Take not of this question for your CA 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 department regarding 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
Direct Answer: What to Do as a Forensic Expert
- Clarify the Scope and Terms of Engagement
- Confirm with MSc 2 Ltd’s directors and finance director (Segun Peter) the scope of the forensic investigation. Obtain formal engagement letters outlining the objectives, responsibilities, confidentiality, and legal considerations.
- Clarify that MSc 2 Ltd is not currently an audit client, and the forensic investigation is a special assignment separate from auditing.
- Plan the Forensic Investigation
- Develop a detailed investigation plan tailored to the suspected payroll fraud.
- Identify key areas to investigate: payroll records, bank payments, employee status records, and related documentation.
- Gather and Secure Evidence
- Obtain relevant documents and data: payroll reports, employee records (active and redundant), bank statements, payment authorizations, and communication logs.
- Ensure preservation and secure custody of evidence to maintain its integrity and admissibility.
- Conduct Analytical Procedures and Detailed Testing
- Verify redundancy records and compare with payroll data to identify discrepancies.
- Trace salary payments for redundant employees to identify unauthorized payments.
- Analyze bank transactions to detect unusual or suspicious patterns.
- Review access logs and system controls around payroll processing.
- Interview Relevant Personnel
- Interview Segun Peter for detailed background and findings.
- Attempt to interview Akeem Bello if possible, noting his unexplained absence.
- Interview other relevant staff in the finance and HR departments.
- Assess Internal Controls and Identify Weaknesses
- Review MSc 2 Ltd’s internal controls over payroll and employee records.
- Identify control failures that allowed fraudulent payments to occur.
- Report Findings and Recommendations
- Prepare a formal forensic report detailing the nature and extent of fraud, evidentiary findings, implicated persons, and impact.
- Provide recommendations to prevent future fraud, including control enhancements.
- Coordinate with Legal Authorities (if necessary)
- Discuss with MSc 2 Ltd’s management about the need for involving law enforcement or legal counsel.
- Assist in legal proceedings or litigation support if required.
Introduction
As a forensic expert engaged to investigate suspected payroll fraud at MSc 2 Ltd, your role is to provide an independent, objective, and thorough investigation into the matter. Given the information provided by the finance director, Segun Peter, there are significant indicators of fraudulent activity related to payroll payments to redundant employees. The forensic investigation must be carefully planned and executed to identify the facts, collect evidence, and support potential legal actions.
Step 1: Engagement and Scope Definition
The first step in conducting any forensic investigation is to formalize the engagement. Since MSc 2 Ltd is not an audit client, this is a distinct service engagement and requires a formal agreement. This agreement should clearly define the scope of the investigation — in this case, suspected payroll fraud following the factory closure. The terms must include confidentiality, access to information, reporting requirements, and limitations.
This step is critical to set client expectations, protect the firm legally, and ensure compliance with professional and ethical standards. It also allows for clarification on whether the investigation should extend to criminal referral or litigation support.
Step 2: Planning the Investigation
A well-structured investigation plan is essential to ensure the forensic process is efficient and focused. Key objectives include:
- Confirming which employees were made redundant and verifying redundancy documentation.
- Identifying all payroll payments made post-redundancy.
- Tracing the flow of funds related to these payments.
- Identifying individuals who authorized or processed these payments.
- Examining the role and involvement of Akeem Bello, the senior accountant now absent.
The plan must also consider timelines, resource allocation (team members with forensic accounting, IT, and interviewing skills), and communication protocols with the client.
Step 3: Evidence Collection and Preservation
In forensic investigations, evidence must be collected legally, systematically, and with a clear chain of custody to be admissible in any legal proceedings. Start by securing all relevant documents such as:
- Payroll registers and reports for the months before and after the factory closure.
- Employee status lists, redundancy notices, and termination documentation.
- Bank statements and payroll disbursement records.
- Emails, memos, and approval forms related to payroll changes.
- IT system logs showing payroll processing activities.
Given the suspicion that payments to redundant employees went into the same bank account, a critical step is to secure bank records showing salary payment inflows and outflows for those accounts.
Ensure all data collected is backed up and access-controlled to prevent tampering.
Step 4: Analytical Procedures and Testing
Analytical procedures involve comparing expectations with actual results to identify anomalies. Segun noted only a 3% payroll expense reduction after redundancy, whereas 20% staff were laid off, indicating potential fraud.
Perform:
- Variance analysis: Compare payroll expenses month-to-month to detect inconsistencies.
- Employee status cross-check: Match payroll records against HR’s redundancy list.
- Payment tracing: Identify salary payments to redundant employees and determine if payments were authorized.
- Bank account analysis: Investigate the single bank account receiving these payments — assess for commingling or misuse of funds.
- Look for patterns such as identical payment amounts, payment frequency, or unusual authorization signatures.
This quantitative work provides evidence of fraud and identifies specific transactions and individuals involved.
Step 5: Interviews and Inquiries
Interviews are a key investigative tool to gather qualitative information, clarify suspicions, and test consistency of explanations. Interview Segun Peter in detail to understand how the fraud was initially detected and what measures were taken.
Attempt to locate and interview Akeem Bello, whose unexplained absence and connection to the payroll system may indicate involvement or knowledge. If he is unavailable or uncooperative, document all attempts made to contact him.
Interview other finance, payroll, and HR personnel to understand processes, controls, and identify any internal collusion or negligence.
Step 6: Review of Internal Controls
Understanding MSc 2 Ltd’s internal controls over payroll is crucial to determine how the fraud was possible. Key areas to assess include:
- Segregation of duties: Were different employees responsible for payroll preparation, authorization, and payment processing?
- Access controls: Were payroll systems and records adequately protected?
- Authorization protocols: Were changes to payroll records and employee status properly authorized and documented?
- Monitoring and reconciliation processes: Were payroll expenses regularly reviewed and variances investigated?
Weaknesses in these controls often contribute to fraud and should be highlighted with recommendations for strengthening.
Step 7: Reporting
Once the investigation is complete, produce a detailed forensic report that includes:
- Executive summary of findings.
- Description of methodology.
- Detailed findings with supporting evidence.
- Identification of individuals involved or implicated.
- Financial impact of the fraud.
- Assessment of control weaknesses.
- Recommendations for fraud prevention and detection.
- Suggested next steps including potential legal or disciplinary action.
This report serves as a basis for MSc 2 Ltd management to act and may be used in legal proceedings.
Step 8: Legal and Ethical Considerations
As fraud is suspected, discuss with MSc 2 Ltd’s directors the possibility of involving law enforcement or legal counsel, especially if employee misconduct is confirmed. Your firm may be called upon to provide expert testimony or assist in litigation.
Maintain confidentiality and adhere strictly to professional ethics throughout the process. Avoid conflicts of interest and ensure all investigative procedures are lawful and defensible.
Summary
To summarize, as the forensic expert you will:
- Formalize the engagement with clear terms.
- Plan a focused investigation on payroll fraud.
- Collect, secure, and analyze relevant evidence.
- Conduct interviews with key personnel.
- Assess internal controls and pinpoint failures.
- Prepare a detailed forensic report.
- Advise on legal follow-up.
This approach ensures a professional, thorough, and legally sound investigation that will assist MSc 2 Ltd in resolving the fraud issue, mitigating losses, and preventing future occurrences.
