How to Interview a Fraud Suspect June 15, 2011 Presented by: Harvey Johnson, CPA Witt Mares, PLC [email protected] Association for Credit Union Internal

How to Interview a Fraud Suspect

June 15, 2011

Presented by:Harvey Johnson, CPAWitt Mares, [email protected]

Association for Credit Union Internal Auditors

Types of Credit Union Fraud

• Two primary categories of fraud:– External Fraud

– Internal Fraud


• External Fraud– Credit/debit card fraud– ACH and wire fraud– Hacking (phishing, vishing, identify theft)– Synthetic identity theft

• Create new identities by combining real and fake information to establish new accounts

– Burglaries / robberies– Counterfeiting– Check kiting, forgery– Money laundering– Mortgage fraud

• Internal Fraud– Fraudulent financial reporting

• Rare, but potential for unlimited damage

• If senior management is bound and determined to perpetrate fraud, preventative controls can provide little assurance

• Increased risk ask pressures on and within financial sector continue to rise


• Internal Fraud– Misappropriation of assets

• Can occur anywhere within the organization• Can range anywhere from a few dollars to a few

million dollars• Includes:

– Simple theft

– Fraudulent loans

– Related party transactions

– Embezzlement

– Internally-assisted robberies

Credit Union Fraud

Shocking Statistics

• According to the ACFE’s “2010 Report to the Nations on Occupational Fraud and Abuse”…– Median loss caused by occupational fraud across

all industries was $160,000– Nearly 1/4 of frauds involved losses of at least $1

million or more– Nearly 1/3 of causes involved loss of $500,000 or

more– More than 60% cases involved losses of at least

$100,000

Shocking Statistics

• According to the ACFE’s “2010 Report to the Nations on Occupational Fraud and Abuse”…– Median loss caused by occupational fraud in the

banking/financial services industry was $175,000

– The banking/financial services industry had the highest percentage of internal fraud incidents – 16.6% of reported cases – of all industries

Shocking Statistics

• According to the FICO’s 2010 “Faces of Fraud: Fighting Back” survey…– Over 75% of all reported fraudulent activity is

reported to institutions by their customers

– The indirect cost of fraud is hidden, but high• 45% of institutions surveyed reported lost

productivity

• 37% of institutions surveyed reported a loss of customer confidence

• 18% of institutions surveyed reported attrition

• Fraud never sleeps– From the Credit Union Journal Daily Briefing,

June 6, 2011• “Ex-Worker at Hidden River CU Convicted of

$58,000 Embezzlement.”

• “Branch Manager Got $80,000 in Fraudulent Loans”

• “Mortgage Broker Guilty in $4.6 Million Fraud”

• “CEO Says He Was Fired For Whistle Blowing”

Shocking Statistics

The Fraud Triangle

Addressing the Fraud Triangle

• Attitude/Rationalization – Occurs entirely within the individual

• Incentives/Pressures – Can be addressed with policies, procedures, and environment, but only indirectly

• Opportunity – Can be addressed directly

Focus on Reducing Opportunity

Fraud Interview Tips

1. Work your way to the suspect– Start with neutral third-party witnesses – people who have

access to evidence, but are not involved

– Next are corroborative witnesses – people with direct knowledge of fraud, but are not involved

– Finish with the target – interview all suspects separately once significant evidence is collected


2. Structure the interview– Introduction – Establish a rapport, provide background

information

– Body – Ask “who, what, when, where, why, how?”

– Conclusion – Confirm your understanding, ask for suggestions on others to interview


3. Expect difficulties– Make a list of possible obstacles, and how they should be

overcome

– Make a list of things that could go wrong, and how they can be put right

– Expect attacks on your character, qualifications, competence, etc – don’t let them detract from the task at hand

– Reluctance can be overcome with a sympathetic, cooperative tone


4. Get to know the subject– Spending time going over the subject’s background at the

outset of the interview can be invaluable

• Observe how they answer non-threatening questions

– Get a feel for vocal tone, body language, etc.

• Observe how they answer questions to which you already know the answers


5. Use silence to your advantage– Leave space between an answer and the next question

• People have a natural inclination to fill long periods of silence, especially in tense situations

• Off-hand comments, non-verbal cues, and unsolicited clarification of previously-given answers can indicate a need to change the direction of the interview or investigate certain matters further

• Use this time to assess the interview and make any “tweaks” that may be necessary


6. Know what you are looking for– Know which types of fraud are most likely to occur in the

subject area that you’re investigating, and tailor your approach accordingly

– Direct your evidence gathering appropriately

– A well-directed fraud interview is more productive, and less likely to result in difficulty than an unfocused, meandering one


7. When following up on an issue, use the subject's own words– Avoids ambiguity

– Deters backtracking

– Shows that you are following the subject closely


8. Always clarify– Fraud, especially in the financial sector, can be very

complicated. Make sure that questions and answers are as exact as possible

– A misunderstanding on a key matter can have disastrous consequences

– Have the subject sign your notes, if applicable


9. Move in the right direction– General questions to specific questions

– Comfortable areas to sensitive areas

– Easy questions to difficult questions

– A fraud interview should be like a funnel


10. Use a script– Can be as formal or informal as deemed necessary

– Fraud interviews are stressful, and crucial items can be omitted in the heat of the moment

– A script helps to organize and focus an interview—and give the impression of being an organized, focused interviewer

Fraud Report• Contents of a fraud report

– Background• Briefly discuss why fraud examination was conducted

– Executive summary• Summarize what actions were performed during

examination• Summarize outcome of examinations

– Scope• One paragraph explaining scope of fraud examination

– Approach• Briefly describe team, interview subjects, documents

examined

Fraud Report• Contents of a fraud report (cont’d)

– Findings• Detailed description of procedures performed and what

was found

– Summary• Briefly summarize the results of the fraud examination

– Impact• Briefly summarize the effects of the fraud on the institution

– Recommendations• Briefly discussed remedial measures

• Optional

Best Practices• Institute a fraud hotline

– Encouraged by the FDIC for all financial institutions

• Set the “tone at the top” – Code of Conduct

• Clearly define fraud

• Require employees to read and sign

– Institute an EAP (Employee Assistance Program)

• Helping employees deal with personal issues creates a culture of openness, honesty, and assistance

Best Practices• Hire, promote, and train ethical employees

– Implement fraud education for all employees on a department-by-department, job-by-job basis

• Dispense fair and balanced discipline – Deal swiftly and consistently with fraud regardless of

source or scale

– All corrective actions should be aligned with the employee code of ethics

Best Practices• Identify and measure risks

– Management must asses the organizations’ exposure to fraud risk and identify potential fraud schemes that can be mitigated and measured

• Implement internal controls– It is not enough to have controls in place; they must be

tested, updated, and—most importantly—used

Best Practices• Maintain a strong and independent supervisory

committee – The supervisory committee is the heart of active fraud

prevention

• Implements anti-fraud measures

• Hires and evaluates internal and external auditors

• Leverage technology– Analytical tools, detailed financial information, and

historical data are widely available—and usually already exist within institutions

Questions

Please Contact:Harvey Johnson, CPAManagerWitt Mares, PLC150 West Main Street, Suite 1150Norfolk, VA 23510Phone: (757) [email protected]

Documents

How to Interview a Fraud Suspect June 15, 2011 Presented by: Harvey Johnson, CPA Witt Mares, PLC [email protected] Association for Credit Union Internal