best practices in conducting financial investigations

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Best Practices in Conducting Financial Investigations in a Cashed-Based Economy Compiled and Presented BY Chief Godwin Emmanuel OYEDOKUN (HND, BSc.Ed, MBA, MTP (SA), ACA, ACIB, AMNIM, ACTI, CFA, CFE, CPFA, FCFIP, CCFS, CNA, ACAMS, ACCA-CertIFR) Asst. Director (Head) Education, Research & Technical The Chartered Institute of Taxation of Nigeria (CITN) DL: +2348033737184, +2348095491026 [email protected] Being a paper presented at the C5’s Third Forum on Anti-Corruption West Africa Held at Mövenpick Ambassador Hotel, Accra, Ghana on June 10 - 11, 2014

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Best Practices in Conducting Financial Investigations in

a Cashed-Based Economy

Compiled and Presented

BY

Chief Godwin Emmanuel OYEDOKUN(HND, BSc.Ed, MBA, MTP (SA), ACA, ACIB, AMNIM, ACTI, CFA, CFE, CPFA, FCFIP, CCFS, CNA, ACAMS, ACCA-CertIFR)

Asst. Director (Head) – Education, Research & Technical

The Chartered Institute of Taxation of Nigeria (CITN)

DL: +2348033737184, +2348095491026

[email protected]

Being a paper presented at the

C5’s Third Forum on Anti-Corruption – West Africa

Held at Mövenpick Ambassador Hotel, Accra, Ghana on June 10 - 11, 2014

This presentation will cover the following major sub topics as follows:

• Introduction

• Corruption and its Challenges

• Cashed-Based Economy

• Black Economy & Underground Economy

• Investigation without accurate, incomplete or unreliable data

• Best Practices in conducting Financial Investigations

• Fraud, fraud triangle and the triangle of fraud action

• Forensic accounting techniques and forensic accountants in court

• Conclusion

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Contents

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• Conducting investigation in cashed-based economy could be so tasking to

the extent that if care is not taking, it may amount to wasted effort, both in

term of fund and human resources employed in the cause of the

investigation.

• World economy is in stimulating, though in challenging times, effort must be

made and proper foundations must be laid to check the effect of the

challenges that comes with it.

• Fraud and corruption risks are not going away, in the word of Amato (2014),

the threats facing companies doing business anywhere, but especially in

emerging markets, are growing in number and complexity.

• It has been proven that traditional investigative skill can no longer resolve the

challenges posed by the fraudster in this century.

• This presentation will explore the Best Practices in conducting financial

investigations in a cashed-based Economy by exposing the reads to the

concepts that closely related to the understanding of the key words in this

article.

Introduction

Corruption is the violation of the obligations of probity, fidelity andimpartiality in the exercise of a public service, to the detriment of theuser.

Corruption is said to have taken place when an individual is paid toperform or refrain from performing his duty either with gifts, promisesor presents; corruption is also deemed to have occurred when anindividual pays a compliant professional to do his work or to refrainfrom doing so (Gerddes-Cameroon 1999).

So many lives have been lost in the bid to tracing, investigating,exposing, prosecuting and serving as expert witness in financialinvestigation of these nature.

This then leaves the professional forensic investigators to no otheroption than to explore the best practices in conduction investigation ofthis nature.

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Corruption and its Challenges

Wednesday, February 18,

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• According to collinsdictionary.com, cashed-based economy is an

economic system, or part of one, in which financial transactions are

carried out in cash rather than via direct debit, standing order, bank

transfer, or credit card.

• In this type of economy, it will be very difficult to trace the flow of fund

and the possibility of government losing tax income is very high.

• It is an unofficial or illegal part of the economy, where goods and

services are paid for in cash, and therefore not declared for tax

(qfinance.com)

• Cashed-based economy is not the same with cash basis of accounting

which is a major accounting method that recognizes revenues and

expenses at the time physical cash is actually received or paid out.

• Cashed-based Economy is similar to black economy or underground

economy.

Cashed-Based Economy

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• A black economy, is an economy where goods and services are paid for in

cash, and therefore not declared for tax (Investopodia).

• Activities in Black Economy are usually untraceable, and hence untaxable,

business dealings that are not reflected in a country's gross domestic product

(GDP) computations.

• To Business Dictionary.com, black or cash economy is an integral part of most

third-world and many first-world economies, it is a cash based system in which

transaction records are kept in secret account books (called 'number two'

accounts).

• Though it employs illegal (and even criminal) methods, it is a survival practice in

repressive tax regimens or where legitimate expression of entrepreneurial

activity is made unnecessarily difficult by a maze of regulations.

• Black economy and black money go hand in hand. Also called parallel

economy, shadow economy, or underground economy. (Business

Dictionary.com).

Black Economy

The underground economy, also known as the shadow economy, has beenin existence as long as its legitimate counterpart.

The difference is that the government has any number of methods fortracking the exchange of goods, services and currency in an above-boardeconomy, but very few ways of tracking the activities of a shadow economy.

Prostitutes, gamblers and others earning illicit incomes are not likely toprovide the government with accurate income information on their taxforms, for instance, and cash-based transactions often work best withoutgovernmental interference.

In the statement of Wisegeek.org “when government agencies calculateeconomic figures such as the gross national product (GNP), they rely oninformation gathered from legitimate income reports generated bycompanies, non-profit organizations, and individual taxpayers.

What these agencies cannot use in their economic forecasts, however, arethe estimated billions of dollars in cash circulating through what is knownas the "underground economy."

This includes income generated through illegal means, such as prostitutionor gambling, as well as legitimate but cash-based activities such as onlineauctions or bartering services”. 7

Underground Economy

Investigations Investigation is a vital part of auditing process but only applied when the

event or transaction is beclouded.

It is carried out when lapse has been established to ascertain who isresponsible, the reason for the action including the extent of damage if any.

It could be referred to as a detailed verification and clarification of doubtabout a transaction or event.

The search and examination of the particulars of an event to determine thehidden, unique, or complex facts surrounding the event.

A deliberate search and review of records in accordance with the laid downand agreed policies in order to ascertain if and why the keeping of therecords resulted in a gap and the responsible person.

Investigation is a structured gathering of documentary evidence andtestimony to resolve an allegation of improper activity.

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Interview and Interrogation

Interview and interrogation as evidence-gathering techniques involveasking people questions.

The basic difference is that interrogation is confrontational whileinterviewing is not.

In either case, the interviewer records both the answers to the questionsand physical behaviors; these may include the interviewed person lookingat the floor rather than making eye contact.

Key information to gather centers on the suspect’s pressures: Being deep indebt; Perceived opportunities such as having access to the organization’sassets; and Rationalization due to being passed over for a promotion.

Effective interviewing is a skill that can be enhanced with continuouseducation and practice.

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Wednesday, February 18,

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• It is not impossible that most of the information needed to access

financial impropriety are not available.

• This may be due to a deliberate destruction of data by the fraudster in

order to cover their track.

• Investigation, when accurate data are missing, incomplete and or

unreliable requires that the Forensic investigators employ forensic

accounting techniques.

• As postulated by ACFE (2013:286), Information about the suspect

business should be obtained, including information about the

organization, personnel, money flow pattern (source of available funds,

related expenditures, etc), and location of bank accounts, financial

condition, and recordkeeping system.

• This information can be obtained through interview of employees,

customer, and competitors; business; and business public fillings.

Investigation without accurate, incomplete or

unreliable data

Best Practices in conducting Financial Investigations

The following among others are the methods ofproving (investigating) corrupt payment (ACFE2013):

Identify and trace them by audit steps

Turn an inside witness

Secretly infiltrate or record ongoing transaction

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Best Practices in conducting Financial Investigations

The following questions provides lead way into resolvingthe allegation of corruption and fraudulent activities (ACFE2013):

How is the business organize, legally and structurally

Who are the key personnel associated with the enterprise

What is the money flow pattern involved in the transaction

Where are the company’s bank accounts

What is the financial condition of the business

What is the company’s record-keeping system

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Sources of information

Principals, employees, and records of suspect business

Customers and competitors

Banks and lending institutions

Business reporting companies

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Best Practices in conducting Financial Investigations

Best Practices in conducting Financial Investigations

Best practices in financial forensic investigation of off-book andpayments in cash demand that the forensic investigators should havethe expertise in:

Identifying the indirect evidence of unrecorded sales on the suspectcompany’s Book and Records;

Identifying unbalanced ratio of cost to sales;

Conducting Investigation in the marketplace;

Matching evidence of cash withdrawers or disbursements;

Looking for the purchase of cashier’s cheques or wire transfers payableto the recipients at, or shortly after, cash withdrawer or disbursement;

Look for correlation between cash-generating transactions and ,moneywires or currier services which are sometimes use to send cash;

The use of Visual or surveillance if the scheme is ongoing;

Interviewing the payer if known;

Focusing investigation on the suspected recipients

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Definition of Fraud:intentional

(deliberate) deception resulting in injury to

another person

In a broad strokes definition, fraud is a deliberate

misrepresentation which causes another person to suffer damages, usually

monetary losses.

Most people consider the act of lying to be

fraudulent, but in a legal sense, lying is only one small element of actual

fraud.

Fraud usually involves lying for a specific gain that causes someone

loss while lying does not always include hurt.

Fraud and lying

Wednesday, February 18,

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Lie is to bridge a gap???????????.

Strangers lies 10 times in 10mins when

they first meet.

In fact, Men lie 8 times to boost self up.

Godwin: Please give practical examples in

class

Fraud and lying

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Which of these can organization control and how?

Fraud Triangle Fraud Examiners relies on the Fraud Triangle to find weak points in

business processes and identify possible suspects in cases of fraud.

It consists of three core concepts that together create a situation ripe forfraud; incentive, opportunity and rationalization.

People must have the incentive and opportunity to commit financialfraud as well as the ability to justify it.

Recent analysis has suggested adding a fourth concept to make adiamond: capability.

Just because someone has the opportunity or incentive to steal, it doesn'tmean that they have the capability to do so.

For example, if someone doesn't understand how to do journal or ledgerentries, they wouldn't know how to manipulate the numbers no matterwhat the incentive or opportunity.

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Triangle of Fraud Action Albrecht et al (2006) and Kranacher et al (2011) described the

action an individual must perform to perpetrate fraud asfollows (Dada 2013):

The Action - the execution of the fraud, embezzlement,cheque kiting or material fraudulent financial reporting.

Concealment- hiding of the fraud action by raising falsejournal, falsification of bank reconciliation and destroyingfiles

Conversion – this is the process of turning the gains fromfraud into something useable by the perpetrator for instance,money laundered, cars or house.

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Wednesday, February 18, 2015 20

Is your tool sophisticated enough to

Investigate or fight fraudsters?

Wednesday, February 18, 2015 21

Fraud Investigations & Govt. Agencies

Forensic Accounting

Forensic accounting has been defined as "accounting analysis that canuncover possible fraud that is suitable for presentation in court.

Such analysis will form the basis for discussion, debate, and disputeresolution."

Forensic accounting, sometimes referred to as investigative accounting, isa unique career field that combines accounting with informationtechnology.

A Forensic Accountant uses his knowledge of accounting, law,investigative auditing and criminology to uncover fraud, findevidence and present such evidence in court if required to.

According to Oyedokun (2013), Forensic Accounting is a ScientificAccounting method of uncovering, resolving, analyzing andpresenting fraud matters in a manner that is acceptable in thecourt of law

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Why is forensic accounting

Because of the struggling stock market and lack of investorconfidence which has forced many organizations to take a long, hardlook at their financial statements.

A sluggish economy with its attendant problems

The increase in white collar crime and the difficulties faced by lawenforcement agencies in uncovering

Many accounting firms believe that the market is sufficiently large tosupport an independent unit devoted strictly to forensic accounting.

The need to use investigative skills to seek out irregularities incompanies’ financial statements

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Uses sophisticated computer programs

Performs investigative accounting as well as litigation support.

Use both accounting and investigating skills to interpret financialevidence

Expert witnesses

Review financial records for mergers and acquisitions.

Serve as advisers to a corporation’s audit committee

Work to resolve shareholder disputes within a company.

Calculate economic damages

In a criminal case, a Forensic Accountant may be asked to presentevidence of insurance fraud, identity theft, money laundering, terroristfinancing, embezzlement, price fixing, stock market manipulation, orother related offences.

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Forensic Accountant

To be successful as a forensic accounting, forensic investigator/anti-fraud professional, you must be:

detail oriented,

persistent,

ambitious, and

highly organized.

a great deal of creativity,

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Forensic Accountant cont’

Qualities and Qualifications of Forensic Accountants

Characteristics

• Curiosity;

• Persistence;

• Creativity;

• Discretion;

• Organization;

• Confidence; and

• Sound professional judgment.

A capable Forensic Accountant should have the following characteristics (Zysman, 2011):

• A Forensic Accountant must be open to consider all alternatives, scrutinize the fine details and at the same time see the big picture. In addition, a Certified Fraud Examiner must be able to listen effectively and communicate clearly and concisely.

Forensic Accountant

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Forensic Accountants in Court

A key piece of evidence is the report of the Forensic Accountant.

The report should not be accusatory or conclusive as to guilt. It is

critical to ensure that the tone of the report is not inflammatory or

prejudicial.

•The fraud trial can be a civil or a criminal trial.

•In either case, the role of the Forensic Accountant is to study

relevant materials documents, and the authoritative literature

relating to the case on hand.

•Direct and cross examination questions will be asked, and the

Forensic Accountant has the responsibility to answer these

questions clearly and concisely.

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Forensic Accountant in Court

To Zysman, 2004, in court, the Forensic Accountant can

be:

• an expert witness,

•a consultant, or

•play other roles such as Trier of fact,

•special master,

•court-appointed expert,

•referee,

•arbitrator, or mediator

Godwin, explain types of witness and their roles

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• Cashed-based economy is an economic system, or part of one, in which

financial transactions are carried out in cash rather than via direct debit,

standing order, bank transfer, or credit card.

• It was noted that in this type of economy, it is difficult to trace the flow of fund

and the possibility of government losing tax income is very high.

• Government tax income is always badly affected if the most of the entities in

such country operate in black economy or underground economy.

• Government of each countries are to intensify effort in ensuring that the

Cashless policy in respective countries are working.

• In the word of the Central Bank of Nigeria through one of its deputy Governors

Kingsley Moghalu, “Nigeria is predominantly a cash-based society and this is

not good for us.

• This is why the CBN decided to launch the Cash-Lite Policy; so that Nigeria

can join other developed economies that adopted cashless society”.

• The nation (Nigeria) runs a cash-based economy and this informed the central

bank’s Cash-Lite Policy which aims to reduce the amount of cash in

circulation (Moghalu 2014) in Tarpel (2014).

Conclusion

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Albrecht W. S (2006), Fraud Examination, Thomson South-Western Publishing, 2006.

Association of Certified Fraud Examiners (2013): 2013 International Fraud Examiners

Manual

Association of Certified Fraud Examiners, www.acfe.com

Amato N. (2014) Six fraud and corruption trends for 2014; Downloaded from

http://www.cgma.org/magazine/news/pages/20149359.aspx on 17/02/2014

Anti-money laundry and Combating Terrorist Financing Min Zhu, Deputy Managing Director of

the IMF http://www.imf.org/external/np/leg/amlcft/eng/

Enyi, E.P (2008): Detecting Causes of Variances in Operational Outputs of Manufacturing

Organizations: A Forensic Accounting Investigation Approach. Downloaded from

http://ssrn.com/abstract=1144783 on 17/03/2014

Ezumba S. (2011), The Transition to a cashless economy in Nigeria; downloaded from

http://www.reinventrebuild.com/nigeriaone.php on February 2, 2014

Forensic; Downloaded from http://www.thefreedictionary.com/forensic on March 25, 2014

Forensics; Downloaded from http://dictionary.reference.com/browse/forensic on March 25, 2014

Investigation; downloaded from http://dictionary.reference.com/browse/investigation?s=t

Becca, Howard, Jayne, Brian (2004), Interview and Interrogation;

http://ncthakur.itgo.com/chand3a.htm March 25, 2014

Bruce L. (nd), The stages of money laundering

http://www.bankrate.com/brm/news/bank/20060628c1.asp on March 26, 2014

References

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Investopedia http://www.investorwords.com/9108/cash_economy.html

http://www.qfinance.com/dictionary/cash-economy

http://www.businessdictionary.com/definition/black-economy.html

http://www.investopedia.com/terms/m/moneylaundering.asp

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