Fraud Schemes and Fraud Investigation
Acc 571
Instructor: Dr. Ole Ruankaew
Diane Phillips
November 22, 2015

Fraud Schemes and Fraud Investigations The problem that organization faces today, are employee fraud. Many organizations feel that long term success of any company comes from the quality of their employees and workers loyalty. While during my research, I discovery that Association of Certified Fraud Examiners, Inc. has shown that organization have lost five percent of their annual revenue each year because of employee fraud. Every organization needs to have a plan in places for fraud detention. In preventing fraud in the work place, a good strategy for any organization is to implement internal control. These are plans; programs and procedures put in place to safe guard the company assets, and ensure the integrity of its accounting records. As prevention fraud is much easier than recovering losses after a fraud has been committed. This study will focus on the case of Stanford Financial Group Company fraud in which Robert Allen Stanford, chairman of Stanford International Bank (SIB), was involved in a Ponzi scheme. Stanford was convicted of orchestrating a 20-year investment fraud scheme in which he misappropriated $7 billion form SIB to finance his personal businesses. The Stanford Financial Group claimed to have pulled in retail, wealthy and commercial investors from 136 countries on six continents. Lopez and Kuhrt was aware of what Stanford was doing but kept the information hidden from the public and from almost all of Stanford’s employees for they would not be able to discovery what was going on. The chief accounting Officer Gilbert T. Lopez Jr., were also involved in the fraud. Both Gilbert T. Lopez Jr., and Kuhrt was aware of the scheme and neither one of them came forward with the information. Doing the trail, more evidence was render about Robert Allen Stanford. The investigator found that Stanford was using sales from new CDs to pay existing depositors. In 2008, the financial crisis caused a slum, because new CD sales and redemptions reached an all-time high. The company brought in revenue of $741 million as additional funds into the bank to strengthen its capital base, as Stanford lied about personal funding. To add on to Stanford lies, his internal accountants inflated on paper work that value a piece of real estate SIB had purchased for $63.5 million earlier. Robert Allen Stanford was sentenced to 110 years in prison for his actions while Lopez and Kuhrt were sentenced to 20 years imprisonment three years of supervised release for their role in the fraud, and Lopez was court ordered to pay a $25000 fine. In this case, as a fraud investigator, I will start from collecting evidence to prove that fraud has been committed. Direct confrontation of the suspect before determining the investigation and in the absence of a witness and sufficient evidence is not advisable because he or she can subsequently: * Resign, making recovery difficult or costly * Eradicate, which may eventually weaken the case against him * Deny, recant any statement he or she may make
To conduct the investigation without knowledge to fraudster, one must ensure that the details about the investigation should be limited to the investigation team only. The investigation should be posed as a normal audit or regular checking instead of a fraud enquiry. The fraudster should not be involved in any process of investigation and should be kept under strict watch so that he or she cannot temper with the evidences. Collection of evidence search starts with verifying company records, emails, inters-company and outside company communication, scrutinizing list of related parties of accused and other important documents. Special care should be given to the areas handled by the accused, in my case, the investment made by bank and the source of income of bank. To collect evidence without intimating the accused of any fraud investigation, the evidence should be collected under the pretext of some routine job or audit. Focus should be on loopholes in internal control which can be exploited by employees and unusual transaction in terms of time, amount, frequencies, parties involved. Use of internet, commercial databases like Dialog, Lexis/Nexis, and Data star, by employees, their public records, and credit scores should also be checked thoroughly. The possible red flags during investigations could have been change in life style of Robert Stanford, He bought a 112 foot yacht and support vessels, six private planes, made various real estate investments in US and abroad and indulged in gambling trips to Las Vegas, apart from involving himself in various philanthropic activities. Also, the rate of interest at 4.5 percent offered on the CDs issued by SOB were “improbable and substantially higher” as compared to the rates offered by other banks in U.S, Moreover, the Stanford Bank was based in Antigua? Antigua and Barbuda has a history of various corruption and fraud cased even before the Stanford fraud. There is sufficient evidence of Antiguan banks being used for illegal activities prior to 2000, but in the absence of local prosecutions, little firm evidence of corruption could be collected Interviews are two types of information seeking and admission seeking. In information seeking interviews the investigator interrogates the accused to gain information from the accused. The main focus of this type of interview is to collect new information about the fraud. In admission seeking interview the focus is on the admission of fraud by the accused. It is a confession technique in which the investigator tries to make to accused confesses to his wrong doings. Regardless of who the interview may be, five general question one can ask: * Informational * Assessment * Introductory * Closing * Admission-seeking (interrogation) In case of SIB, both types of interviews could be used to collect information however; the information seeking interview would be best suited for the situation. In case of SIB everybody knew there was a fraud and investigative agencies had sufficient evidence to prove the fraud. However, the main of the investigation is to collect data with regard to the whereabouts of the money involved in fraud. The agencies were able to identify 29 financial ledgers accounts located abroad worth an estimated of $330 million which was later forfeited by the court (ww.fbi.gov). The most effective way to fraud prevention is to establish “Internal Control System”. A proactive internal control system and the proper implementation of internal control system can prevent many frauds from happening. The important points which should be given due when establishing the system are: * Know your employees * Establish a code of ethics * Establishing various red flags for timely detection of fraud * Management oversight * Internal audit * Review hiring procedures * Setup of a fraud hotline * Develop training programmers to aware employees * Customizes internal control environment * A proper accounting system * The procedures relating to control can then be operated effectively * Update and communicated When the environment to punish the fraudster is absent, the feeling of “you can get away with it” will be evoked among employees, and the business will be exposed to corporate frauds. The present of an effective fraud prevention plan will discourage the employees from indulging in fraudulent activities. However, excess implementation of useless procedures and checkpoints will increase the workload on employees and will also affect the work of the organizations.

Reference
American Institute of Certified Public Accountants (AICPA). 1988. The auditor’s responsibility to detect and report errors and irregularities. Statement of Auditing Standards (SAS) No.53. New York: AICPA

Arens, A. A. and Elder, R. J. (2006). Perspectives on Auditing Education after Sarbanes-Oxley. Issues in Accounting Education, 21, 345-362.

Public Company Accounting Oversight Board (PCAOB). 2005. Report on the initial implementation of auditing standard no.2:, An audit of internal control over financial reporting performed in conjunction with an audit of financial statements. November 30. PCAOB Release No. 2005-03. Washington, D.C.: PCAOB.

Wells, J. T. 2003. The Fraud Examiners. Journal of Accountancy, (Oct), 1-2.