You are a manager in the forensic auditing investigation department of the audit firm. The directors of a local manufacturing company, MSc 2 Ltd, have contacted your dregarding a suspected fraud, which has recently been discovered operating in the company, and you have been asked to look into the matter further. You have held a preliminary discussion with Segun Peter, the finance director of MSc 2 Ltd, the notes of this conversation are shown below:Notes of discussion with Segun PeterFour month ago MSc 2 shut down one of its five factories, in response to deteriorating market conditions, with all staff employed at the factory made redundant on the date of closure.
While monitoring the monthly management accounts, Segun perform analytical procedures on salary expenses. She found that the monthly total payroll expenses has reduced by 3% in the months following the factory closure-not as much as expected jilven that 20% of the total staff of the company has been made redundant. Initial investigation performed last week by Segun revealed that many of the employees who had been made redundant had actually remained on the payroll records, and salary payments in respect of these individuals were still being made every month, with all payment going into the same bank account. As soon as she realised that there may be a fraud being conducted within the company, Segun stopped any further payments in respect of the redundant employees. He contacted our firm as she is unsure how to proceed, and would like our firm‘s specialised department to conduct an investigation.
Segun says that the senior accountant, Akeem Bello, has been absent from work since he conducted his initial investigation last week, and it has been impossible to contact him. Segun believes that he may have been involved with the suspected fraud.
Segun has asked whether your department would be able to provide a forensic investigation, but is unsure what this would involve. MSc 2 is not an audit client to your firm. As a forensic expert, what are you going to do
The Correct Answer and Explanation is:
As a forensic expert, upon receiving this report from MSc 2 Ltd regarding suspected payroll fraud, the first and most appropriate step is:
Correct Answer:
Accept the assignment after performing client acceptance procedures, including checking for conflicts of interest, and then plan a forensic investigation to determine the nature, extent, and parties involved in the suspected fra
1. Introduction to the Situation
As the manager of the forensic audit and investigation department, you have been contacted by MSc 2 Ltd’s Finance Director regarding a potential fraud case. The case revolves around payroll anomalies discovered after the closure of one of the company’s factories. Notably, salary payments continued for employees who were supposedly made redundant. Alarmingly, all payments were funneled into a single bank account, raising suspicions of fraudulent activity.
The company is not currently a client of your firm, which raises several important considerations that must be addressed before beginning any forensic investigation. Your role as a forensic expert includes not only conducting the investigation but also ensuring your engagement adheres to professional standards and ethical guidelines.
2. Client Acceptance Procedures
Before initiating any forensic work, it is critical to perform thorough client acceptance procedures. This includes:
- Conflict of Interest Check:
Determine whether your firm has any existing or past relationships with MSc 2 Ltd or any of its stakeholders that could impair objectivity or independence. Even though MSc 2 is not an audit client, any prior consulting, tax, or advisory work must be assessed. - Independence and Objectivity:
Forensic accounting engagements must be approached with neutrality. Ensure that there are no biases or circumstances that could be perceived as a conflict of interest. This includes personal relationships with staff, including Segun Peter or Akeem Bello. - Engagement Letter:
Once your firm determines it can accept the client, a formal engagement letter must be prepared and signed. This letter should define the scope of work, responsibilities of both parties, fees, timeline, and limitations of the forensic investigation.
3. Understanding the Nature of the Fraud
Based on the preliminary discussion, the suspected fraud appears to be a payroll fraud where:
- Redundant employees continued to appear on payroll.
- Payments for these employees were being made to a single bank account, implying potential identity misuse or fictitious employees.
- A senior accountant, Akeem Bello, has gone missing, possibly indicating his involvement or attempt to evade scrutiny.
This is a classic example of what is known in forensic accounting as a ghost employee scheme, where non-existent or departed employees remain on payroll and payments are redirected for personal gain.
4. Planning the Forensic Investigation
Once the engagement is accepted, the next step is to plan the forensic investigation. Planning involves:
- Define Objectives:
Establish the purpose of the investigation, which in this case includes:- Verifying the occurrence of payroll fraud.
- Quantifying the financial loss.
- Identifying all individuals involved.
- Recommending internal control improvements.
- Understand the Business Context:
Understand the company’s payroll systems, internal controls, approval processes, and the sequence of events related to the factory closure. - Develop an Investigation Strategy:
Create a roadmap of procedures to be carried out, which will include:- Data collection and analysis.
- Digital forensics.
- Interviews with key personnel.
- Documentation review.
5. Key Investigation Procedures
The core forensic work involves evidence collection, data analysis, and reporting. Below are the key steps:
a. Payroll Data Analysis
- Extract payroll data from before and after the factory closure.
- Reconcile the list of redundant employees with the payroll system.
- Identify any continued payments and compare them against employee bank details.
- Flag anomalies—such as payments to the same bank account or duplicate details.
b. Bank Account Tracing
- Obtain transaction details for the suspicious bank account(s).
- Identify the account holder and any links to current or former employees.
- Trace payments from the company account to this suspicious account and any withdrawals or transfers that follow.
c. Review of Redundancy Process
- Examine HR documentation and termination letters.
- Determine who had authorization to remove employees from payroll records.
d. Digital and Email Forensics
- Investigate Akeem Bello’s email and system activity before his disappearance.
- Look for signs of unauthorized changes in payroll software.
- Recover deleted emails, payroll files, and records if needed.
e. Interviews
- Interview HR staff, payroll team, and relevant managers.
- Interview Segun Peter to get further context.
- Attempt to contact or locate Akeem Bello—possibly with legal support.
6. Legal Considerations and Evidence Handling
All evidence collected must be handled in accordance with legal standards to ensure its admissibility in potential legal proceedings. Forensic experts must:
- Maintain chain of custody records for all documents.
- Keep original copies secured.
- Store digital evidence using forensically sound tools (e.g., write blockers, imaging software).
It is also important to be aware that the findings may eventually lead to:
- Internal disciplinary actions,
- Civil litigation, or
- Criminal prosecution.
7. Reporting
At the conclusion of the investigation, a comprehensive forensic report must be prepared. The report should be clear, unbiased, and based solely on factual findings. It should include:
- Executive summary of findings.
- Methodologies used.
- Detailed description of fraudulent activity.
- Identification of individuals involved.
- Quantification of the financial loss.
- Recommendations for control improvements.
If required, you may also be called upon to act as an expert witness in legal proceedings.
8. Recommendations and Prevention
After identifying and documenting the fraud, a forensic expert should advise MSc 2 Ltd on improving internal controls to prevent future occurrences. Recommendations might include:
- Stronger separation of duties in payroll processing.
- Regular reconciliation of HR and payroll records.
- Automation of payroll termination procedures.
- Role-based access controls on payroll systems.
- Periodic audits of employee records and bank details.
9. Ethical and Professional Considerations
As a forensic accountant, you must adhere to the following ethical principles:
- Confidentiality – Do not disclose client information to unauthorized parties.
- Professional competence – Ensure the investigation is carried out by qualified professionals.
- Objectivity and Integrity – Remain unbiased and free from conflicts throughout the process.
- Due care – Exercise diligence in evidence gathering and reporting.
Conclusion
In summary, as a forensic expert, you must proceed methodically:
- Perform client acceptance procedures.
- Confirm independence and avoid conflicts of interest.
- Agree on scope and terms via an engagement letter.
- Plan and conduct a detailed forensic investigation.
- Analyze data, trace financial flows, and identify perpetrators.
- Ensure evidence is preserved correctly.
- Report findings clearly and objectively.
- Provide actionable recommendations to improve internal controls.