As fraud investigations get folded into the internal audit department, some audit shops are tempted to frame a fraud report in the same format and tone as the audit report. The idea couldn’t be more wrong. Fraud and audit reports must be distinct because they are intrinsically different from one another.
Read on for ways to present a full and succinct fraud investigation report using report design, content, and tone.
Design: Fraud Reports with an Edge
From the onset, fraud reports include different information and you want these reports to look distinct, but still look like part of the fleet of reports that internal audit cranks out. For example, you’ll probably need to stay within the font and design conventions of your company, but consider how the following design areas can be changed to distinguish the fraud report.
Be specific. Make sure that the first thing your audience reads is “Fraud Investigation Report” so there is no confusion on the purpose of the report.
Enlarge the word Confidential. “Confidential” should be at the top of the report. Make it large and boldface the word. Fraud investigations are typically not shared outside of HR, Legal, and upper management. If you don’t normally use a title page, you may want to consider a title page for fraud reports.
Change the color scheme. If your audit reports have a blue header, consider a different color header for the fraud report. Your company may allow a red or a purple color scheme as an alternative format.
Content: Write to Your Audience
Because investigative reports mainly involve personnel and legal issues, your audience is limited. Your typical fraud audience will be the Chief Executive Officer, Chief of HR, Chief of Law, Chief Audit Executive, and Head of the Audit Committee.
This small and informed audience knows the situation, and they are ready to move forward, so you can skip the internal audit fluff (e.g., scope, background, audit notes, distribution list).
Think of the investigative fraud report as being part of a larger conversation not the beginning of a conversation. Because of the knowledge level of your audience, you can start your report in the middle of the conversation. So, skip the intros and get right to the heart of the investigation.
Keep in mind that your position in the investigation (and therefore your audience) might be different between fraud investigations and you might be asked to prepare different types of fraud reports. Different types of reports include: reports for outside litigation (but not as an expert witness), reports as an expert witness (where Federal Rules of Civil Disclosure apply), or an internal report for the Audit Committee.
Content: Keep It Simple and Succinct
Although design might change between different companies, audit reports share roughly the same content. In an audit report, you go through some overarching business items of the audit (e.g., audit dates, background, and scope) along with some optional sections (e.g., distribution list, report rating, and audit notes).
From the beginning, fraud audit content will look different from audit reports.
Lane Hollis (MBA, CPA, CFF) is a MISTI instructor and President/CEO of Hollis, Pleiman and Company, P.A. CPAs. As a fraud and forensics expert, Hollis notes that the final report should be organized with the following topics discussed:
- Results. Communicate the results (write a concise final report organized by elements of proof for relevant accusations/offenses).
- Audience. Identify the reader/benefactor (Management/Business Partner/Outside Counsel, etc.).
- Qualifications. Include the forensic accountant’s qualifications and background (courtroom-specific requirement).
- Accusation. Describe the accusation/claim/predication.
- Investigator services. Describe what services were asked of the Investigator.
- Scope. Describe the investigation scope, including the time period examined.
- Restrictions. Include mention of any restriction as to distribution and use of the report.
- Exclusions. Identify exclusions in the reliance on the forensic accountant’s report.
For formal reporting purposes:
- Documents. Include a list of the documents reviewed and relied upon during the investigation.
- Interviewees. Include the names, titles/organization and dates of interviewees.
- Procedures. Include the procedures performed and the technical pronouncements relied upon.
Each company has different needs and the list above is meant as a general outline. “There are instances when the investigator may be asked to report her findings in a particular format,” says Hollis. “When asked to provide such, the investigator should follow legal counsel’s instructions, or formal requirements when reports are used in a federal court.”
Tip: For the Audit Committee version of the fraud report, Hollis keeps it simple with the following headings: Introduction, Allegation and Results Summary, Summary of Work Performed, Overall Conclusion, Agreed Actions, Parties Involved, Communications (memo that the investigation is complete), and Other Matters.
Content: For Fraud Eyes Only
The outline above looks very different than typical audit reports. Here’s a quick breakdown of what to write for some major sections and why some sections don’t belong.
Results: The Results section isn’t long – around 2-3 sentences per allegation. This section will determine whether the allegation was substantiated, unsubstantiated, or inconclusive. Here’s an example of a Results section:
Evidence examined supports that the AR manager skimmed cash beginning January 1, 2018. This resulted in a loss to the system of $xx.
Accusation: in typical reports, there are no Accusation (alternative names include Introduction, Complaint Summary, Investigation Summary, Factual Background) – you look at a predetermined process or operation. Keith Fletcher is an internal audit manager with more than 20 years experience, specializing in fraud. For Fletcher, allegations keep fraud interesting. “When I did bank secrecy audits, I could often write the report before completing the fieldwork – so mundane. In fraud, we have a specific allegation we’re going in to review. The report and content are always different.”
How many allegations should you include in a fraud investigation? It varies depending upon the situation and the number of people involved.
“If the fraud investigation is about a person,” notes Fletcher, “like someone skims cash, commits payroll fraud, and abuses the company-purchasing card, then we have three allegations: theft, payroll fraud, and misappropriation of assets. However, because the same person commits all of these allegations, the report is still a single investigation.”
Scope: Scope is similar to the audit report Scope section; however, fraud Scope lists who was interviewed and what the fraud investigative team looked at. In this section, you can also refer the reader to various exhibits and more information located in the Appendix portion of the report.
Summary of Evidence: The Summary of Evidence (alternative names include Findings and Observations, Conclusion Summary, Findings of Fact, or Conclusions) in fraud reports is the same as the body of the report (the Issues) in audit reports. The length of the summary of evidence varies according to the results. If substantiated, the summary of evidence could be from a single page to 3-4 pages.
To organize your Summary of Evidence section, break it down into sections, or subcategories. Using the example from above, categories could be Theft, Payroll Fraud, and Purchasing Cards.
Content: The Skinny on Recommendation and Risk Assessment
You might think that fraud reports should borrow some sections from the audit report (like Risk or Recommendations). However, these sections detract from the single purpose of the fraud report: to inform.
Recommendations: After all the investigating, fraud auditors should include their recommendations for action, right? Maybe. The jury is out on this one. “For us, we give no recommendations,” says Fletcher, “but we have to provide enough supporting evidence so the recipient can take the information and decide what they need to do.” However, other companies share their recommendations – especially when the recommendation could create beneficial change in the company by identifying underlying root causes.
Risk: Unlike audit reports that outline the risk of audit issues, the fraud audience has to determine the risk on their own. Fraud investigations trust the audience is already well aware of the risk. For fraud, what once was a risk has often already materialized into a financial, productive, or reputational loss to the company.
Tone: Keeping Your Cool
In audit reports you have to be a little more... diplomatic. In fraud reports you get to be candid, and for many, writing frankly is a breath of fresh air.
This candid method presents pros and cons. On the up side, you have very few people reviewing this – and the person being investigated is not a reviewer (yay!), so you get to be blunt. On the down side, you could inadvertently use negative instead of neutral language – especially when the suspect is guilty. You have to allow the facts to stand alone and keep your tone neutral.
Below is a quick list of tone words you can expect to see in fraud reports that would communicate differently in audit reports.
Fraud is a whole different behemoth than internal audit, and it’s important that investigative auditors have a passion, a knack, and especially an education for fraud audit. If you’re interested in learning more about fraud, check out MISTI’s many courses in fraud investigation.
Editorial Note: This article was updated on Wednesday, February 20 with insights from additional subject matter experts.
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