located on the baby isle, and Lucy told me, that the word I was reading, did not say med.s-that it said needs. I told Lucy, that she was incorrect, that the word required two “e’s.” Lucy, did not even notice, that the word also required, an “n” instead of an “m.” It was then that I realized, that Lucy, could not really speak or read English very well.

I then went to Kat, the assistant manager on duty, and complained to Kat, about working with Lucy, because: she was not training me, she was not allowing me to us the cash register to ring up customers, at the cosmetics counter, and, she was very difficult to understand, because of her broken English. Kat became very defensive, and did not want to hear my complaints. I asked if I could work at the front cash register, with: Meme and Daniel instead, and Kat said, that we would have to talk it over, the next day with Ms. Patty, when she came in, because, Ms. Patty was the one responsible for hiring me.

Then Kat told me, to go do some of the Walgreens training exercises on the computer, in the store office, until my shift was over. I walked out of the store room, away from Kat right away, to head back to the Walgreens store office, to complete the online training exercises, as Kate suggested I do, but then, when I left the store room, Kat yelled out-very loudly: “Do you have a problem with me?” I was startled, and replied: “No, I have no problems with you, I was simply going to begin the store training exercises, as you instructed me, to do so.”

I was perplexed, as to how Lucy, could have passed the exams, at the end of the training videos, for the Walgreens cosmetics department, when she does not speak, or read English very well. I began taking a new training video, and at first, I got all of the answers correct, and then, I began intentionally missing questions, to see what would happen, with the results of the exam, if I missed too many.

After I failed a training exam, on the Walgreens computer, I was given as many opportunities as I required, in order to pass the exam. All I had to do, was remember which questions I missed, and then, select a different answer, the next time, I went through the exam. It took me four times, to pass one exam, passing it, by trying different answers, to the questions I missed, until I had selected the correct answer. I was not penalized, for all of the extra attempts, on the exam.

I had been in the Walgreens store office, for less than half an hour, playing around, and experimenting, with the Walgreens online computer training program, when, both: Kat and Carla, came into the back office, because Kat wanted to speak with me again. Kat told me, in front of Carla, that Lucy wanted to sue me, for harassment, because I told her, that I did not want her training me, because her English, was too difficult, for me to understand. I thought that was completely outrageous.

Kat told me, that the store is all inclusive, and that there was no way, for me to work in cosmetics, without working with Lucy. That was a change, from when I came into the office, that morning-when she asked me, how much longer, I thought I would need assistance, learning how to use the cash register. That morning, Kat made it sound like, after I was trained, that I would be working in cosmetics alone, and then, that afternoon, she was telling me, that I had to work with Lucy.

I asked again, if I could be moved, from the cosmetics counter, to the front of the store, to work with: Meme, and Daniel instead, and Kat said, that I would have to come in the following day, and speak to both: her, and Ms. Patty, about being moved to the front cash register. Then Kat said, that she was not aware of any employment openings, at that position, and therefore, she thought it would be best, if I learned to understand Lucy-which I was not willing to do. I did not want to tell Kat, why Patty had hired me, or, that I was really uncomfortable, with the open bag of adult diapers, that Lucy had behind the cosmetics counter, and, that I was really uncomfortable, with sharing a cash register with Lucy, because, I suspected, that she may be stealing, from the cash register in cosmetics.

Then Kat proceeded to tell me, that she felt like I was attacking her, when I was complaining to her, about trying to work with Lucy-in the Walgreens store room. I was on the other side of the Walgreens store room, when I was talking to Kat. I was not really arguing with her-I was just explaining the situation to her. I never raised my voice. I never said anything sarcastic. I never called Kat a name. I never lunged at Kat, or reached out to touch her. I had no idea, what Kat was talking about, when she told me, that she felt like I was attacking her, when I was complaining about working with Lucy. I felt frustrated, and, I was thinking about quitting.

All morning long, while I had been completing assignments for Lucy, she was not following Walgreens store protocol. Lucy forced me to leave carts in the isle, and assignments unfinished, and at one point, Lucy left the package, of open adult diapers, on the cosmetics counter, where customers, are supposed to place their items, from cosmetics, for purchase. I was alarmed. I was also embarrassed-although, I personally, do not need adult diapers.

I thought it was incredibly inappropriate, for Lucy to leave, an open package, of adult diapers, on the cosmetics counter, however-it did not phase Lucy, at all. Then I wondered, if Lucy was passing out the adult diapers for free, at the cosmetics counter, along with, the free: shampoo samples, toothpaste, body wash etc. .I wondered, if Lucy was trying to attract customers to the cosmetics counter, by leaving the open package, of adult diapers, in plain sight, for the cosmetic customers to see?

After Kat was done talking to me, in the Walgreens store office, she and Carla left the office, and I continued working on the training activities, on the computer. Then, Lucy and Carla, entered the Walgreens store office together. By that time, Lucy already knew, that I could not really understand her broken English. I hardly spoke to Lucy all day. I do, however, speak some Spanish. When I told Lucy, that I was having a difficult time understanding her English, I thought that maybe she would try to explain things to me in Spanish. Carla, the other manager working that day, also speaks some Spanish. However, Lucy never tried to speak to me, in Spanish, and Lucy never spoke to Carla in Spanish, in front of me.

When Lucy, came back to the Walgreens store office, with Carla, I looked at her very carefully. I was extremely uncomfortable, being in the office with her, because she told Kat, that she wanted to sue me for harassment, because I said it was too difficult to understand her broken English. When I looked more closely, at Lucy, I realized, that she might really be from the Middle East, instead of from a Spanish speaking country. She showed me her son’s name, and it was a very unusual name-it was not a typical male name, for a Latino child. When Carla decided to leave the Walgreens store office, where I was training on the computer, Lucy did not want to leave with her, and that was when, I decided to quit working at Walgreens. I did not want to be alone with Lucy.

When I got home, I Facebooked, and Tweeted, about my highly unusual day at work, at Walgreens, at 13^th street, and 39^th Avenue, in Gainesville, FL, U.S.A., and, I sent a text message to Ms. Patty, to give her the final results, of my under-cover fraud investigation. I told Ms. Patty, that I thought that Lucy, was the cause, of Walgreens losing business, and, of the cosmetics department at that Walgreens location, losing sales. I told Ms. Patty, that Lucy had very broken English, which was difficult to understand, that Lucy did not read English very well either. I told Ms. Patty, that Lucy was only passing out items, which Walgreens intended customers to have for free, if customers made a purchase, in the cosmetics department. I told Ms. Patty, that I saw Lucy, intentionally lock herself out of the cosmetics counter cash register, and, therefore, I suspected, that she was stealing cash, from the cosmetics cash register, and, I told Ms. Patty, that I strongly suspected, that Lucy, was passing out free adult diapers, at the cosmetics counter, with cosmetic’s purchases, and possibly encouraging the customers to prostitute.

I told Ms. Patty, that Americans, do not want to shop at a store, where they are given a free adult diaper, along with a cosmetics purchase. Prostitution, is illegal in the U.S. .Too often, people immigrate to the United States, from other parts of the world, and they refuse to acculturate-they do not want to learn, or to abide by: U.S.: laws, rules, and regulations. Although, Kat said Lucy, was doing a wonderful job, selling products at the cosmetics counter. Ms. Patty told me, that sales were down for the entire store, and in particular, for the cosmetics counter.

When I asked Carla about the situation, I asked her if she thought that C.V.S., being directly across the street, was a factor for slow sales at Walgreens, and Carla said, that C.V.S., was not a factor. I think that Lucy, on her own, may be the reason, why Walgreens, was losing sales, and why sales were down in the cosmetics department-specifically, however, I was really very uncomfortable with Kat, and how she interacted with me, because she defended Lucy-over, and over again.

According to James Tackett (May/June 2008), covert investigations occur in the workplace, on a regular basis these days, in both: small, and large companies (p. 1). Covert investigations, are dangerous, and therefore must be carried out carefully (p.1). There are certain legal guidelines, which must be strictly adhered to, in order for a covert investigation to be successful. Studies show, that amateur investigators, can make mistakes, with invasion of privacy, and evidence collection, which can make evidence, insubmissible in court. If evidence is collected incorrectly, then, an employee can sue the company, for not following the legal guidelines, that are in place, to protect, the suspected fraudster. In a worst case scenario, a fraud investigation, gone wrong, can lead to serious “injuries,” or even “death (p. 1).”

What causes and/or evidence, must an employer have, to justify, a fraud investigation? According to James Tackett (May/June 2008):

Employers have broad powers to investigate improprieties within their organizations, provided they have “probable cause.” Probable cause exists when a reasonable person would conclude that illegal or improper activities are likely occurring within the organization. (p. 1)

The bottom-line, is that, if you suspect, that an employee at your company, is engaging in an act, or acts, of fraud, then, management has sufficient probable cause, to initiate, a covert investigation (Tackett, 2008, p. 1).

There are three basic kinds of fraud, which can occur, in connection with a company:

1. Accounting Fraud;

2. Consumer Fraud; and

3. Organizational Fraud.

Accounting fraud occurs, when a company decides to: “cook the books,” and to lie about on their financial accounting statements, in order to make their company, look better, to: consumers, investor, shareholders, and to financiers. Companies, that are not meeting their revenue sales goals, often engage in a practice known as: “earnings management,” in order to make the company’s financial records and outlook, appear, to be in better condition, than in reality, they are.

When a company commits, an earnings management, act of fraud, money is moved, from fund accounts, where it is being held indefinitely, to pay for: warantee coverage, or for restricted use, or, sometimes, a payment that is due, or that is paid, is credited to the wrong pay period, to improve the overall picture, of the financial accounting records, and financial statement, for a particular pay period. Sometimes financial accounting entries, are just plain falsified. Companies that engage in earnings management acts of fraud, are usually-eventually caught, because an employee, who is a whistleblower, provides a suspected fraud tip, to management, or, because an auditor, or an investigator, spots anomalous entries, in the company’s financial statements.

Consumer fraud occurs, when consumers, are cheated or stolen from, by vendors, who offer specific products, or services, for an agreed amount of money, and then, the products, or services that are provided, are of poor quality, not in a timely manner, or simply not provided for the consumer at all. Additionally, identity theft, is considered consumer fraud. Identity theft, is when fraudsters, collect bits and pieces, of personal information from people, and then, they either sell the personal information, on the Black market, to the highest bidder, or, the fraudster, utilizes the personal information, to steal money from the victim, to open bank accounts in the victim’s name, to apply for employment in the victim’s name, etc..

There are a number of protections, against consumer fraud, in the United States. There are government agencies, in the U.S., that are supposed to track and follow, consumer fraud problems here, and, that are supposed to assist Americans, with preventing consumer fraud. The consumer fraud protections, which are in place, in the U.S., at this time, are not that effective, because of the poor policy choices, of the Obama administration. At this point in time, the best an American consumer can do, in regards to consumer fraud, and consumer fraud protections, is to be proactive, and to be careful. Consumers should not:

1. Share personal identification information with strangers, through: phone, email, online chatting, etc.;

2. Share personal access codes, or PINs, to personal accounts;

3. Throw away papers or other items, that contain personal, identifying information-shred it, etc..

Organizational fraud, is fraud that occurs, at a company, and that usually involves, more than one employee-or the fraud involves both: employees, and management. Organizational fraud, is very often, collusive, and, can be caused, by a third-party, that is acting against a company, as well. The fraud that I investigated, at Walgreens, in Gainesville, FL U.S.A., at 13^th Street and 39^th Avenue, is an organizational fraud. Although, it appeared to me, that Lucy, was the only employee, that was possibly stealing cash from the cash register, and, handing out adult diapers for free, with cosmetics purchases-Lucy, could have been fired, a long time ago, and someone, in management-I suspect the assistant manager Kat, decided not to fire Lucy-even though, her behaviors, and her actions, are inappropriate, by American standards, and, that makes the Walgreens suspected acts of fraud, a collusive-an organizational fraud. Therefore, because Lucy was not fired by Kat, for her acts of fraud in the workplace, both Kat, and Lucy, must be investigated, for suspected acts of fraud, in the workplace.

In order to execute, an undercover fraud investigation, as previously stated, according to Tackett (2008), the privacy rights, of the suspected fraudster, must not be violated (p. 2). In America, employees at a company, have generally expected rights to privacy. According to Tackett (2008), reasonable privacy rights, in-so-far as surveillance equipment is concerned, must follow, the following guidelines:

Physical surveillance, including videotaping, would be acceptable in public places or open work areas, but these methods would be prohibited in lavatories or locker rooms. Similarly, outdoor surveillance of parking lots or shipping and receiving areas is acceptable, but surveillance through the windows of a private residence is not allowed. Employee offices, desks, and filing cabinets may be acceptable surveillance targets depending on the circumstances—consult legal counsel. (p. 2)

There are different legal guidelines in place, for taping, of conversations. According to Tackett (2008), the following guidelines, are applicable, to taping employee conversations, in the workplace, during covert investigations:

Recording conversations has greater legal complexities, and this activity must be approved in advance by legal counsel. Yet, even here, many employers have the legal right to record the conversations of their employees (verbal, telephone, e-mail) while they are working. It is legal to record the conversations of others providing you are a party to the conversation in most states. In the remaining states—referred to as all-party states (California, Connecticut, Delaware, Florida, Massachusetts, Maryland, Michigan, Montana, New Hampshire, Pennsylvania, and Washington), you must inform the other parties that you are recording the conversation. (p. 2)

There is a significant difference, between individuals, who are hired by a company, as a professional fraud investigator, and, individuals, who agree to investigate a fraud, as an under-cover fraud investigator, and an employee. According to Smith (2012), undetected evidence collection, is the primary reason, for an under-cover fraud investigation (p.3). I am not, a professional investigator. While I have academic training, in the field of: fraud, fraud prevention, fraud detection, and fraud resolution, I am not a: C.P.A., or any other type, of certified and trained expert, in the field, of fraud investigation.

I was hired, for the most basic of investigative positions-the “discreet observation” position (Tackett, 2008, p. 2):

The most basic form of covert investigation involves discreet observations by company personnel who appear to be carrying out their routine responsibilities. When investigative observers feign their attention elsewhere, malfeasant employees can be surprisingly brazen. Professional investigators are obviously not required for such simple observations, and all that is needed is a confirmation that employee privacy rights are not being violated. (p. 2)

I investigated the situation at Walgreens, as an under-cover fraud investigator, who was hired as an employee, for: “discreet observations.” Professionally, I work as a freelancer: researcher, writer, investigator, photographer, and reporter, and, I am looking for a professional: editor and/or publisher, for my news stories:

Miss Bayo Elizabeth Cary, A.A., B.A., M.L.I.S.

1005 N.W. 39^th Avenue

Gainesville, FL 32609

Student: Northcentral University, Post Master’s Certificate, Business Administration, Specialization: Advanced Accounting 2015

bayo.cary@yahoo.com Home/Cell: 001-352-262-9733 Google Blogger: bayocary.blogspot.com Toll Free U.S.: 1-888-571-0019 Fax: 1-352-433-1875 Please contact me, if you are willing to consider printing, one of my stories, or, if you are interested in hiring me, for an investigation, or a news story.

While I was able to observe, and to collect a great deal of information, and training, in regards to the Walgreens work environment, in just two days, as previously stated, I am not trained, as a professional investigator. Professional investigators, have specialized, expert skills, and training, which allow them to both: collect culpable evidence, of fraud in a workplace, and, to testify in court, for the prosecutor, as an expert witness. According to Tackett (2008), the following, is an abridged list, of some of the skills, and qualifications, that a professional fraud investigator, should possess:

Professional investigators of workplace misconduct have received specialized training in covert methods, courtroom procedure, litigation avoidance, evidence accumulation, and many other topics that go beyond the training of a typical CPA or internal auditor. They frequently have occupational fraud investigative certifications such as Certified Fraud Examiner or Certified Forensic Accountant. Many are experts in interviewing and interrogation techniques, which are highly useful in extracting legal confessions when the covert investigation migrates into an open inquiry. Professional investigators can operate in a supportive role, giving advice and counsel, or they can conduct the covert investigation themselves. (p. 2)

According to Tackett (2008), a fraud investigation, covert, or otherwise, should be ended immediately, if:

. . .any routine covert investigation, such as theft of merchandise by employees, with signs of escalating threats or potential violence should be discontinued until both legal counsel and professionals are consulted. (p. 3)

On the second day, that I worked at Walgreens, as an under-cover fraud investigator, I had to quit the job. The work became too dangerous for me, in only two days. Lucy, as previously stated, threatened to sue me, for harassment, for telling her, that she could not train me, to work at the cosmetics counter, because I could not understand her English well enough. Additionally, Kat-the assistant manager, telling me, that she felt like I was attacking her, when in fact, I was merely having a conversation with her, made the work environment at Walgreens, too dangerous, and too unfriendly, for me to continue working there, as an employee.

When an under-cover fraud investigator, or an employee, reports an act of suspected fraud, by another employee, or by management-in the case of Walgreens, as previously stated-I recommend, that both: Lucy, and Kat, be investigated-then, management, has an obligation to the company: Walgreens, to follow through, with a full fraud investigation of the workplace. According to Tackett (2008), in order to resolve, an act, or acts of fraud in the workplace, management, must follow through, with an investigation:

. . .almost every successful covert investigation eventually becomes an open inquiry when the desired evidence is obtained. At this point, the focus shifts from evidence accumulation to interviews and the interrogation of suspects. The suspect interrogation area can have legal complexities that require professionals. (p. 3)

A fraud investigator, must be hired, to conduct a full fraud investigation. According to Tackett (2008), there are certain skills, qualifications, and recommendations, to look for, in a professional fraud investigator:

When choosing a professional investigator, experience and reputation should be taken into consideration. Ask for references and general descriptions of prior experience with covert investigations. Engagement details such as their willingness to testify in court or any subsequent legal proceedings should be verified in advance. (p. 3)

When a fraud investigation, of a suspected fraudster is recommended, the investigation, must be conducted, to fulfill certain: ethical, moral, and legal obligations, which management, and employees, have towards the company, which they work for. “Unlike an audit, in which the client’s cooperation is essential, fraud examination involves dealing with potentially uncooperative individuals-even liars, cheats, and thieves (Wells, 2009, p. 1).”

What is a professional fraud investigation? According to Smith (2012), a fraud investigation and examination:

Fraud examination is the process of identifying and determining whether fraud has occurred. This process includes collecting and analyzing documentary evidence, interviewing key personnel within an organization and suspects of fraud, reporting on observations, and testifying on conclusions. (p. 2)

Because of the fact, that a fraud investigation, often times, involves collecting information, from dishonest people, sometimes, various techniques are applied, to the information collection, so that the most accurate information possible, may be obtained. “If your client authorizes you to conduct a full investigation and you accept, your work could easily end up being reviewed in court, so approach the case with that thought uppermost in your mind (Wells, 2009, p. 1).

There are fundamental, and, there are State and Federal: laws, rules, and regulations, which guide, how information, can be legally collected, from a suspected fraudster, and others, during a fraud investigation. According to Wells (2009), the following, are some of the guidelines pertaining to, the legal collection of information, during a professional fraud investigation:

1. Conducting pre-text interviews, under-cover operations, and other investigative trickery can be perfectly legal;

2. Using the name of a law enforcement agency is considered “impersonation,” and it’s a crime;

3. If you use a real company name, for a cover, then, that company can sue you. (p. 2)

4. You need to have a clear understanding with the client as to whether it is necessary to protect their identity. If so, you must protect it;

5. You should not disclose information, which you have gathered in other interviews;

6. Abide by the privacy regulations and guidelines pertaining to personal information collection. (p. 3)

If you are a qualified professional fraud investigator, then, you are constrained by certain reporting obligations, because of the professional license that you hold, in order to investigate cases, of suspected fraud, in the workplace. A C.P.A.-if fraud is discovered, and the fraud involves management, at a company-according to Wells (2009), is required to report, to the company’s board of directors.

Additionally, according to Wells (2009), if a C.P.A., investigates a fraud, and discovers corroborating evidence, that fraud did indeed occur, at a public company, and management was involved, then, the fraudulent situation, must be reported, to both: the F.B.I., in the United States, and to, the S.E.C., in the U.S. . “A CFE, engaging in a fraud investigation, is obligated to inform the client, prior to beginning the investigation, that, if the client-him or herself, is found guilty of fraud, the fraud will be reported, to the proper authorities (Wells, 2009, p. 3).” I will be sending in copies of my report, as soon as I complete it, to both: the F.B.I. and the S.E.C., because Kat, the assistant manager, was too sympathetic, towards Lucy.

The resolution process of a fraud investigation, often times, involves taking the case to court. In order to send, a clear message, to other employees, at the company, that fraud will not be tolerated, in the workplace, the company, where fraud is suspected, is obligated, to conduct a full, professional investigation, and, if culpable evidence is collected, the company is obligated, to take the case to court, to prosecute. According to Smith (2012), the following, are the consequences, associated, with committing an act of fraud, in the workplace, in the United States:

Consequences of fraud include criminal and civil enforcement actions, profit disgorgements, fines, prison terms for employees, and reputation-damaging headlines for the organization. To limit these consequences, senior management might conduct a fraud examination and might consider implementing an antifraud program to prevent, deter, and detect improper conduct by employees and agents. (p. 3)

According to Albrecht,& Hoopes (2014), sometimes, when fraud is discovered, in a workplace, a company may attempt to blame an auditor, for not discovering the fraudulent acts first. Auditors, cannot guarantee, that all acts of fraud, will be detected, during an audit. There are certain types of fraud, which occur in the workplace, that are very difficult, for auditors to detect. Many times, when a devastating act of fraud, is discovered at a company, shareholders, will decide to sue the auditing company, for failing to detect the fraud, prior to severe financial losses (p. 3).

According to Albrecht,& Hoopes (2014):

Despite the public’s view of the auditor as a protector, the accounting and audit literature state that a company has the primary duty to design, implement, and maintain a system of internal controls that provide reasonable assurance that reliable financial statements can be produced and that auditors have the responsibility to provide reasonable assurance that the financial statements are prepared fairly in accordance with U.S. GAAP. (p. 3)

Even with an auditor, exercising due care, when conducting an audit, and, providing “reasonable assurance,”-according to Albrecht,& Hoopes (2014), there are still four auditing situations, that do frequently occur, whereby, it is extremely difficult, for an auditor, to detect fraud: “Could The Auditor Have Detected Fraud?”:

. . .four factors that made it extremely difficult—if not impossible—for even a properly designed and performed financial statement audit to detect a material fraud:

The nature of accounting records necessitates sampling

The use of outsiders to help conceal the frauds

Reluctance of people to disclose what they know

Forgery and lying. (p. 4)

In cases, where an audit occurred, and the auditors failed, because of lack of: skills, experience, training, protocol, due effort, etc., to detect fraud, then, according to Fereance (2015), there are steps that a company, can go through, in order to resolve the matter, with the auditor, through the U.S. court system:

In such cases, plaintiff attorneys may contend that the CPA failed to exercise due care in accordance with Article V of the Principles of Professional Conduct, which are included in the AICPA Code of Professional Conduct. Lawyers may allege that CPAs have a duty to identify and inform clients of fraud red flags such as suspicious activities or internal control deficiencies. (p. 1)

In cases, where the auditor is found guilty, of not performing, an adequate audit, the company, is still liable, for the fraud, which occurred on their premises, and by their employees, and/or management. Fraud, has devastating consequences, which effect the entire company, and all of the investors, and shareholders as well. Sometimes, if a fraud occurs at a company, that is larger than most, the act of fraud at the company, can impact, the entire U.S. stock market and therefore, the U.S. economy.

Quite literally, the stability of the U.S. economy, could be shaken, by one very large company, and, an unchecked act of fraud, that has drained the company, of billions of dollars U.S.D. .Fraud prevention, is a responsibility, of all businesses, within the United States. By ensuring, that companies in the U.S., report financial accounting statements correctly, and in a timely manner, and within U.S. business accounting guidelines: American companies, are protecting: themselves, investors, shareholders, consumers, and the U.S. economy.

In conclusion, according to Wells (2009), in regards to a final statement, from an individual, such as myself, who has participated, and conducted, and under-cover fraud investigation, as an employee: “Reporting must normally be done in writing, and no issues, that were detected, regarding possible acts of fraud, in the workplace, may be excluded (p. 3).” This research paper, that you have just read, is my final, and concluding report, for the under-cover fraud investigation, which I engaged in, on April 15, and April 16, of 2015, at Walgreens, on 13^th Street, and 39^th Avenue, in Gainesville, FL U.S.A. .

If you have any questions, regarding my findings in the report, or, any of my final conclusions, please do not hesitate, to contact me. Thank you for your time, and for your full consideration, regarding the matters stated above. For additional information, regarding fraud investigations, please refer to the direct quote notes, that I compiled, in order to write my research paper-they are attached, at the end of the paper, after the References section. Thank you again.

References

Albrecht, W. Steve,& Hoopes, Jeffrey L. (Oct. 2014). Why Audits Cannot Detect All Fraud.

CPA Journal, 84. Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/pdfviewer/pdfviewer?vid=2&sid=e9212cf1-9aaf-4151-89e6-e52b02fc54be%40sessionmgr4004&hid=4111

Ference, Sarah Beckett. (Feb.2015). Failure to Detect Theft and Fraud: It’s not just an audit

issue. Journal of Accountancy, 219. Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/pdfviewer/pdfviewer?vid=4&sid=e9212cf1-9aaf-4151-89e6-e52b02fc54be%40sessionmgr4004&hid=4111

Smith, Ernest Patrick. (June 2012). The Basics of Business Valuation, Fraud and Forensic

Accounting, and Dispute Resolution Services. CPA Journal, 82(6). Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/pdfviewer/pdfviewer?vid=1&sid=45186db5-9fab-4cf6-a5be-b1787f96d8fd%40sessionmgr4001&hid=4211

Tackett, James A. (May/June 2008). Covert Investigations In The Workplace. Journal of

Corporate Accounting & Finance, 19, 7-11. doi: 10.1002/jcaf.20396.

Wells, Joseph T. (June2009). Practical and Ethical Considerations In Fraud. CPA

Journal, 79 (6). Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/pdfviewer/pdfviewer?vid=6&sid=25676ede-2b7c-419a-ad8b-a76c2cdfd05c%40sessionmgr4001&hid=4211

Appendix: Additional Reference Materials: Direct Quote Notes:

Post Master’s Certificate Degree: Northcentral University: Business Administration: Specialization: Advanced Accounting

Miss Bayo Elizabeth Cary, A.A., B.A., M.L.I.S.

Home/Cell: 001-352-262-9733 Toll Free U.S.A.: 1-888-571-0119 Fax: 1-352-433-1875

Email: bayo.cary@yahoo.com Google Blogger: bayocary.blogspot.com Twitter: @bayocary1

Mailing Address:

Miss Bayo E. Cary

1005 NW 39^th Avenue

Gainesville, FL 32609

Assignment 8: Fraud Resolution: Fraud Prevention and Detection: Final Assignment

Covert Investigations In The Workplace

In reality, covert investigations are far less glamorous—and have become routine in many large business organizations. A covert investigation is designed to obtain evidence of impropriety by discreet surveillance, forensic analysis, or undercover operations. (p. 1)

Accordingly, always consult your legal counsel before starting a covert investigation. (p. 1)

Undercover Fraud Investigations are Dangerous

A carefully planned and executed covert investigation can identify perpetrators and prevent the destruction of incriminating evidence. However, a flawed inquiry can result in litigation losses that far exceed the original theft or embezzlement that triggered the probe. Even worse, a slipshod investigation can result in serious injury or death. (p. 1)

Legal Issues

Some examples of probable cause could include missing inventory, fictitious business

documents, or the deliberate destruction of company property. Having probable cause, employers can conduct open or covert investigations. (p. 1)

Do Not Violate Employee Privacy Expectations

A key legal requirement in conducting a covert investigation is to avoid violating an employee’s reasonable expectation of privacy. Physical surveillance, including videotaping, would be acceptable in public places or open work areas, but these methods would be prohibited in lavatories or locker rooms. Similarly, outdoor surveillance of parking lots or shipping and receiving areas is acceptable, but surveillance through the windows of a private residence is not allowed. Employee offices, desks, and filing cabinets may be acceptable surveillance targets depending on the circumstances—consult legal counsel. (p. 2)

Legal Requirements for Recording Conversations

It is legal to record the conversations of others providing you are a party to the conversation in most states. In the remaining states—referred to as all-party states

(California, Connecticut, Delaware, Florida, Massachusetts, Maryland, Michigan, Montana, New Hampshire, Pennsylvania, and Washington), you must inform the other parties that you are recording the conversation. (p. 2)

Accordingly, audio surveillance can be an effective means of gathering information, provided the investigator is a party to the conversation and is not located in an all-party state. Some all-party states—Pennsylvania, for example—create exceptions to the notification rule if the conversation involves certain types of illegal activity. Again, consult legal counsel for an accurate assessment of your recording opportunities. (p. 2)

Professional Investigators

Every employer has the right to monitor the working environment of his/her employees for purposes of quality control and compliance with company policies.

(p. 2)

Most Basic Covert Investigation: Discreet

Professional Private Investigators and Covert Investigations

Fraud Examiner or Certified Forensic Accountant. Many are experts in interviewing and interrogation techniques, which are highly useful in extracting legal confessions when the covert investigation migrates into an open inquiry. Professional investigators can operate in a supportive role, giving advice and counsel, or they can conduct the covert investigation themselves. (p. 2)

Amateur Investigator

First, amateur investigators are more likely to commit legal errors in their zeal to gather incriminating evidence. (p. 2)

For example, the failure to properly document the chain of custody of physical evidence corruption. (p. 2-3)

Fourth, placing investigators in harm’s way through undercover assignments or working with informants calls for professionals. (p. 3)

Also, any routine covert investigation, such as theft of merchandise by employees, with signs of escalating threats or potential violence should be discontinued until both legal counsel and professionals are consulted. (p. 3)

Fifth, professionals should be consulted when high-tech surveillance, computer forensic, polygraph, fingerprint, or other advanced techniques are desired. (p. 3)

Sixth, many larger organizations employ internal investigators, such as internal auditors or loss prevention specialists, who hold one of the recognized fraud investigation certifications. Having such in-house talent gives them a clear advantage in conducting covert investigations. (p. 3)

Finally, almost every successful covert investigation eventually becomes an open inquiry when the desired evidence is obtained. At this point, the focus shifts from evidence accumulation to interviews and the interrogation of suspects. The suspect interrogation area can have legal complexities that require professionals. (p. 3)

Nearly every state regulates private investigators, and your legal counsel should review their license and the adequacy of their liability insurance coverage. (p. 3)

Cameras To Deter Fraud

One strategy is to place the cameras in plain view; this can serve as a powerful deterrent, but many cameras and recorders will be required for adequate coverage. Also, clever fraudsters can easily disable visible cameras, or modify their fraudulent methods to render them impotent. (p. 3)

Covert Video Camera

In a covert operation, the camera should be well hidden but still provide compelling evidence of wrongdoing if it exists. (p. 3)

Computer Forensics Evidence

Commercial “spyware” programs, such as Spector Pro 6, can silently timestamp and record which Web sites were visited, which programs were used, and every stroke of the keyboard. However, if serious legal action is contemplated, then a computer forensics specialist should be retained to clone the hard drive and preserve the available evidence in proper legal form. (p. 4)

Forged signatures and fictitious documents present another type of problem; however, a covert examination of questionable documentation is usually simple, provided a professional examiner has unrestricted access. Fingerprints can be lifted off paper documents, and a comparative microscope can flag bogus documents by examining their print and paper characteristics at high magnification. (p. 4)

A cautionary note: if incriminating evidence is discovered during a forensic document examination, the original document may need to be seized as evidence, and this seizure could destroy the “covert” element of the investigation. Under such circumstances, it may be advisable to lock down all of the related records until their value as evidence can be properly assessed.

(p. 4)

Otherwise, massive document destruction, such as Arthur Andersen shredding Enron’s working papers, could begin as perpetrators feel the heat of the investigation. (p. 4)

Undercover and Mobile Operations

However, there are times when undercover operations or mobile surveillance become necessary. These are among the most expensive and risky investigative methods, and they should only be used when absolutely necessary to achieve a highly valued objective. (p. 4)

Undercover Investigations

Undercover operations establish a fictitious identity for the investigator and then use that identity to directly gather incriminating evidence from other persons. (p. 4)

Developing a Strategic Plan

Covert investigations can produce results that are unachievable by any other means, and organizations need to develop a plan for using them where appropriate. Large organizations with internal auditing or loss prevention departments could consider hiring permanent employees who possess significant fraud investigation expertise. (p. 4)

Alternatively, such organizations could encourage their existing staff to earn one of the recognized fraud investigation certifications. Employing fraud investigation professionals internally can augment the antifraud and internal control provisions of the Sarbanes-Oxley Act, as well as provide an expert opinion on a multitude of investigative and legal questions. (p. 4)

Practical and Ethical Considerations in Fraud Examinations

The various high-profile schemes that have recently come to light across the country serve as a reminder that all CPA’s should remain vigilant, looking out for the red flags that could indicate fraud. (p. 1)

Discovery

What do you do, if you uncover a suspected fraud?

The potential for serious problems is due primarily to the adversarial nature of the fraud examination process. (p. 1)

Unlike an audit, in which the client’s cooperation is essential, fraud examination involves dealing with potentially uncooperative individuals-even liars, cheats, and thieves. (p. 1)

Legal and Ethical Questions:

How do you legally collect evidence? Witness Interviews, Suspects, Financial Institutions,& Credit Bureau Reports, etc.?

Relations with Clients

If your client authorizes you to conduct a full investigation and you accept, your work could easily end up being reviewed in court, so approach the case with that thought uppermost in your mind. (p. 1)

The failure or success of a fraud case hinges on many factors beyond an auditor’s control, including the availability of evidence, the cooperation of witnesses, and legal process. (p. 1-2)

Billing Ethics

If you bill by the hour, it would be a violation of the Certified Fraud Examiner (CFE) Code of Professional Ethics to promise the client guaranteed success in resolving the suspicion. (p. 2)

You can accept as payment a portion of any recovery of loss resulting from your efforts, provided adequate disclosure of the arrangement is made, where appropriate. (p. 2)

Disclosures to Your Client

All relevant facts, concerning the alleged fraud must be revealed to the client. (p. 2)

Disclosures to Third Parties

What can you tell third-parties, about what you are doing?

Conducting pre-text interviews, under-cover operations, and other investigative trickery can be perfectly legal. (p. 2)

Using the name of a law enforcement agency is considered “impersonation,” and it’s a crime.

(p. 2)

If you use a real company name, for a cover, then, that company can sue you. (p. 2)

Interviews and Legal Issues

You need to have a clear understanding with the client as to whether it is necessary to protect their identity. If so, you must protect it. (p. 3)

You should not disclose information, which you have gathered in other interviews. (p. 3)

Client’s Participation in Illegal Acts

If you are a CPA conducting an investigation, and you client is involved in the act of fraud, then, you must withdraw from the investigation, whoever, first, report to the board of directors. (p. 3)

For a public company, the CPA, would need to disclose, information pertaining to managements complicity, with business fraud, to the following US regulating agencies: FBI and SEC. (p. 3)

A CFE, engaging in a fraud investigation, is obligated to inform the client, prior to beginning the investigation, that, if the client-him or herself, is found guilty of fraud, the fraud will be reported, to the proper authorities. (p. 3)

Privacy Issues

Banking, credit, medical, and other personal records are governed by various laws and statutes. (p. 3)

Reporting Issues

Reporting must normally be done in writing, and no issues, that were detected, regarding possible acts of fraud, in the workplace, may be excluded. (p. 3)

The Basics of Business Valuation, Fraud and Forensic Accounting, and Dispute Resolution Services

Professional accounting services have evolved significantly over the past three decades. One such service area, well known by some but new to many, is business valuation, fraud and forensic accounting, and dispute resolution (BVFDR) services. (p. 1)

Business Valuation

Business valuation is the process of determining the estimated value of a business entity. It includes a detailed understanding and analysis of the business being valued, the industry in which it operates, and the local and national economic climates. A valuation performed in accordance with a fair market value standard—both an art and a science—represents the price at which a business interest would change hands between a willing buyer and a willing seller that have reasonable knowledge of the relevant facts. (p. 1)

What is the origin of business valuation?

Business valuation services began in the 1920s. In response to the Eighteenth Amendment, which enacted Prohibition, the IRS issued Appeals and Revenue Memorandum (ARM) 34 to establish guidelines and methodologies for determining the amount of loss sustained by a taxpayer as a result. (p. 1)

What is business valuation used for?

Business valuations services are utilized in a multitude of circumstances, including the following:

· Mergers or acquisitions

· Shareholder disputes

· Buy-sell agreements

· Gift and estate purposes

· Employee stock option plans (ESOP)

Divorce
Litigation (p. 1)

What is the difference Between a Conclusion of Value and a Calculation?

A Conclusion of Value

A conclusion of value is expressed when a valuator is engaged to perform a valuation engagement (i.e., business valuation); this requires that valuators consider all valuation approaches and methods and use their judgment to determine which are most appropriate, considering the facts and circumstances of the engagement. (p. 1)

A Calculation of Value

A calculation of value is determined when a valuator is engaged to perform a calculation engagement; this occurs when the valuator and client agree to specific valuation approaches and methods, as well as the extent of selected procedures. Simply put, the valuator will only perform the calculations agreed upon with the client. (p. 1)

What are different approaches to Business Valuation?

The following are the three approaches to business valuation:

■Asset approach

■Income approach

■Market approach. (p. 1)

It is the valuator’s responsibility to choose the most appropriate methods, given the facts and circumstances of a particular valuation (p. 1)

Asset Approach

The asset approach is a method of determining the value of a business ownership interest, based upon the value of the assets of the business net of liabilities. (p. 1)

This approach includes an analysis of the business’s tangible, intangible, recorded, and unrecorded assets, net of outstanding liabilities. The asset approach is most often used for holding companies, companies with very poor financial performance, or for liquidation purposes. Common asset methods include the following:

■The book value method subtracts the book value of a company’s liabilities from the book value of its assets.

■The adjusted net assets method subtracts the fair market value of a company’s liabilities from the fair market value of its assets.

■The liquidation method is the net amount that would be realized if a business is terminated and the assets are sold in a fragmented manner. Liquidation can be either orderly or forced. (p. 1-2)

Income Approach:

The income approach is a method of determining the value of a business interest by converting anticipated economic benefits into a present value. (p. 2)

Common income methods include the following:

Capitalization of Earnings

The capitalization of earnings method capitalizes the estimated future benefits. (p. 2)

Discounted Cash Flow

The discounted cash flow method presents the value of the business’s projected future earnings plus the present value of the terminal value (a value of stable future growth).The discounted cash flow method is the present value of the business’ projected future earnings plus the present value of the terminal value (a value of stable future growth). (p. 2)

Excess Earnings

The excess earnings method combines both the asset approach and the income approach by adding the adjusted net assets of the business to the company’s capitalized earnings, in excess of a reasonable rate of return on adjusted net assets. (p. 2)

Market Approach

The market approach is a method of determining the value of a business interest by referring to comparable guideline companies or actual merger/acquisition transactions of other comparable companies. Common market methods include the following:

The guideline public company method applies multiples to the business being valued for comparable guideline companies. This information is usually public and can be obtained through SEC filings (i.e.,10-Q, 10-K, 8-K). (p. 2)

The merger and acquisition method applies multiples to the business being valued for sales of comparable companies. This information can be obtained through databases such as Pratt’s Stats, BizComps, and IBA Market Database. (p. 2)

What is SSVS 1?

Statement on Standards for Valuation Services (SSVS) 1 is effective for engagements to estimate value accepted after January 1, 2008; it is the AICPA professional guidance applicable to members providing valuation services. SSVS 1 provides guidance for determining when an engagement is considered a valuation engagement. It was created to improve the consistency and quality of valuation services. The standard specifically outlines when an estimate of value results in a conclusion of value or a calculation of value, and it applies to all engagements regarding the estimate of value of a business, business ownership interest, security, or intangible asset. (p. 2)

What professional certifications are offered?

The following is a list of business valuation certifications from reputable associations that have experience, testing, and continuing education requirements:

■The certified valuation analyst (CVA) certification is granted by the National Association of Certified Valuators and Analysts (NACVA). A CVA is required to hold a valid CPA license.

■The accredited in business valuation (ABV) certification is granted by the AICPA. A professional with an ABV is also required to hold a valid CPA license.

■The certified business appraiser (CBA) certification is granted by the Institute of Business Appraisers (IBA).

■The accredited senior appraiser (ASA) certification is granted by the American Society of Appraisers. (p. 2)

Fraud Examination

What occurs during a fraud examination engagement?

During the initial phase of a fraud examination, the client and examiner meet to discuss why the client believes that fraud has taken place. During this meeting, the fraud examiner has the opportunity to obtain documents and direct inquiries regarding the suspect’s occupational duties and related transactional records. The purpose of these interviews is to obtain knowledge about the suspicious fraudulent activity, any weaknesses in the organization’s internal controls, misstatements in the financial statements, or misappropriations in assets. (p. 2)

What is the fraud theory approach?

The fraud theory approached consists of four parts: facts, assumptions, rationale, and conclusion (FARC). (p. 2)

During the examination, the fraud examiner identifies and documents the following items:

Facts

A fact means an event or transaction that has actually happened and is undisputed. The fraud examiner conducts a financial analysis of the facts. (p. 2)

Assumptions

An assumption means the development of a hypothesis. An assumption may also include a hypothetical fraud scheme with unique red flags that would warrant further examination. (p. 3)

Rationale

Rationale means applying logic and testing the assumptions. This is the process through which the fraud examiner determines whether the facts and the assumptions lead to a conclusion. (p. 3)

Conclusion

Conclusion means a written summary of the observations and results of the fraud examiner’s investigation and analysis. (p. 3)

What are the tools used in a fraud examination?

Analysis of Documents

Fraud examiners ensure that all relevant and material evidence is obtained and that the chain of custody is maintained for documents to be accepted by the court. (p. 3)

Evidence: Direct or Circumstantial?

Evidence is either direct or circumstantial: direct evidence shows prima facie the facts at issue, while circumstantial evidence is anything that indirectly shows culpability. The fraud examiner maintains a chronology of the evidential matter to show the trends of events leading to the conclusion. (p. 3)

Interviews

Fraud examiners conduct interviews with potential witnesses to obtain relevant information. In addition, fraud examiners plan and time the interviews in order to obtain information in a fair and impartial manner. (p. 3)

During interviews, a fraud examiner should also observe the respondent’s reactions, expressions, methods of persuasion, and behavior. (p. 3)

Covert Examination

Fraud examiners might also employ third-party agents to conduct undercover or surveillance services. The purpose of these services is to obtain information that cannot be obtained through the data analysis or interview process. (p. 3)

When is fraud examination necessary? Conducted or Initiated by Senior Management

Legal requirements

Certain regulatory agencies require an organization to provide accurate financial information and report any misconduct. (p. 3)

Liability Concerns

Forensic Accounting

Definition

Forensic accounting is the comprehensive view of a fraud investigation. It is the audit of accounting records to interpret whether a fraud has occurred, the interview process of all related parties involved in a fraud, and the act of serving as an expert witness (if applicable). (p. 3)

What is the difference between fraud examination, forensic accounting, and auditing?

Forensic Accounting

Forensic accounting is the systematic collection of financial data to analyze and interpret complex financial issues. Forensic accountants generally hold an accounting degree and are engaged by insurance companies, banks, police forces, government agencies, and other organizations. (p. 3)

Fraud Examinations

Fraud examinations can be conducted by either accountants or other professionals by utilizing the forensic account to their freedom or a financial award or loss. Forensic accountants can help a variety of users determine whether fraud or any other wrongdoing has occurred, as well as the financial impact of the fraud or wrongdoings. (p. 4)

What is a typical forensic assignment and approach?

Forensic accountants perform each assignment based upon the needs of the company or individual retaining their services. They are utilized for the following:

Corporate investigations

Companies utilize forensic accountants to react to concerns or issues, arising from various sources, that suggest possible fraud, both inside and out-side of the corporate environment. (p. 4)

Litigation support

Forensic accountants assist a company’s legal counsel in investigating and assessing the integrity and amount of the financial impact of an investigation, which would include areas such as loss of profits, construction claims, product liability, shareholder disputes, bankruptcies, and breach of contract, among others. (p. 4)

Criminal matters

In these cases, forensic accountants are utilized as expert witnesses, once they have analyzed and interpreted relevant financial transactions related to allegations against individuals and companies in various situations, such as fraud, scams, or stock market manipulations. (p. 4)

Insurance claims

Forensic accountants also work on behalf of insurance companies or policy-holders/claimants; in these situations, they analyze the insured’s financial information to determine whether loss of income is applicable to the losses claimed due to a specific incident, in which coverage might be afforded to a respective policyholder or claimant. (p. 4)

Governmental issues.

Forensic accountants can assist governments by ensuring that companies are following appropriate laws and regulations. (p. 4)

What characteristics should a forensic accountant possess?

Objectivity and independence are vital in selecting a forensic accountant. One must also consider the accountant’s education, training, and experience, especially with respect to the specific type of assignment. One should choose a forensic accountant with the background and professional experience needed to meet the demands of the assignment at hand. (p. 4)

Forensic accountants should also meet several criteria, discussed below.

Identify frauds with minimal initial information. Forensic accountants need to be able to identify a possible scheme, the manner in which it was perpetrated, and the effective procedures to help prove or disprove the potential fraud. (p. 4)

Identify financial issues.

As soon as forensic accountants are presented with a situation generated by a complaint, they must clearly identify the financial impact. (p. 4)

Knowledge of investigative techniques.

Once the issues have been identified, it is important that further required information and documentation be obtained in order to either support or refute the allegation or claim. Forensic accountants need to know not only where to find this evidence, but also the details of generally accepted accounting principles (GAAP), financial statement disclosure, and systems of internal controls.

Knowledge of evidence.

Forensic accountants must understand what is considered evidence, what is “primary” evidence, and the rules of evidence within the court. (p. 4)

Interpretation of financial information.

Forensic accountants must be conscious of a natural bias that exists in the interpretation process. Because a transaction or series of events might have more than one interpretation, it is important that accountants view each from various viewpoints to ensure that the ultimate interpretation of the presented information adheres to common sense and business reality. (p. 4)

Presentation of findings.

Forensic accountants must be able to clearly communicate their findings from the investigation in a manner that an average person with no financial or accounting background can understand. (p. 4)

Investigative skills.

Forensic accountants must apply these skills throughout the entire assignment. (p. 5)

Investigative mentality.

Along with knowledge of accounting, forensic accountants develop an investigative mentality that allows them to look beyond the boundaries set out by either GAAP, generally accepted auditing standards (GAAS), or any other basis of accounting. (p. 5)

Evidence for Court

Three principles in forensic accounting are driven by the need to prove intent in court in order to prove that fraud has occurred.

First, scope is not restricted as a result of materiality.
Second, the use of sampling is not accepted in establishing evidence.
Third, there is an assumption of the integrity of management and documentation. (p. 5)

What professional designations can be obtained in the fraud and forensic accounting field?

Certifications Required for Fraud Investigators:

The following are three fraud and forensic accounting designations from associations that have experience, testing, and continuing education requirements:

The certified fraud examiner (CFE) designation is granted by the Association of Certified Fraud Examiners (ACFE).

The certified in financial forensics (CFF) designation is granted by the AICPA. A professional with a CFF designation is required to hold a valid CPA license. (p. 5)

The certified forensic financial analyst (CFFA) designation is granted by the

NACVA. A CFFA must also hold at least one of the following certifications: ABV,

ASA, CBA, CFE, CPA, CVA, accredited member (AM), accredited valuation analyst

(AVA), chartered accountant (CA), chartered financial analyst (CFA), certified management accountant (CMA), or certified forensic accountant (Cr.FA). (p. 5)

Dispute Resolution

Dispute resolution pertains to the processes used to resolve disputes between parties, including litigation, negotiation, mediation, and arbitration. In common terms, dispute resolution is the process of resolving a dispute by addressing both parties’ needs and interests. (p. 5)

What is the role of financial experts in dispute resolution?

The financial expert’s role in dispute resolution is to explain the complex calculations of damages—including technical accounting, financial, and business matters—to attorneys and other nonfinancial parties. CPAs are professionals who can provide competent, financial, and expert services to attorneys and clients involved in the litigation process. In litigation services, the financial expert’s role is to develop an objective opinion and testify before a judge or jury. Litigation pertains to the process of a lawsuit for the purpose of resolving a dispute or enforcing a right. (p. 5)

What services do financial experts provide?

Document discovery assistance.

Dispute resolutions require attorneys and financial experts to provide evidence of facts. As a result, attorneys undertake voluminous document discovery and production processes.

Financial experts can assist by formulating precise requests for documents. (p. 5)

Establishment of facts.

Based on the documents provided, attorneys develop the facts and opinions. Financial experts can assist in understanding, organizing, and explaining the information in these documents. (p. 5)

Computation of damages.

Dispute resolution matters often require financial experts to calculate damages from actual or expected losses. Most calculations of damages require the “but for” approach and determine what would have happened if questionable historic events had been different. (p. 5)

Strategy development.

Based upon an analysis of the documents provided, financial experts can help attorneys identify strengths and weaknesses in the business issues and develop a strategy for resolution. (p. 5)

Attest to GAAP/GAAS rules and compliance.

CPAs who serve as financial experts can render opinions as to GAAP and GAAS. Financial experts can assist attorneys by attesting to the financial statements provided during discovery.

(p. 5)

Expert opinion.

CPAs are considered experts on accounting matters and can testify as to the economic, financial, and statistical aspects of dispute resolution. They can provide expert opinions on a dispute resolution matter because of their training, skills, education, experience, observation, practice, and familiarity with the subject matter. (p. 5)

What skills must financial experts possess?

Auditing.

Financial experts should be familiar with conducting investigations, analyzing financial statements, and developing cash flow statements. (p. 5)

Financial analysis.

A dispute resolution matter might require financial experts to conduct an analysis of earned income, business operations, present value, production, and business valuations. (p. 5)

Marketing analysis.

Financial experts might also collect and analyze market data and relative market share. (p. 5)

Statistics.

Financial experts often utilize statistical tools to conduct an analysis, such as sampling, regression analysis, horizontal and vertical analysis, and ratio analysis. (p. 5)

Looking to the Future

Why Audits Cannot Detect All Fraud

Certain factors can make fraud nearly impossible to discover, even when a competent GAAS audit is performed, and certain factors are often present when auditors should have detected fraud. (p. 2)

The Auditors Role

Society has long believed that the protector—that is, the “public watchdog” [U.S. v. Arthur Young & Co., 465 U.S. 805 (1984)]—against this dishonest minority is the independent financial statement auditor. (p. 2)

Arthur Levitt, former SEC chairman, articulated the auditor’s role: “America’s auditors were given a franchise by the Securities Acts of 1933 and 1934 to provide the public with accurate audited statements of companies. ... And their mission, the reason for all of that, was to protect the public investor from financial fraud”

(http://www.pbs.org/wgbh/pages/ front tine/shows/regulation/interviews/levitt.html). (p. 2)

It is important that auditors take AU 316 (SAS 99) seriously and conduct audits in a manner that makes it probable fraud will be detected” (http://www.pcaobus.org/News_and_Events/Events/2003/Speech/12-12_Carmichael.aspx). (p. 3)

Indeed, William R. Kinney Jr. and Mark W. Nelson indicated that “bank loan officers, bank regulators, members of Congress and their staff, the SEC, GAO, financial writers, financial analysts, judges, jurors, and ordinary investors appear to hold auditors responsible for higher levels of disclosure and greater audit effectiveness than auditors believe is appropriate” (“Outcome Information and the ‘Expectation Gap’: The Case of Loss Contingencies,”

Journal of Accounting Research, vol. 34, no. 2, Autumn 1996, pp.281–299). (p. 3)

Consistent with this belief, auditors are usually sued in class action lawsuits on behalf of the shareholders in cases of financial statement fraud. (p. 3)

This is demonstrated by the language used in the audit report that accompanies every 10-K filing and many auditing standards. AU section 316, “Consideration of Fraud in a Financial Statement Audit” [originally issued as Statement on Auditing Standards (SAS) 99, Consideration of Fraud in a Financial Statement Audit], states that “even a properly planned and performed audit may not detect a material misstatement resulting from fraud.” (p. 3)

A fuller understanding of when auditors can or cannot be expected to detect fraud should guide auditors, expert witnesses, legal practitioners, policymakers, and the investing public as they observe instances in which fraud is discovered in a company previously subject to a financial statement audit and where auditor negligence is being considered. (p. 3)

Background: Nature of the Audits

There are two types of financial statement-related audits that are performed today—regular financial statement audits and fraud audits. (p. 3)

The term “financial statement audit” refers to an audit that looks at the financial statements in their entirety, on a sample basis, with the goal of forming an opinion as to whether the financial statements, as a whole, are fairly presented. (p. 3)

Financial Statement Audits

Financial statement audits involve the examination, usually on a sample basis, of the entirety of the financial statements and are performed according to promulgated standards set by the PCAOB for public companies and by the Auditing Standards Board (ASB) for nonpublic, nongovernmental organizations. (p. 3)

Financial Statement Fraud Audits

Fraud audits are much more detailed and look in greater depth at specific elements that might be misstated. These audits are designed to detect financial statement fraud, and they most often only occur after there is suspicion (predication) of actual fraud. (p. 3)

The fraud auditors physically confiscated all the computers of suspected perpetrators, interviewed hundreds of individuals, and audited 100% of the transactions in the suspected accounts. These steps are neither contemplated by GAAS or PCAOB auditing standards for a regular financial statement audit, nor are they feasible for such audits. (p. 4)

Could The Auditor Have Detected Fraud?

. . .four factors that made it extremely difficult—if not impossible—for even a properly designed and performed financial statement audit to detect a material fraud:

The nature of accounting records necessitates sampling

The use of outsiders to help conceal the frauds

Reluctance of people to disclose what they know

Forgery and lying. (p. 4)

Nature of Accounting Records

Too Large a Sample Size

The first reason why a well-conducted GAAS audit did not detect material financial statement fraud was the voluminous nature of accounting records and the economics of financial statement audits. (p. 4)

Large Amount of Data to Be Audited

In another case, a large industrial corporation was audited using proper techniques; however, the company concealed fraud within vast amounts of data, and the valid random samples taken by the auditor simply did not include fraudulent transactions. (p. 4)

Hidden Financial Information

In one case, the fraudsters hid the fraudulent transactions in very minor and remote subsidiaries that were beyond the scope normally examined by the auditors. (p. 4)

Spread Out Locations of Companies

Further complicating the nature of audits is the fact that most large companies are spread out in various locations. (p. 4)

While a single store probably could not commit a fraud that would be material to Wal-Mart’s financial statements, the company’s various divisions could. (p. 4)

Errors vs. Intentional Acts of Fraud

The audit scope assumes that errors that fall beyond the scope of the audit are uncorrelated or random; however, collusion among managers that turns errors into fraud can make this assumption untrue. (p. 4)

Use of Outsiders To Help Conceal The Fraud

Bribery and Deception

The bank’s president and executive vice president—individuals completely unrelated to the general partners—had been bribed by the partners to respond to the auditors and remove the liens for one day; thus, they colluded with the general partners to deceive the auditors. (p. 6)

GAAS and other auditing standards allow auditors to accept confirmations as audit evidence.

(p. 6)

Collusion

Even when auditors go the extra mile, as they did in this case, there is always one more deception, one more collusion, one more forgery, or one more act of concealment that can be used to mislead financial statement auditors. (p. 6)

The ability of perpetrators to rely on unrelated outsiders to collude, forge, and use off-book entities makes some frauds very difficult—if not impossible—to detect, even when an audit is performed in accordance with professional standards. (p. 6)

Reluctance of People to Disclose What They Know

A third problem that makes financial statement fraud very difficult to detect is that company employees and others who have knowledge of the fraud often do not help external auditors—indeed, they often lie to protect their supervisors or colleagues, or they assume that these supervisors or colleagues know what they’re talking about. (p. 6)

Uncertainty About Suspected Fraud

Another reason for not disclosing suspicious activity is the difficulty in knowing for sure that a fraud has been committed. (p. 6)

First Reaction to Fraud, at a Company: Denial:

The first reaction of those victimized by fraud is usually denial. They then generally attempt to try to convince themselves that fraud could not be happening at their company, nor could their trusted coworkers commit fraud; as a result, they don’t report suspicious activity. (p. 7)

The five distinct stages, of fraud victims: denial, anger, rationalization, depression, and acceptance (W. Steve Albrecht and Timothy L. Williams, “Understanding Reactions to Fraud,” Internal Auditor, vol. 47, no. 4, August 1990, pp. 45–51).] (p. 7)

Whistleblower Consequences

Even once they feel confident that something is not right, employees of an otherwise normal-seeming company are often hesitant to divulge information that may indicate fraud because they fear the consequences. (p. 7)

Whistleblowers often lose their jobs or see their companies experience serious financial and legal problems if material financial statement fraud is found. (p. 8)

Before a fraud audit is conducted, a fraud is generally already suspected. (p. 8)

Employee and Consumer Assistance in Fraud Investigations

The resulting uncertainty and shift in social attitudes toward disclosure make people more willing to tell what they know and help the fraud auditors. The unwillingness of knowledgeable individuals to assist is much more common in annual financial statement audits than in fraud audits. (p. 8)

Concentric Circles of Knowledge Surrounding Fraudulent Activities

In the authors’ experience, people are aware of a fraud at different levels, which can be represented by concentric circles. (p. 8)

Inner Circle:

The inner circle, which contains the key perpetrators, usually involves only two or three individuals, often including the CEO and CFO. (p. 8)

Next Circle:

The next circle, which includes those individuals who were first recruited to help with the fraud, rarely see the fraud in its entirety; rather, they are usually exposed to only a few fraudulent elements, none of which seems too large or too egregious. (p. 8)

Next Circle:

Further removed from the key perpetrators are those individuals asked to assist in making suspicious transactions or other accounting entries in order to help with the fraud or concealment. These individuals often do not suspect fraud but, instead, assume that, even though management is asking them to do something unusual, it knows what it is doing; therefore, they comply with the illicit requests. (p. 8)

Outer Circle:

Even further away are those who are not directly involved in the fraud but who observe events and accounting entries that appear questionable. Because these individuals do not see the entire fraud and are not actually involved in perpetrating it, they usually dismiss the questionable actions as something other than fraud. (p. 8)

First Time Offenders:

In addition, because fraud perpetrators are usually first time offenders who cannot be distinguished from nonperpetrators unless conspicuous red flags of egregious behavior are observed, such observers often believe there is no reason to suspect fraud. (p. 8)

Forgery and Lying:

A fourth reason why auditors may not detect a financial statement fraud is forgery and lying. Although it isn’t their main purpose, GAAS auditors are always on the lookout for fraud symptoms, including analytical symptoms, internal control symptoms, documentation or records symptoms, lifestyle symptoms, behavioral symptoms, and tips or complaints—anything that could be a red flag. (p. 8)

But regardless of how hard auditors search for fraud symptoms, they often cannot be expected to find fraud that involves forgery and lying. (p. 8)

Indeed, AU section 316 states that auditors are not trained to be forgery experts. In paragraph 9, it continues: “Employees or members of management who misappropriate cash might try to conceal their thefts by forging signatures. (p. 8)

Sufficient Financial Statements Audits Not Performed

. . .four factors—which are not completely independent of each other—that existed in the financial statement fraud cases where fraud was not detected, but where, in the author’s opinion, a competent financial statement audit was not performed:

Inadequate training and experience of the auditors

Poor audit execution—planning, gathering evidence, and examining controls

Failure to exercise due professional care

Lack of independence.

Inadequate Training and Ability:

Field Time:

It is common for the youngest and most inexperienced auditors to spend the most time in the field during an audit. As a result, these auditors are most likely to have first-hand exposure to fraud symptoms if they exist. On the other hand, the most experienced auditors typically spend less time in the field; thus, they are less likely to see any fraud symptoms. (p. 9)

Poor Audit Execution:

Field Work Auditing:

Fieldwork auditing standards require that audits be properly planned, that internal controls be examined, and that sufficient evidence be obtained. (p. 10)

Audit Failure: Management Explanation:

Probably the most egregious audit failure involving poor execution in our sample was a large fraud where the auditors actually saw several red flags that fraud was occurring, asked management about them, and then accepted management’s explanations without getting the corroborating evidence that, in an expert’s opinion, would have been easily obtain able. (p. 10)

Failure To Exercise Due Professional Care

Auditors cannot detect all material financial statement frauds, but there is no excuse for not catching fraud because of a failure to exercise due care. (p. 10)

Lack of Independence

Lack of independence ranges from cases where auditors are willfully complicit in the fraud to those where auditors might not be completely independent. Serious cases are relatively easy to prove. The more difficult cases are those where auditors are not completely independent and their mental state has been changed, perhaps even at an unconscious level, allowing frauds to go undetected. (p. 10)

Closing the Expectation Gap

The investing public, as well as lawmakers, juries, regulatory agencies, and others, often expect auditors to detect all material financial statement fraud; however, the auditing standards do not, and have never, indicated that detecting all material financial statement fraud is possible. (p. 10)

This expectation gap often results in costly auditor litigation, even when a financial statement audit has been conducted in accordance with professional standards. (p. 10)

Failure To Detect Theft and Fraud: It’s Not Just an Audit Issue

Commonly referred to as the “expectation gap,” a disconnect sometimes exists between a CPA’s professional responsibility for detecting theft and fraud and the general public’s perception of a CPA’s duties. (p. 1)

However, claims made against CPAs in the AICPA Professional Liability Insurance Program alleging failure to detect theft and fraud emanate from all types of engagements, including those generally regarded by CPAs as low-risk, such as

bookkeeping or tax compliance services. (p. 1)

Limiting Risk Exposures

Regularly evaluate the risk of the client and the engagement. Client and engagement acceptance and continuance are not simply for audit engagements. Regularly screen clients and consider the risks associated with both the client and the services you are being engaged to perform. It should raise a red flag for the CPA when clients dismiss internal control weaknesses brought to their attention. Is this a situation where the client has an unreasonable service expectation, or is it possibly one of questionable integrity? Either way, the CPA should take precautions. (p. 2)

Use engagement letters on all engagements. That’s correct—all engagements. A well-crafted engagement letter can help reduce expectation gaps and can serve as key evidence in the defense of a professional liability claim. The engagement letter should include an understandable description of the scope and limitation of services to be performed, a statement that the engagement is not designed to detect theft or fraud, and the responsibilities of both the client and the CPA. The engagement letter should also be renewed and signed by the client annually. (p. 2)

Stay within the scope of the engagement. An engagement letter is useful only if the CPA adheres to the defined scope in rendering the professional services. Additional services, or modifications to agreed-upon services, should be memorialized in writing with the client, whether it’s through email, a new engagement letter, or an amendment to the existing engagement letter. (p. 2)

Be fraud aware. Train all firm personnel, not only auditors, about potential fraud risk factors and the “fraud risk triangle” (opportunity, rationalization, and incentive/pressure). Learn about the risk factors associated with common frauds, such as embezzlement by an unmonitored book keeper or controller with excessive authority or access, or use of business credit cards for personal expenses. Firm personnel should be educated about common internal control weaknesses that create an opportunity for fraud to occur, such as a lack of segregation of duties, poor tone at the top, or infrequent vacations taken by key financial employees. (p. 2)

Apply professional skepticism to all engagements. This is particularly important on engagements with long-time clients, where a level of established comfort could threaten objectivity. Trust your instincts and follow up on matters that don’t seem quite right. (p. 2)

If you see something, say something. Management letters with suggestions for control or process improvements are not designed solely for audit clients. If you observe a weakness in internal controls or believe management should follow-up on an observation noted, inform your client orally and in writing. If the weakness persists year after year, keep telling the client both orally and in writing until the deficiency is addressed. (p. 2)

Document, document, document. Contemporaneous documentation represents critical evidence in the defense of professional liability claims. Strong documentation includes, at a minimum, a well-crafted and detailed engagement letter, documentation regarding client inquiries made and responses received, and communication of internal control matters or suspicious activities noted. (p. 2)

References

Albrecht, W. Steve,& Hoopes, Jeffrey L. (Oct. 2014). Why Audits Cannot Detect All Fraud.

CPA Journal, 84. Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/pdfviewer/pdfviewer?vid=2&sid=e9212cf1-9aaf-4151-89e6-e52b02fc54be%40sessionmgr4004&hid=4111

Ference, Sarah Beckett. (Feb.2015). Failure to Detect Theft and Fraud: It’s not just an audit

issue. Journal of Accountancy, 219. Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/pdfviewer/pdfviewer?vid=4&sid=e9212cf1-9aaf-4151-89e6-e52b02fc54be%40sessionmgr4004&hid=4111

Smith, Ernest Patrick. (June 2012). The Basics of Business Valuation, Fraud and Forensic

Tackett, James A. (May/June 2008). Covert Investigations In The Workplace. Journal of

Corporate Accounting & Finance, 19, 7-11. doi: 10.1002/jcaf.20396.

Wells, Joseph T. (June2009). Practical and Ethical Considerations In Fraud. CPA

Journal, 79 (6). Retrieved from http://eds.a.ebscohost.com.proxy1.ncu.edu/eds/pdfviewer/pdfviewer?vid=6&sid=25676ede-2b7c-419a-ad8b-a76c2cdfd05c%40sessionmgr4001&hid=4211

Advanced Accounting: Northcentral University: Post Master's Certificate: Bayo Cary

Saturday, April 18, 2015

Advance Accounting: Fraud Resolution: Case Study: Walgreens Gainesville, FL USA Under-cover Fraud Investigation Bayo Cary

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