1. Investigation Technique for Internal Auditors Jimmy Ardianto

2. When? You’ll do the investigation when: 1.There is a fraud 2.You found any irregularities 3.Suspicious

3. Accounting Fraud:The intentional misrepresentation or alteration of accounting records regarding sales, revenues, expenses and other factors for a profit motive such as inflating company stock values, obtaining more favorable financing or avoiding debt obligations. Employees who commit accounting fraud at the request of their employers are subject to personal criminal prosecution.misrepresentationalterationaccounting recordsregardingrevenuesexpensesfactorsprofit motivecompanystockvaluesfavorablefinancingavoidingdebtobligationsEmployeesemployerssubject tocriminal prosecution

4. Creative Accounting Using the flexibility within accounting to manage the measurement and presentation of the accounts so that they serve the interests of preparers.

5. Fraud Stepping outside the Regulatory Framework deliberately to give a false picture of the accounts.

6. 6 Methods of Creative Accounting 1 Innumerable, but managers can, for example, manipulate income, expenses, assets and liabilities 1.Income Recognition 2. Interest payable e.g., capitalisation 3.Stock 4.Depreciation 5.Goodwill and Intangibles 6.Off balance sheet financing

7. 7 Methods of Creative Accounting II Stock Only one asset, stock, worth say 10 million Euros. If capital is 5 million Euros and this year’s profit is 5 million Euros, then balance sheet A:

8. 8 Methods of Creative Accounting III Depreciation Business Profit10,000 Euros Fixed Assets100,000 Euros Depreciation straight line 10 years If company adopts 20 year asset life will this affect profit? Yes: Original policy New policy Euros Euros Profit before depreciation 10,00010,000 Depreciation(10,000)(5,000) Profit after depreciation - 5,000 Profit increases by 5,000 Euros

9. 9 Methods of Creative Accounting IV Simple off balance sheet financing scenario  Company wants to acquire new premises  Merchant bank sets up a special purpose company to acquire clients properties. Loans secured on properties  Ownership spread over clients  Company leases properties  Rents pay loan interest  End of initial lease, clients can  i, buy leased properties; or  ii, sell properties and repay

10. 10 Methods of Creative Accounting V Financing Scenario Banker 10 year secured loan Receives rental Capital Guaranteed Client Immediate access If property appreciates will gain  Effective ownership without having to borrow  No need for loan on financial statements

11. List Irregularities to Look for in Source Documents? Missing Documents “Stale Items” on Bank Reconciliation Excessive Voids or Credits Payee Names & Addresses = Customer Names & Addresses Photocopied Documents Payee Names & Addresses = Employee Names & Addresses Past Due A/R Reconciling Items Altered Documents Duplicate Payments Second Endorsements on Checks

12. Accounting Anomalies Faulty Journal Entries Inaccuracies in the Ledgers – Ledger doesn’t balance – Master or Control Accounts do not equal the sum of individual customer or vendor accounts

13. Identify Symptoms of Journal Entry Fraud. Journal entries without support documentation Unexplained adjustments to receivables, payables, revenues or payables Journal entries that do not balance Journal entries made by individuals who would not normal make such entries Journal entries made near the end of an accounting period

14. Discuss the Inaccuracies of Ledgers Define a Ledger – A book of accounts How do you prove the accuracy of a ledger? – A = L + OE or Dr = Cr What symptoms relate to control accounts? – Dr = Cr – Master account balances do not equal sum of the subsidiary account balances

15. List Common Examples of Analytical Anomalies. Explain. Unexplained Inventory Shortages or Adjustments Deviations from Specifications Increased Scrap Excess Purchases Too Many Debit or Credit Memos Significant Increase or Decrease in Account Balances Physical Anomalies Cash Shortages or Overages Excessive Late Charges Unreasonable Expenses or Reimbursements

16. 10 Biggest Accounting Fraud

20. Good economy was masking problems …. With increasing stock prices, profits and wealth for everyone, no one worried about potential problems.

21. So? All fraud has a player As an Internal Auditor, you are the first door of investigation Find the evidence Make sure that all condition suit to the case Focus to player, support with evidence That’s the art

22. Planning for Investigation  Obtain facts of the case and organize case facts (with chart-case, witnesses and evidence)  Selection of witnesses starting with favorable witnesses  Develop structured process (Don’t talk about the case first, find the behavior or what he/she does

23. Preparation Prepare interview questions (Motive, Opportunity, Corroborate) Select appropriate place and timing of interview (Privacy is very important) Interview environment and other relevant requirements

24. Verification Process Psychologically condition subject to tell the truth Develop a list of case related direct questions to evaluate subject credibility Ask follow-up questions to deceptive verbal response

25. Use Direct Questions Direct questions should be specific and not general Direct questions should be objective and not elicit opinions or beliefs

26. Follow-up Questions Probing questions – When asked for details, memory can provide without problems but creating needs time and effort Assumptive questions – Use to confirm suspicion in a way that is easy for admission against self-interest Corroborative questions – To elicit further details of an admission and more details to verify alibi or explanation

27. General Principles Like words in a sentence, gestures in a cluster Conflict in verbal and non-verbal Pick up indicator and note what is said simultaneously

28. Emotions Felt When Lying Fear of being caught lying (facial expression) Guilt about lying (body language) Delight in having duped someone (micro expression)

29. Universal Facial Expressions Happiness – smiles Sadness – frowns Surprise – raise eyebrows and mouth slightly open Anger – lowered eyebrows and lips tight Fear – Inner eyebrows raised and lips appart Disgust – mouth/nose

30. Paralinguistic Response latency Volume and Rate changes Fluency (stop/start..emm..ehh)

31. Eye Contact Breaks in gaze Assessing memory Influencing factors (cultural and contextual)

32. Body Indicators Eye (blinking) Illustrators shut down (frozen stiff) Aversion and body movement / shift Displacement activity Adapters (rub, scratch, cover, pinch/grab)

33. 2 Reasons why lies fail Thinking (creating) betrays the lie Feelings expose the lie

34. The Detection System Controlled sample Contradictions (verbal vs non verbal, emotion vs words, behavior vs norm) Clusters (2 or more indicators) Concentrate on reaction just before or after and note down what is said Corroboration (identify deception, record interview)

35. Types of Evidence 3 main types of evidence: – Documentary – Physical/real – Oral (testimonial) Oral evidence most unreliable due to: – Failure of memory – Mistaken memory – Lie or contort facts

36. If there is enough evidence, so there is no need interrogation

37. Source Investigative Interviewing Techniques, International Cybercrime and Forensic Examiners, 2011 Moenske, The Perfect Storm-The Rise of Corporate Accountability, Kent State University, Ohio Council IMA, 2003 Jones, Creative Accounting, Fraud and Accounting Scandals, Cardiff Business School www.businessdictionary.com

38. Thank You