Which fraud detection procedures are most often performed?

This column provides an outlet for some new research into fraud and related studies. The ACFE doesn't necessarily vouch for the methods and results of any research in these columns. This material is food for thought and discussion. — ed.

Every fraud has its unique features. Therefore, every fraud examination will have its differences. However, commonalities might also exist — especially the detection procedures and investigation techniques. Certainly, we've taught that to our students through the years. We wanted to explore those commonalities. We wanted to discover those fraud procedures that, by and large, fraud examiners perceive as most useful and determine if a "list of procedures" exists for a typical fraud examination. Those were our two areas of interest as we began a quest to survey fraud examiners about how they uncover fraud.

Discovering a common set of procedures and perceptions for different fraud examination techniques could be useful in many ways. Fraud examiners could compare their procedures against this "industry standard," so to speak. Perhaps fraud examiners are overusing, underusing or not even considering certain methods at all.

We can also make the same comparison to evaluate the fraud detection efforts of others, especially when the evaluators don't have direct experience in the field of fraud detection. Finally, finding a common set of fraud detection procedures could inform students and educators of the relative importance of such procedures and facilitate the training of future fraud examiners. These are the things we wanted to discover from fraud examiners through our survey.

Survey testing and results

Before we devised our survey, we read everything we could find that provided "lists" of fraud detection procedures. We talked with a former FBI agent, CFEs and CPAs about each and every item on the lists to try to determine the most common procedures in use.

We first tested the survey with a small group of fraud examiners we know personally, and with a group of professors who teach fraud and forensic accounting classes. After we were satisfied that we were asking the right questions, we had to ask them of the right people.

We contacted a number of local ACFE chapters and offered to be the speaker for one technical meeting. During the networking time at each of the four chapter meetings, we asked the ACFE meeting attendees to take our survey anonymously, and, in exchange, they were entered in a raffle for a small prize. Nearly all of the attendees participated. We also administered the survey at two fraud conferences. We had 151 responses in pencil and paper and another 45 responses using the Survey Monkey version of the survey. A total of 178 completed the survey in its entirety. Most of the respondents were CFEs.

In our survey, we asked the respondents if they could supply fraud investigation procedures they ALWAYS apply. Fifty-five provided answers. An edited list of those procedures is in Exhibit 1. Twenty respondents listed "inquiries" or "interviews" with management and/or employees as a procedure they always follow. Two of the respondents always evaluate internal controls and two always conduct surveillance. [Interestingly, two of the respondents use social media (including Facebook, Twitter and LinkedIn) — a new fraud procedure in the social networking era.

In another part of the survey, we supplied a list of 36 techniques and procedures that we'd gathered from anti-fraud practitioners and academics. (See Exhibit 2 below.) The survey asked each respondent to think of the fraud investigation procedures he or she performs and to indicate for each of the 36 procedures whether he or she normally performs the procedure when investigating suspected fraud, and, if so, how often. The survey asked all respondents to circle answers between 1 ("never") and 5 ("always").

Those procedures that had a score of more than 3.5 out of 5 (i.e, closest to "always") included: 1) Examine canceled checks/bank statements. 2) Examine documents, looking for erasures, alterations and other oddities. 3) Examine credit card receipts. 4) Search for management overriding of controls. 5) Examine expense invoices. 6) Examine purchase documents, where applicable.

A second question asked, "Which THREE of the investigation procedures described above are the most important to you?" The answers to that question were somewhat expected but also somewhat surprising. (See Exhibit 3 below.) The "top three most important procedures" that at least 15 percent of the respondents listed included: 1) Search for management overriding of controls. 2) Examine canceled checks/bank statements. 3) Examine documents, looking for erasures, alterations and other oddities. 4) Examine endorsements on canceled checks. 5) Apply ratio analysis, horizontal analysis and/or vertical analysis. 6) Search for extravagant lifestyles. 7) Examine expense invoices.

Reflect the global community?

In gathering the information, we realize these 178 fraud examiners might or might not reflect the global community of those who search for and detect fraud. Many of the answers reflect auditing techniques and not necessarily investigative methods — an important component of fraud examinations.

However, the information we found answered our two areas of interest. Additionally, because of this project we're better able to educate our students — the fraud examiners of tomorrow. As a result of this survey, we've created a list for those less experienced in fraud detection to have a starting point for future fraud examinations. 

Lynn H. Clements, DBA, CFE, CPA, CGMA, is the Dorotha C. Tanner Chair in Ethics in Business & Economics and professor of accounting at the Barney Barnett School of Business & Free Enterprise in Florida Southern College in Lakeland. Her email address is: LClements@flsouthern.edu.

Michael Knudstrup, Ph.D., is an assistant professor of business administration at the Barney Barnett School of Business & Free Enterprise in Florida Southern College in Lakeland. His email address is: mknudstrup@flsouthern.edu.

Exhibit 1: Fraud procedures suggested

• Actions/involvement inconsistent with job responsibilities
• Claim activity outside perceived norms. 
• Claim volume inconsistent with area.
• Discuss fraud with employees; explain characteristics.
• Ask employees how they would commit fraud in their area.
• Ask employees if they are aware of any current/previous fraud.
• Ask if they are suspicious of anyone or anything.
• Fraud inquiries of management and some employees.
• Review unusual balance in G/L sub ledgers and payroll controls.
• Inquiry to management and employees in regards to their knowledge/ suspicion of fraud.
• Criminal background check on all suspects.
• Review of security video if present.
• Interview witnesses.
• Subpoena and review records and documents.
• Polygraph suspects/ interrogate suspects.
• Double-checking calculations and reviewing system trails for altered data.
• I assign all the travel cases to detectives and I review all the work that they do.
• Search social media, Facebook, 
• LinkedIn, Twitter.
• Search for conflicts of interest or related parties.
• Conducting an internal control and fraud risk conversation with client management. 
• Ask about knowledge of prior or current fraud risks and fraud occurrences.
• Statement analysis.
• Behavioral interviews.
• Video review.
• Interview and interrogation.
• Interviews.
• Proof of cash.
• Inquiries.
• Check for errors in paying duplicate invoices and/or a number of unapplied credits.
• Consideration of internal controls and effectiveness is always a start.
• Talk to each person involved in financial activity and thoroughly understand their role.
• Compare financial statement to tax returns.
• Interview key employees.
• Net worth.
• BK department analysis.
• Credit card expenditures for patterns.
• Verify and thoroughly examine funds being transferred from the same client interviews.
• Review social media of key players.
• Check blank-check supplies for missing numbers.
• I always talk to employees about their job and policies and procedures.
• If possible, interviews with employees and management team.
• Document searches for specific type of documents or specific words.
• Review records of policy exceptions; Activity that results in exceptions to the ethics policy.
• Access to data is limited so I focus on employee time, cash deposits & vendor submission.
• Surveillance.
• General ledger reconciliations and aging.
• Talk to employees, individual who made complaint, agency that wrote referral report.
• Looking at billing as a whole and see if it is reasonable or not.
• If the investigation involves an employee, we always run an investigation packet.
• Interviewing.
• Review customer feedback.
• Surveillance.
• Talking to employees.