Book Review: Anatomy of a Fraud Investigation
Learn How the Pros Take Down an Embezzlement Scheme and Gather Tips on How to Best Defend Your Own Practice.
Mark S. Warshavsky reviews Stephen Pedneaultâ€™s Anatomy of A Fraud Investigation. The book combines a step-by-step recounting of best practices with real-life drama as investigators discover, investigate, and resolve a fraud incidentâ€”a fantastic guide to how to defend against and uncover fraud.
Stephen Pedneault takes his readers through a real-life forensic accounting engagement in Anatomy of A Fraud Investigation. Most fraud stories appear one day in the media when the story breaks and then nothing further is heard about the matter until the individual is sentenced. Even when cases are reported by the media, the reporting on the story is generally very short due to editorial limitations, such as space and cost. In this book, Pedneault describes the detailed process from the initial allegation to the final resolution of a case in a way that readers very rarely get to experience. Describing the events in the first person, the author guides the reader through the case as he explains how the matter was discovered, investigated, and resolved.
Pedneault, a fraud investigator and forensic accountant, receives a telephone call from Tim Hill, the CFO of a well known, not-for-profit organization. Hill had received a tip from a reliable source who preferred to remain anonymous. The tip, accompanied by a copy of a credit card statement with a high volume of personal charges, was a clear indication of a potential fraud being committed at one of the divisions of the not-for-profit organization. At the center of the alleged fraud is James Smith, the controller of the division.
Pedneault does not keep the reader in suspense as to the outcome of this investigation as it relates to the controller. The bookâ€™s Introduction gives a glimpse of the newspaper article after the matter was wrapped up.
â€śJames Smith, 43, was arrested yesterday on charges that he pilfered hundreds of thousands of dollars from his employer over the course of several years. Smith turned himself in to local authorities accompanied by his attorney after learning that police had secured a warrant for his arrest.â€ť
The inside jacket of the book informs the reader that the following details of a fraud investigation will be addressed:
- How does a case come to light in the first place?
- Who are the individuals behind the scene putting the case together, sifting through ledgers, cancelled checks, and other records that comprise a mountain of evidence?
- Who handles all the information, and where is evidence stored?
- Who are the witnesses, and how can you know if the suspect acted alone or with the assistance of an accomplice?
- If computer forensics is involved, how can you extract the most evidence from the suspectâ€™s computers?
Each chapter of the book contains â€śLearning Pointsâ€ť and â€śFraud Facts,â€ť giving the reader further insight as to how to manage an entire fraud investigation. One of the learning points addressed is the importance of arranging an interview with the prime suspect, even though the evidence in the case was overwhelming as to the guilt of the controller. Pedneault describes a worst-case scenario when a report is issued and the targetâ€™s reputation is harmed, only to learn that there was a plausible explanation and the forensic accountant never sought it.
The following is a recap of the book by chapter:
Chapter 1â€”First Indications [Theyâ€™re Doing What?]
The forensic accountant is brought into the fray by a phone call from the CFO, Tim Hill. The merits of using an anonymous tipster are evaluated. Information is received that a controller in one of the companyâ€™s divisions could be stealing money from the organization. Pedneault explains that timing is everything in cases of this type, and he inquires from Mr. Hill if anyone else is aware that the scheme had become known. Pedneault discusses the potential logistical issues to be addressed at Mondayâ€™s meeting, including human resource considerations, such as the possibility of putting individuals on paid administrative leave.
Chapter 2â€”The Importance of Planning [Maximizing Desired Outcomes]
The reader is taken into the initial planning meeting at the headquarters of the not-for-profit. A time is set for Pedneault to arrive at the identified division the next day. It is decided that it is best if the controller is not on the premises when the actual â€śraidâ€ť takes place. A computer forensic specialist will have to be engaged. Pedneault obtains a job description of each individual employed at the division.
Chapter 3â€”Collecting the Evidence [a.k.a. â€śThe Raidâ€ť]
The raid goes as planned. Pedneault explains that safety should always be a concern when doing fraud investigations. It is important to have a plan, identify potential risks regarding the individual under investigation, and observe the individual until he/she has left the premises. Now the forensic accountant must gather the relevant evidence in a manner that will preserve its integrity. Pictures must be taken. A locksmith is brought in to change the locks and an alarm company is also present to change alarm codes.
Chapter 4â€”Reviewing the Evidence [The Day After]
The evidence must be inventoried and maintained in a safe area. Pedneault and a senior accountant for the not-for-profit organization sift through mountains of evidence separating the potential valuable materials from items of no interest, including the dayâ€™s trash. Pedneault suggests that you need to think about the details of the procedures to perform a financial investigation, such as bringing disposable rubber gloves to examine the contents of a garbage pail or dumpster.
Chapter 5â€”Electronic Evidence Considerations [Computers, Files, and Communications]
What do you do with the hard drives seized during the raid? The computer forensic specialist arrives to image the hard drives. Pedneault must also deal with QuickBooks software that is password protected. Finally, Pedneault is able to log onto QuickBooks only to find that there is no general ledger account for this mysterious cash account. Nor is there any indication of credit card activity on the general ledger. Pedneault explains that there are free resources on the Internet that can be downloaded to provide password breaking programs.
Chapter 6â€”Interviewing [Responding to Tears]
Pedneault speaks with the employees at the division. He must deal with the different employee personalities along with individuals that were perhaps part of the suspected fraud. Pedneault stresses that the interview environment is critical to the success of the interview.
Chapter 7â€”Importance of Documentation [Keeping Track of Things]
Pedneault has to understand the companyâ€™s written policies in place relating to the use of bank and credit card accounts. Privacy issues must be considered. He details his step-by-step process to detect the missing account and trace the credit card activity. The important concept of â€śchain of custodyâ€ť of evidence is introduced in this chapter and the need for custody of the evidence from the time it is collected to the time it is presented in court.
Chapter 8â€”Further Investigative Measures [Obtaining More Evidence]
This chapter is dedicated to the long-awaited interview with the office manager. The office manager also had use of the credit card and is a loyal underling of the controller. This interview will definitely have to be handled carefully. Pedneault takes us through the interview planning process along with the actual interview. One interviewing technique that he reveals is the use of non-threatening questions in order to determine the individualâ€™s general body language. The forensic accountant then moves through the interview and commences discussions with the suspect, their specific actions, and behavioral changes.
Chapter 9â€”Tracking Down Leads [The Plot Thickens]
Pedneault finally gets to meet the whistleblower. He goes into the strategies and potential pitfalls in dealing with tipsters. He emphasizes that it is important to keep an open mind when reviewing tips and information provided, to ensure the information is reliable and worthy of an investigation. It is not uncommon for tipsters to have their own agenda, and the information provided could be false or misleading in order to put the target individual under a microscope of attention. Pedneault continues his investigation of the available company records and starts to analyze the documents. He still has a question in his mind as to whether there were other schemes perpetrated at the company that were not yet identified.
Chapter 10â€”Drawing Conclusions [What Does It All Show?]
Pedneault has had the opportunity to review the monthly bank statements for the â€śsecretâ€ť bank account. He reviews a preliminary summary of the account activity. He now has a good understanding as to the fraud committed, although the bank is a little slow in getting him copies of the actual deposit slips and canceled checks to document his case. As he continues to investigate the fraud, new information unfolds. Pedneault reminds the reader â€śExpect the un- expected, and never let your guard down,â€ť and consider the human factors in your case. Business continuity issues are also addressed in this chapter. Payroll must be processed and bills must be paid.
Chapter 11â€”Confronting the Suspect [â€śI Didnâ€™t Do Anything Wrongâ€ť]
The credit card activity has been analyzed by the senior accountant and the remaining information has been obtained from the bank. Pedneault expands his analysis of the companyâ€™s records, and he requests additional documents from third parties. Pedneault realizes that the controller is not the only person who has charges on this credit card, as there are actually three authorized users. Pedneault is ready to wrap up the case. He requests that Tim Hill arrange a meeting with the controller who has been on paid administrative leave since the initial raid. Will the controller accept this offer? He did and three days later arrived at the office of the not-for-profit organization along with his attorney.
Chapter 12â€”Documenting the Investigation [Your Written Report]
Pedneault describes his report writing techniques including the issue of saving drafts. He even gives some suggestions as to the mundane task of collating the final report. In this chapter, the police department is notified of the fraud. First, a patrolman comes to the companyâ€™s division to take a report. Next, Pedneault is contacted by a detective.
Chapter 13â€”Working toward a Resolution [I Donâ€™t Want to Go to Prison]
Pedneault receives a call from the detective requesting a meeting. The detective, armed with Pedneaultâ€™s report, has several questions that need to be answered. Ultimately, the detective advises Pedneault that the only arrest warrant that will be issued will be that for the controller. Pedneault explains that the case is on three parallel tracks â€” the civil case, the criminal case, and the insurance claim. His report is received by the not-for-profitâ€™s insurance carrier for the claim of a partial reimbursement of the theft.
Chapter 14â€”Case Closed!
It was determined that the civil case against the controller would probably not move forward until the criminal case heated up with his arrest. Although in an uneventful manner, the controller is finally arrested. The news of the controllerâ€™s arrest on charges of embezzlement hits the press. Pedneault explains that the approach that he uses to document his report allows it to stand on its own with all of the procedures and findings contained in the report as exhibits. Insurance proceeds are received to compensate the division for a small portion of the theft.
Epilogueâ€”Do You Want to Know the Outcome?
The controller agrees to make full restitution of his theft in order to avoid a prison sentence. The company can now put this event behind them and focus on implementing better controls for the future. Pedneault moves on to the next caseâ€”itâ€™s the same process, just different people and facts.
We recommend â€śAnatomy of a Fraud Investigationâ€ť to everyone who wishes to read about all the facets of a real fraud investigation. Pedneault has the reader right next to him as he describes the steps and measures taken down to every detail. The book is well written, with a fast paced storyline, and is a relatively quick read.
Published by John Wiley & Sons, Inc., and generally priced at less than $ 50.00, the book is available at various booksellers, online, and in retail outlets.
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This review was originally published in the November/December issue of National Litigation Consultantsâ€™ Review.
Mark S. Warshavsky, CPA/ABV/CFF, CVA, CBA, CFE, DABFA,Â CFFA, is Partner-in-Charge of the Business Valuation and Litigation Support Group at the New York firm of Gettry Marcus Stern & Lehrer, CPA, P.C. He has been retained as a consultant and expert in the areas of litigation support, forensic accounting, and business valuations for both federal and state cases. He also serves on the editorial advisory board of several national publications for which he peer reviews articles submitted for publication in the areas of business valuation, forensic accounting, and litigation support He is a founding member, author, and instructor for NACVAâ€™s Forensic Accounting Academy. Mr. Warshavsky can be reached at email@example.com or 516-364-3390 ext. 121.
Andrew P. Ross, CPA, CVA, PFS is a Partner in Gettry Marcus Stern & Lehrer,Â CPA, P.C.â€™s BusinessÂ Valuation and Litigation Support Group. He specializes in complex commercial litigation matters and business valuations. In addition, he is a member of the firmâ€™s Quality Control Committee and is the past Chairman of the Accounting & Auditing Committee of the Nassau Chapter of the New York State Society of CPAs. Mr. Ross can be reached at firstname.lastname@example.org or 516-365-3390 ext. 246.