Write & Wrong

It’s an adage in the auditing world that examination results that can’t be effectively communicated might as well not exist.  Unlike a financial statement audit report, the CFE’s final report presents a unique challenge because there is no standardized format. Our Chapter receives more general inquiries from new practitioners about the form and content of final examination reports than about almost any other topic.

Each fraud investigation report is different in structure and content, depending on the nature and results of the assignment and the information that needs to be communicated, as well as to whom the results are being directed. To be effective, therefore, the report must communicate the findings in an accurate and concise form. Corporate counsel, law enforcement, juries, an employing attorney and/or the audit committee and management of the victimized organization must all be able to delineate and understand the factual aspects of the fraud as well as the related risks and control deficiencies discovered so that appropriate actions can be taken timely. Thus, the choice of words used and the tone of the CFE’s final report are as important as the information presented within it. To help ensure their reports are persuasive and bring positive results, CFEs should strive to keep them specific, meaningful, actionable, results oriented, and timely.

Because the goal of the final report is to ensure that the user can interpret the results of the investigation or analysis with accuracy and according to the intentions of the fraud examiner or forensic accountant, the report’s tone and structure are paramount. The report should begin by aligning issues and recommendations with applicable ACFE and with any other applicable professional standards and end with results that are clearly written and timely presented. To ensure quality and accuracy, there are some basic guidelines or ground rules that authorities recommend should be considered when putting together a final report that adds value.

The CFE should consider carefully what specifically to communicate in the report, including the conditions, cause, effect, and “why” of each of the significant fraud related facts uncovered.  Fraud investigators should always identify and address issues in a specific context rather than in broad or general terms. For example, stating that the fraud resulted from weaknesses in the collection and processing of vendor payment receipts is too broad. The report should identify the exact circumstances and the related control issues and risk factors identified, the nature of the findings, an analysis of the specific actions constituting the fraud and some discussion (if the CFE has been requested to do so) of possible corrective actions that might be taken.

To force the writing toward more specificity, each paragraph of the report should express only one finding, with major points enumerated, or bulleted, and parallel structure should be used for each itemized statement of a listing of items. Further, the most important findings should be listed in the first sentence of a paragraph. Once findings are delineated, the explanatory narration of facts aligned to each finding should be presented. Being specific means leaving nothing to the
user’s interpretation beyond that which is intended by the writer.  Another way to achieve specificity is to align the writing of the report to an existing control framework like the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO’s) internal control or risk management frameworks. When issues are aligned with existing standards or to a framework, it can be easier for the CFE to explain the weaknesses in the client’s control environment that made the fraud possible.

The question to be answered is: Can the client(s) readily tell what the issues are by reading the investigative report alone? If the answer is “no,” how will they satisfactorily address areas the client will eventually deem important in moving forward toward either remediation or possible prosecution? This aspect of the writing process requires the practitioner to, first, identify to whom the final report is specifically directed and, second, determine what is to be communicated that will add value for the client. For example, the report may a communication to an employing attorney, to corporate counsel, to the client’s management or audit committee or to all three. What are their expectations? Is the report the result of a routine investigation requested by client management of possible accounts payable fraud or a special investigation to address a suspected, specifically identified fraud? The answer to these and related questions will help determine the appropriate technical level and tone for the report.

When there are different readers of the report, the process necessarily becomes more complex under the necessity to meet the expectations, understandings and eventual usages of all the parties. Finding the right words to address the identified fraud related facts in a positive tone, especially when client conditions surrounding the fraud are sometimes sensitive or at least not favorable, is crucial to making the report meaningful as well as persuasive. The investigative findings must be clear and logical. If the reported results are understood and meaningful actions that add value to the position of the various users are taken because of the findings, then the purpose and meaning of the CFE’s report (and work) will be realized.

What about investigative situations in which the CFE or forensic accountant is asked to move beyond a straight-forward presentation of the facts and, as an expert on fraud and on fraud prevention, make recommendations as to corrective actions that the client might take to forestall the future commission of frauds similar to those dealt with in the final report? In such cases (which are quite common, especially with larger clients), the final report should strive to demonstrate to the extent possible the capacity of the entity to implement the recommendations the CFE has included in the report and still maintain an acceptable level of operation.  To this end, the requested recommended actions should be written in a way that conveys to management that implementing the recommendations will strengthen the organization’s overall fraud prevention capability. The writing, as well as the complexity of the corrective action, should position the client organization to implement recommendations to strengthen fraud prevention. The report should begin with the most critical issue and progress to the least important and move from the easiest recommended corrective steps to the most difficult, or to the sequence of steps to implement a recommendation. The cost to correct the fraud vulnerability should be
apparent and easily determined in the written report. Additionally, the report should provide management with a rubric to evaluate the extent to which a deficiency is corrected (e.g., minimally corrected, fully corrected). Such a guide can be used to gauge the fraud prevention related decisions of management and serve as a basis for future fraud risk assessments.

Developing the CFE’s final report is a process that involves four stages: outlining, drafting, revising, and editing. In the outlining stage, the practitioner should gather and organize the information so that, when converted to a report, it is easy for the reader to follow. This entails reviewing the working papers and making a list of the fraud related facts to be addressed and of their related chronologies. These should be discussed with the investigative team (if any) and the
client attorney, if necessary, to ensure that there is a clear understanding of the underlying facts of the case. Any further work or research should be completed at this stage. This process may be simple or complicated, depending on the extent of the investigation, the unit or operation that is under examination, and the number of fraud related facts that must be addressed.

Once all information has been gathered, the next stage is writing the draft of the report. In completing the draft, concise and coherent statements with sufficient detail should enable the reader to understand the chronology and related facts of the fraud, the fraud’s impact on operations, and the proposed corrective actions (if requested by the client). After completing the draft, revisions may be necessary to make sure that the evidence supports the results and is written in a specific context.

The final stage involves proofreading and editing for correct grammar, sentence structure, and word usage to ensure that the facts and issues related to the fraud are effectively and completely presented and that the report is coherent. Reviewers should be used at this stage to give constructive feedback. Several iterations may be necessary before a final report is completed.

In summary, the CFE’s final report should be designed to add value and to guide the client organization’s subsequent steps to a satisfactory overall fraud response and conclusion. If the CFE’s report is deficient in communicating results, critical follow-on steps requiring immediate action may be skipped or ignored. This can be costly for any company in lost opportunities for loss recoveries, botched prosecutions and damaged reputation.

New Rules for New Tools

I’ve been struck these last months by several articles in the trade press about CFE’s increasingly applying advanced analytical techniques in support of their work as full-time employees of private and public-sector enterprises.  This is gratifying to learn because CFE’s have been bombarded for some time now about the risks presented by cloud computing, social media, big data analytics, and mobile devices, and told they need to address those risk in their investigative practice.  Now there is mounting evidence of CFEs doing just that by using these new technologies to change the actual practice of fraud investigation and forensic accounting by using these innovative techniques to shape how they understand and monitor fraud risk, plan and manage their work, test transactions against fraud scenarios, and report the results of their assessments and investigations to management; demonstrating what we’ve all known, that CFEs, especially those dually certified as CPAs, CIAs, or CISA’s can bring a unique mix of leveraged skills to any employer’s fraud prevention or detection program.

Some examples …

Social Media — following a fraud involving several of the financial consultants who work in its branches and help customers select accounts and other investments, a large multi-state bank requested that a staff CFE determine ways of identifying disgruntled employees who might be prone to fraud. The effort was important to management not only because of fraud prevention but because when the bank lost an experienced financial consultant for any reason, it also lost the relationships that individual had established with the bank’s customers, affecting revenue adversely. The staff CFE suggested that the bank use social media analytics software to mine employees’ email and posts to its internal social media groups. That enabled the bank to identify accurately (reportedly about 33 percent) the financial consultants who were not currently satisfied with their jobs and were considering leaving. Management was able to talk individually with these employees and address their concerns, with the positive outcome of retaining many of them and rendering them less likely to express their frustration by ethically challenged behavior.  Our CFE’s awareness that many organizations use social media analytics to monitor what their customers say about them, their products, and their services (a technique often referred to as sentiment analysis or text analytics) allowed her to suggest an approach that rendered value. This text analytics effort helped the employer gain the experience to additionally develop routines to identify email and other employee and customer chatter that might be red flags for future fraud or intrusion attempts.

Analytics — A large international bank was concerned about potential money laundering, especially because regulators were not satisfied with the quality of their related internal controls. At a CFE employee’s recommendation, it invested in state-of-the-art business intelligence solutions that run “in-memory”, a new technique that enables analytics and other software to run up to 300,000 times faster, to monitor 100 percent of its transactions, looking for the presence of patterns and fraud scenarios indicating potential problems.

Mobile — In the wake of an identified fraud on which he worked, an employed CFE recommended that a global software company upgrade its enterprise fraud risk management system so senior managers could view real-time strategy and risk dashboards on their mobile devices (tablets and smartphones). The executives can monitor risks to both the corporate and to their personal objectives and strategies and take corrective actions as necessary. In addition, when a risk level rises above a defined target, the managers and the risk officer receive an alert.

Collaboration — The fraud prevention and information security team at a U.S. company wanted to increase the level of employee acceptance and compliance with its fraud prevention – information security policy. The CFE certified Security Officer decided to post a new policy draft to a collaboration area available to every employee and encouraged them to post comments and suggestions for upgrading it. Through this crowd-sourcing technique, the company received multiple comments and ideas, many of which were incorporated into the draft. When the completed policy was published, the company found that its level of acceptance increased significantly, its employees feeling that they had part ownership.

As these examples demonstrate, there is a wonderful opportunity for private and public sector employed CFE’s to join in the use of enterprise applications to enhance both their and their employer’s investigative efficiency and effectiveness.  Since their organizations are already investing heavily in a wide variety of innovative technologies to transform the way in which they deliver products to and communicate with customers, as well as how they operate, manage, and direct the business, there is no reason that CFE’s can’t use these same tools to transform each stage of their examination and fraud prevention work.

A risk-based fraud prevention approach requires staff CFEs to build and maintain the fraud prevention plan, so it addresses the risks that matter to the organization, and then update that plan as risks change. In these turbulent times, dominated by cyber, risks change frequently, and it’s essential that fraud prevention teams understand the changes and ensure their approach for addressing them is updated continuously. This requires monitoring to identify and assess both new risks and changes in previously identified risks.  Some of the recent technologies used by organizations’ financial and operational analysts, marketing and communications professionals, and others to understand both changes within and outside the business can also be used to great advantage by loss prevention staff for risk monitoring. The benefits of leveraging this same software are that the organization has existing experts in place to teach CFE’s how to use it, the IT department already is providing technical support, and the software is currently used against the very data enterprise fraud prevention professionals like staff CFEs want to analyze.  A range of enhanced analytics software such as business intelligence, analytics (including predictive and mobile analytics), visual intelligence, sentiment analysis, and text analytics enable fraud prevention to monitor and assess risk levels. In some cases, the software monitors transactions against predefined rules to identify potential concerns such as heightened fraud risks in any given business process or in a set of business processes (the inventory or financial cycles).  For example, a loss prevention team headed by a staff CFE can monitor credit memos in the first month of each quarter to detect potential revenue accounting fraud. Another use is to identify trends associated with known fraud scenarios, such as changes in profit margins or the level of employee turnover, that might indicate changes in risk levels. For example, the level of emergency changes to enterprise applications can be analyzed to identify a heightened risk of poor testing and implementation protocols associated with a higher vulnerability to cyber penetration.

Finally, innovative staff CFEs have used some interesting techniques to report fraud risk assessments and examination results to management and to boards. Some have adopted a more visually appealing representation in a one-page assessment report; others have moved to the more visual capabilities of PowerPoint from the traditional text presentation of Microsoft Word.  New visualization technology, sometimes called visual analytics when allied with analytics solutions, provides more options for fraud prevention managers seeking to enhance or replace formal reports with pictures, charts, and dashboards.  The executives and boards of their employing organizations are already managing their enterprise with dashboards and trend charts; effective loss prevention communications can make effective use of the same techniques. One CFE used charts and trend lines to illustrate how the time her employing company was taking to process small vendor contracts far exceeded acceptable levels, had contributed to fraud risk and was continuing to increase. The graphic, generated by a combination of a business intelligence analysis and a visual analytics tool to build the chart, was inserted into a standard monthly loss prevention report.

CFE headed loss prevention departments and their allied internal audit and IT departments have a rich selection of technologies that can be used by them individually or in combination to make them all more effective and efficient. It is questionable whether these three functions can remain relevant in an age of cyber, addressing and providing assurance on the risks that matter to the organization, without an ever wider use of modern technology. Technology can enable the an internal CFE to understand the changing business environment and the risks that can affect the organization’s ability to achieve its fraud prevention related objectives.

The world and its risks are evolving and changing all the time, and assurance professionals need to address the issues that matter now. CFEs need to review where the risk is going to be, not where it was when the anti-fraud plan was built. They increasingly need to have the ability to assess cyber fraud risk quickly and to share the results with the board and management in ways that communicate assurance and stimulate necessary change.

Technology must be part of the solution to that need. Technological tools currently utilized by CFEs will continue to improve and will be joined by others over time. For example, solutions for augmented or virtual reality, where a picture or view of the physical world is augmented by data about that picture or view enables loss prevention professionals to point their phones at a warehouse and immediately access operational, personnel, safety, and other useful information; representing that the future is a compound of both challenge and opportunity.

First Steps to Prosecution

A recent study sponsored by the financial trade press indicated some haziness among assurance professionals generally about the precise mechanism(s) underlying the process by which the authorities make the initial decision to prosecute or not to prosecute alleged financial statement fraud.

In the U.S. federal system, a criminal investigation of fraudulent financial reporting can originate in all sorts of ways. An investigation may be initiated because of a whistleblower, an anonymous tip, information supplied by a conscientious or guilt-ridden employee, or facts discovered during a routine annual audit of the company’s financial statements. In addition, the company’s public disclosure of financial misstatements may itself lead to the commencement of a criminal investigation. However initially initiated, the decision to start a criminal investigation is entirely within the discretion of the United States Attorney in each federal district.

For the prosecutor, the decision whether to open an investigation can be difficult. The main reason is the need for the prosecutor to establish criminal intent, that is, that the perpetrator not only got the accounting wrong but did so willfully. Often, bad accounting will be the result of judgment calls, which can be defended as exactly that, executive determinations or judgement calls that, while easy to second guess with the benefit of hindsight, were made in good faith at the time. Thus, a prosecutor evaluating the viability of a criminal prosecution will be looking for evidence of conduct so egregious that the perpetrator must have known it was wrong. This is not to suggest that evidence of a wrongful intent is the only consideration. A prosecutor’s exercise of his or her prosecutorial discretion may consider all kinds of factors in deciding whether criminal inquiry is warranted. Those factors may include the magnitude and nature of the accounting misstatements, whether individuals personally benefited from the misstatements or acted pursuant to the directive of a superior, whether documents were fabricated or destroyed, the probable deterrent or rehabilitative effect of prosecution, and the likelihood of success at trial. The availability of governmental resources may also be a factor.

Where the putative defendant is a corporation, partnership, or other business organization, a more settled set of factors come into play:

–The nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for certain categories of crime;
–The pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management;
–The corporation’s history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it;
–The corporation’s timely and voluntary disclosure of wrong-doing and its willingness to cooperate in the investigation of its agents;
–The existence and effectiveness of the corporation’s preexisting compliance program;
–The corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies;
–Collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as the impact on the public arising from the prosecution;
–The adequacy of the prosecution of individuals responsible for the corporation’s malfeasance;
–The adequacy of remedies such as civil or regulatory enforcement actions.

However, a prosecutor gets there, once s/he determines to commence a criminal investigation, there is no doubt that those who are its targets will quickly come to view it as a priority over everything else. The government’s powers to investigate are broad, and, once a determination to go forward is made, the full resources of the government, including the FBI, can be brought to bear. The criminal sentences resulting from a successful prosecution can be severe if not excessive, particularly considering the enhanced criminal sentences put in place by Sarbanes-Oxley.  The ACFE reports that one midlevel executive at a company who elected to proceed to trial was convicted and received a prison sentence of 24 years. The fact that the sentence was subsequently set aside on appeal does little to mitigate the concern that such a sentence could be imposed upon a first-time, nonviolent offender whose transgression was a failure to apply generally accepted accounting principles.

Typically, a company learns that it is involved in a criminal investigation when it receives a grand jury subpoena, in most instances a subpoena duces tecum, compelling the company or its employees to furnish documents to the grand jury. In an investigation of fraudulent financial reporting, such a subpoena for documents may encompass all the files underlying the company’s publicly disseminated financial information, including the records underlying the transactions at issue and related emails.

For a CFE’s client company counsel and for the company’s executives generally, the need to respond to the subpoena presents both an opportunity and a dilemma. The opportunity stems from the company’s ability, in responding to the subpoena, to learn about the investigation, an education process that will be critical to a successful criminal defense. The dilemma stems from the need to assess the extent to which active and complete cooperation should be pledged to the prosecutor at the outset. The formulation of a response to a criminal subpoena, therefore, constitutes a critical point in the investigatory process. Those involved are thereby placed in the position of needing to make important decisions at an early stage that can have lasting and significant effects.  The CFE can support them in getting through this process.

Once an initial review of the subpoena and its underlying substance is complete, one of the first steps in formulating a response is often for company counsel to make a phone call to the prosecutor to make appropriate introductions and, to the extent possible, to seek background information regarding the investigation. In this initial contact, the prosecutor will be understandably guarded. Nonetheless, some useful information will frequently be shared. A general impression may be gained about the scope and focus of the investigation and the timing of additional subpoenas and testimony. Thereafter, it is not unusual for an initial meeting to be arranged to discuss in greater detail the company’s response. One benefit of such a meeting is that some level of additional information may be forthcoming.

From the outset, company counsel will be undertaking a process that will be ongoing throughout the criminal proceedings: learning as much as possible about the prosecutor’s case. The reason is that, unlike a civil case, in which broad principles of discovery enable the defendants to learn the details of the adversary’s evidence, the procedural rules of a criminal investigation result in much greater secrecy. Less formal methods of learning the details of the prosecutor’s case, therefore, are critical. In these initial contacts, the establishment of a sound foundation for the company’s dealings with the prosecutor is an important aspect of the investigation. To state it simply, CFE’s should always support that those dealings be premised on a foundation of candor.

Although it may be appropriate at various stages to decline to discuss sensitive matters, counsel should avoid making a factual statement on any subject about which it may be incompletely or inaccurately informed. This admonition applies to subjects such as the existence and location of files, the burden of producing documents, and the availability of witnesses. It also applies to more substantive matters bearing on the guilt or innocence of parties. CFE’s should, again, counsel their clients that a relationship with the prosecutor based on trust and confidence is key.

The judgment regarding the extent of cooperation with the prosecutor can be a tough one. Unlike in a civil proceeding, where cooperation with regulatory authorities (such as the SEC) is generally the preferred approach, the decision to cooperate with the government in a criminal investigation may be much more difficult, insofar as a subsequent effort to oppose the government (should such a change of approach be necessary) would be impeded by the loss of a significant tactical advantage, the loss of surprise. In criminal cases, the government is not afforded the same broad rights of discovery available in civil proceedings. It is entirely possible for a prosecutor to have no significant knowledge of the defense position until after the start of a trial. On the other hand, the privileges available to a corporation are limited. There is, most importantly, no Fifth Amendment privilege against self-incrimination for companies.  Furthermore, almost any kind of evidence, even evidence that would be inadmissible at trial, except for illegal wiretaps or privileged material, can be considered by a grand jury. Therefore, the company’s ability to oppose a grand jury investigation is limited, and the prosecutor may even consider a company’s extensive zeal in opposition to constitute obstruction of justice. Moreover, the prosecutor’s ultimate decision about indictment of the company may be affected by the extent of the company’s cooperation. And corporate management may wish to demonstrate cooperation as a matter of policy or public relations.

One issue with which a company will need to wrestle is whether it is appropriate for a public company or its executives to do anything other than cooperate with the government. On this issue, it is useful for executives to appreciate that the U.S. system of justice affords those being investigated certain fundamental rights, and it is not unpatriotic to take advantage of them. As to individuals, one of the most basic of these rights is the Fifth Amendment privilege against self-incrimination. Insofar as, in fraud cases, guilt can be established through circumstantial evidence, executives need to keep in mind that it demonstrates no lack of civic virtue to take full advantage of constitutional protections designed to protect the innocent.

A challenge is that many of these judgments regarding cooperation must be made at the outset when the company’s information is limited. Often the best approach, at least as a threshold matter, will be one of courteous professionalism, meaning respect for one’s adversary and reasonable accommodation pending more informed judgments down the road. Premature expressions of complete cooperation are best avoided as a subsequent change in approach can give rise to governmental frustration and anger.

Following the initial steps of the grand jury subpoena and the preliminary contact with the prosecutor, CFE’s are uniquely positioned to assist corporate counsel and management in the remaining stages of the criminal investigation of a financial crime:

–Production of documents;
–Grand jury testimony;
–Plea negotiations (if necessary);
–Trial (if necessary).

The Other Assets Dance

Studies by the ACFE and various academics have revealed over the years that, while not as common as cash schemes, employee misappropriations of other types of corporate assets than cash can sometimes prove even more disastrous than cash theft for any organization that suffers them.  The median losses associated with noncash schemes is generally higher than cash schemes, being $100,000 as opposed to $60,000.

The other asset category includes such assets as inventories of all kinds, i.e., inventory for sale, supplies and equipment and some categories of fixed assets; in short, the term inventory and other assets is generally meant to encompass misapplication schemes involving any assets held by an enterprise other than cash.  The theft of non-cash assets is generally classified by the ACFE into three groups: inventory schemes, supplies schemes and other asset schemes; of these schemes inventory related schemes account for approximately 70% of the losses while misappropriation of company supplies accounts for another 20%…the remaining losses are associated with several types of fixed assets, equipment, and corporate related information.

Those who study these types of fraud generally lump non-cash assets together for describing how these types of assets are misappropriated since the methods for misappropriation don’t vary much among the various asset types.  The asset, no matter what it is, can be misused (or “borrowed”) or it can be stolen.  Assets that are misused rather than stolen outright include company assigned vehicles, company supplies of all kinds, computers, and other office equipment.  As a very frequently occurring example, a company executive might make use of a company car when on an out of the home office assignment; false documentation (both in writing and verbally) is provided to the company by the employee regarding the nature of her use of the vehicle.  At the end of the trip, the car is returned intact and the cost to the fraudster’s company is only a few hundred dollars at most; but what we have here is, nonetheless, an instance of fraud when a false statement or declaration accompanies the use.

In contrast, the costs of inventory misuse schemes can be very costly.  To many employees, inventory fraud of some kinds is not perceived as a crime, but rather as “borrowing” and, in truth, the actual cost of borrowing a laptop to do personal computing at home may often be immaterial if the asset is returned undamaged.  On the other hand, if the employee uses the laptop to operate a side business during and after normal work hours, the consequences can be more serious for the company, especially if the employee’s business is in competition with that of the employer.  Since the employee is not performing his or her assigned work duties, the employer suffers a loss of productivity and is defrauded of that portion of the employee’s wages related to the fraud.  If the employee’s low productivity continues for any length of time, the employer might have to engage additional employees to compensate which means more capital diverted to wages.  As noted above, if the employee’s business is like that of the employer’s, lost business for the employer would be an additional cost of the scheme.  If the employee had not contracted work for his own company, the business would presumably have gone to her employer. Unauthorized use of company equipment can also mean additional wear and tear, causing company owned equipment to break down sooner than it would have under normal operating conditions.

So, what about prevention?  There are preventative measures for control of other asset related frauds which, if properly installed and operating, may help prevent employee exploits directed against all the many types of inventories maintained by a typical business:
For each type of asset inventory (for sale, supplies, equipment, etc.), the following items (as appropriate) should be pre-numbered and controlled:

–requisitions
–receiving reports
–perpetual records
–raw materials requisitions
–shipping documents
–job cost sheets

The following duties related to the distinct types of asset inventories should be handled by different employees:

–requisition of inventory
–receipt of inventory
–disbursement of inventory
–conversion of inventory to scrap
–receipt of proceeds from disposal of scrape.

Someone independent of the purchasing or warehousing function should conduct physical observation of all asset inventories according to defined schedules.  Personnel conducting physical observations of these types of assets should be knowledgeable about the inventory, i.e., what types of material it should contain, where the material should physically be, etc.  All company owned merchandise should be physically guarded and locked; and access should be limited to authorized personnel only.

Threat Assessment & Cyber Security

One rainy Richmond evening last week I attended the monthly dinner meeting of one of the professional organizations of which I’m a member.  Our guest speaker’s presentation was outstanding and, in my opinion, well worth sharing with fellow CFE’s especially as we find more and more of our client’s grappling with the reality of  ever-evolving cyber threats.

Our speaker started by indicating that, according to a wide spectrum of current thinking, technology issues in isolation should be but one facet of the overall cyber defense strategy of any enterprise. A holistic view on people, process and technology is required in any organization that wants to make its chosen defense strategy successful and, to be most successful, that strategy needs to be supplemented with a good dose of common sense creative thinking. That creative thinking proved to be the main subject of her talk.

Ironically, the sheer size, complexity and geopolitical diversity of the modern-day enterprise can constitute an inherent obstacle for its goal of achieving business objectives in a secured environment.  The source of the problem is not simply the cyber threats themselves, but threat agents. The term “threat agent,” from the Open Web Application Security Project (OWASP), is used to indicate an individual or group that can manifest a threat. Threat agents are represented by the phenomena of:

–Hacktivism;
–Corporate Espionage;
–Government Actors;
–Terrorists;
–Common Criminals (individual and organized).

Irrespective of the type of threat, the threat agent takes advantage of an identified vulnerability and exploits it in the attempt to negatively impact the value the individual business has at risk. The attempt to execute the threat in combination with the vulnerability is called hacking. When this attempt is successful, and the threat agent can negatively impact the value at risk, it can be concluded that the vulnerability was successfully exploited. So, essentially, enterprises are trying to defend against hacking and, more importantly, against the threat agent that is the hacker in his or her many guises. The ACFE identifies hacking as the single activity that has resulted in the greatest number of cyber breaches in the past decade.

While there is no one-size-fits-all standard to build and run a sustainable security defense in a generic enterprise context, most companies currently deploy something resembling the individual components of the following general framework:

–Business Drivers and Objectives;
–A Risk Strategy;
–Policies and Standards;
–Risk Identification and Asset Profiling;
–People, Process, Technology;
–Security Operations and Capabilities;
–Compliance Monitoring and Reporting.

Most IT risk and security professionals would be able to identify this framework and agree with the assertion that it’s a sustainable approach to managing an enterprise’s security landscape. Our speaker pointed out, however, that in her opinion, if the current framework were indeed working as intended, the number of security incidents would be expected to show a downward trend as most threats would fail to manifest into full-blown incidents. They could then be routinely identified by enterprises as known security problems and dealt with by the procedures operative in day-to-day security operations. Unfortunately for the existing framework, however, recent security surveys conducted by numerous organizations and trade groups clearly show an upward trend of rising security incidents and breaches (as every reader of daily press reports well knows).

The rising tide of security incidents and breaches is not surprising since the trade press also reports an average of 35 new, major security failures on each and every day of the year.  Couple this fact with the ease of execution and ready availability of exploit kits on the Dark Web and the threat grows in both probability of exploitation and magnitude of impact. With speed and intensity, each threat strikes the security structure of an enterprise and whittles away at its management credibility to deal with the threat under the routine, daily operational regimen presently defined. Hence, most affected enterprises endure a growing trend of negative security incidents experienced and reported.

During the last several years, in response to all this, many firms have responded by experimenting with a new approach to the existing paradigm. These organizations have implemented emergency response teams to respond to cyber-threats and incidents. These teams are a novel addition to the existing control structure and have two main functions: real-time response to security incidents and the collection of concurrent internal and external security intelligence to feed predictive analysis. Being able to respond to security incidents via a dedicated response team boosts the capacity of the operational organization to contain and recover from attacks. Responding to incidents, however efficiently, is, in any case, a reactive approach to deal with cyber-threats but isn’t the whole story. This is where cyber-threat intelligence comes into play. Threat intelligence is a more proactive means of enabling an organization to predict incidents. However, this approach also has a downside. The influx of a great deal of intelligence information may limit the ability of the company to render it actionable on a timely basis.

Cyber threat assessments are an effective means to tame what can be this overwhelming influx of intelligence information. Cyber threat assessment is currently recognized in the industry as red teaming, which is the practice of viewing a problem from an adversary or competitor’s perspective. As part of an IT security strategy, enterprises can use red teams to test the effectiveness of the security structure as a whole and to provide a relevance factor to the intelligence feeds on cyber threats. This can help CEOs decide what threats are relevant and have higher exposure levels compared to others. The evolution of cyber threat response, cyber threat
intelligence and cyber threat assessment (red teams) in conjunction with the existing IT risk framework can be used as an effective strategy to counter the agility of evolving cyber threats. The cyber threat assessment process assesses and challenges the structure of existing enterprise security systems, including designs, operational-level controls and the overall cyber threat response and intelligence process to ensure they remain capable of defending against current relevant exploits.

Cyber threat assessment exercises can also be extremely helpful in highlighting the most relevant attacks and in quantifying their potential impacts. The word “adversary” in the definition of the term ‘red team’ is key in that it emphasizes the need to independently challenge the security structure from the view point of an attacker.  Red team exercises should be designed to be independent of the scope, asset profiling, security, IT operations and coverage of existing security policies. Only then can enterprises realistically apply the attacker’s perspective, measure the success of its risk strategy and see how it performs when challenged. It’s essential that red team exercises have the freedom to treat the complete security structure and to point to flaws in all components of the IT risk framework. It’s a common notion that a red team exercise is a penetration test. This is not the case. Use of penetration test techniques by red teams is a means to identify the information required to replicate cyber threats and to create a controlled security incident. The technical shortfalls that are identified during standard penetration testing are mere symptoms of gaps that may exist in the governance of people, processes and technology. Hence, to make the organization more resilient against cyber threats, red team focus should be kept on addressing the root cause and not merely on fixing the security flaws discovered during the exercise. Another key point is to include cyber threat response and threat monitoring in the scope of such assessments. This demands that red team exercises be executed, and partially announced, with CEO-level approval. This ensures that enterprises challenge the end-to-end capabilities of an enterprise to cope with a real-time security incident. Lessons learned from red teaming can be documented to improve the overall security posture of the organization and as an aid in dealing with future threats.

Our speaker concluded by saying that as cyber threats evolve, one-hundred percent security for an active business is impossible to achieve. Business is about making optimum use of existing resources to derive the desired value for stakeholders. Cyber-defense cannot be an exception to this rule. To achieve optimized use of their security investments, CEOs should ensure that security spending for their organization is mapped to the real emerging cyber threat landscape. Red teaming is an effective tool to challenge the status quo of an enterprise’s security framework and to make informed judgements about the actual condition of its actual security posture today. Not only can the judgements resulting from red team exercises be used to improve cyber threat defense, they can also prove an effective mechanism to guide a higher return on cyber-defense investment.

A CDC for Cyber

I remember reading somewhere a few years back that Microsoft had commissioned a report which recommended that the U.S. government set up an entity akin to its Center for Disease Control but for cyber security.  An intriguing idea.  The trade press talks about malware and computer viruses and infections to describe self -replicating malicious code in the same way doctors talk about metastasizing cancers or the flu; likewise, as with public health, rather than focusing on prevention and detection, we often blame those who have become infected and try to retrospectively arrest/prosecute (cure) those responsible (the cancer cells, hackers) long after the original harm is done. Regarding cyber, what if we extended this paradigm and instead viewed global cyber security as an exercise in public health?

As I recall, the report pointed out that organizations such as the Centers for Disease Control in Atlanta and the World Health Organization in Geneva have over decades developed robust systems and objective methodologies for identifying and responding to public health threats; structures and frameworks that are far more developed than those existent in today’s cyber-security community. Given the many parallels between communicable human diseases and those affecting today’s technologies, there is also much fraud examiners and security professionals can learn from the public health model, an adaptable system capable of responding to an ever-changing array of pathogens around the world.

With cyber as with matters of public health, individual actions can only go so far. It’s great if an individual has excellent techniques of personal hygiene, but if everyone in that person’s town has the flu, eventually that individual will probably succumb as well. The comparison is relevant to the world of cyber threats. Individual responsibility and action can make an enormous difference in cyber security, but ultimately the only hope we have as a nation in responding to rapidly propagating threats across this planetary matrix of interconnected technologies is to construct new institutions to coordinate our response. A trusted, international cyber World Health Organization could foster cooperation and collaboration across companies, countries, and government agencies, a crucial step required to improve the overall public health of the networks driving the critical infrastructures in both our online and our off-line worlds.

Such a proposed cyber CDC could go a long way toward counteracting the technological risks our country faces today and could serve a critical role in improving the overall public health of the networks driving the critical infrastructures of our world. A cyber CDC could fulfill many roles that are carried out today only on an ad hoc basis, if at all, including:

• Education — providing members of the public with proven methods of cyber hygiene to protect themselves;
• Network monitoring — detection of infection and outbreaks of malware in cyberspace;
• Epidemiology — using public health methodologies to study digital cyber disease propagation and provide guidance on response and remediation;
• Immunization — helping to ‘vaccinate’ companies and the public against known threats through software patches and system updates;
• Incident response — dispatching experts as required and coordinating national and global efforts to isolate the sources of online infection and treat those affected.

While there are many organizations, both governmental and non-governmental, that focus on the above tasks, no single entity owns them all. It is through these gaps in effort and coordination that cyber risks continue to mount. An epidemiological approach to our growing technological risks is required to get to the source of malware infections, as was the case in the fight against malaria. For decades, all medical efforts focused in vain on treating the disease in those already infected. But it wasn’t until epidemiologists realized the malady was spread by mosquitoes breeding in still pools of water that genuine progress was made in the fight against the disease. By draining the pools where mosquitoes and their larvae grow, epidemiologists deprived them of an important breeding ground, thus reducing the spread of malaria. What stagnant pools can we drain in cyberspace to achieve a comparable result? The answer represents the yet unanswered challenge.

There is another major challenge a cyber CDC would face: most of those who are sick have no idea they are walking around infected, spreading disease to others. Whereas malaria patients develop fever, sweats, nausea, and difficulty breathing, important symptoms of their illness, infected computer users may be completely asymptomatic. This significant difference is evidenced by the fact that the overwhelming majority of those with infected devices have no idea there is malware on their machines nor that they might have even joined a botnet army. Even in the corporate world, with the average time to detection of a network breach now at 210 days, most companies have no idea their most prized assets, whether intellectual property or a factory’s machinery, have been compromised. The only thing worse than being hacked is being hacked and not knowing about it. If you don’t know you’re sick, how can you possibly get treatment? Moreover, how can we prevent digital disease propagation if carriers of these maladies don’t realize they are infecting others?

Addressing these issues could be a key area of import for any proposed cyber CDC and fundamental to future communal safety and that of critical information infrastructures. Cyber-security researchers have pointed out the obvious Achilles’ heel of the modern technology infused world, the fact that today everything is either run by computers (or will be) and that everything is reliant on these computers continuing to work. The challenge is that we must have some way of continuing to work even if all the computers fail. Were our information systems to crash on a mass scale, there would be no trading on financial markets, no taking money from ATMs, no telephone network, and no pumping gas. If these core building blocks of our society were to suddenly give way, what would humanity’s backup plan be? The answer is simply, we don’t now have one.

Complicating all this from a law enforcement and fraud investigation perspective is that black hats generally benefit from technology long before defenders and investigators ever do. The successful ones have nearly unlimited budgets and don’t have to deal with internal bureaucracies, approval processes, or legal constraints. But there are other systemic issues that give criminals the upper hand, particularly around jurisdiction and international law. In a matter of minutes, the perpetrator of an online crime can virtually visit six different countries, hopping from server to server and continent to continent in an instant. But what about the police who must follow the digital evidence trail to investigate the matter?  As with all government activities, policies, and procedures, regulations must be followed. Trans-border cyber-attacks raise serious jurisdictional issues, not just for an individual police department, but for the entire institution of policing as currently formulated. A cop in Baltimore has no authority to compel an ISP in Paris to provide evidence, nor can he make an arrest on the right bank. That can only be done by request, government to government, often via mutual legal assistance treaties. The abysmally slow pace of international law means it commonly takes years for police to get evidence from overseas (years in a world in which digital evidence can be destroyed in seconds). Worse, most countries still do not even have cyber-crime laws on the books, meaning that criminals can act with impunity making response through a coordinating entity like a cyber-CDC more valuable to the U.S. specifically and to the world in general.

Experts have pointed out that we’re engaged in a technological arms race, an arms race between people who are using technology for good and those who are using it for ill. The challenge is that nefarious uses of technology are scaling exponentially in ways that our current systems of protection have simply not matched.  The point is, if we are to survive the progress offered by our technologies and enjoy their benefits, we must first develop adaptive mechanisms of security that can match or exceed the exponential pace of the threats confronting us. On this most important of imperatives, there is unambiguously no time to lose.

Help for the Little Guy

It’s clear to the news media and to every aware assurance professional that today’s cybercriminals are more sophisticated than ever in their operations and attacks. They’re always on the lookout for innovative ways to exploit vulnerabilities in every global payment system and in the cloud.

According to the ACFE, more consumer records were compromised in 2015-16 than in the previous four years combined. Data breach statistics from this year (2017) are projected to be even grimmer due to the growth of increasingly sophisticated attack methods such as increasingly complex malware infections and system vulnerability exploits, which grew tenfold in 2016. With attacks coming in many different forms and from many different channels, consumers, businesses and financial institutions (often against their will) are being forced to gain a better understanding of how criminals operate, especially in ubiquitous channels like social networks. They then have a better chance of mitigating the risks and recognizing attacks before they do severe damage.

As your Chapter has pointed out over the years in this blog, understanding the mechanics of data theft and the conversion process of stolen data into cash can help organizations of all types better anticipate in the exact ways criminals may exploit the system, so that organizations can put appropriate preventive measures in place. Classic examples of such criminal activity include masquerading as a trustworthy entity such as a bank or credit card company. These phishers send e-mails and instant messages that prompt users to reply with sensitive information such as usernames, passwords and credit card details, or to enter the information at a rogue web site. Other similar techniques include using text messaging (SMSishing or smishing) or voice mail (vishing) or today’s flood of offshore spam calls to lure victims into giving up sensitive information. Whaling is phishing targeted at high-worth accounts or individuals, often identified through social networking sites such as LinkedIn or Facebook. While it’s impossible to anticipate or prevent every attack, one way to stay a step ahead of these criminals is to have a thorough understanding of how such fraudsters operate their enterprises.

Although most cyber breaches reported recently in the news have struck large companies such as Equifax and Yahoo, the ACFE tells us that small and mid-sized businesses suffer a far greater number of devastating cyber incidents. These breaches involve organizations of every industry type; all that’s required for vulnerability is that they operate network servers attached to the internet. Although the number of breached records a small to medium sized business controls is in the hundreds or thousands, rather than in the millions, the cost of these breaches can be higher for the small business because it may not be able to effectively address such incidents on its own.  Many small businesses have limited or no resources committed to cybersecurity, and many don’t employ any assurance professionals apart from the small accounting firms performing their annual financial audit. For these organizations, the key questions are “Where should we focus when it comes to cybersecurity?” and “What are the minimum controls we must have to protect the sensitive information in our custody?” Fraud Examiners and forensic accountants with client attorneys assisting small businesses can assist in answering these questions by checking that their client attorney’s organizations implement a few vital cybersecurity controls.

First, regardless of their industry, small businesses must ensure their network perimeter is protected. The first step is identifying the vulnerabilities by performing an external network scan at least quarterly. A small business can either hire an outside company to perform these scans, or, if they have small in-house or contracted IT, they can license off-the-shelf software to run the scans, themselves. Moreover, small businesses need a process in place to remedy the identified critical, high, and medium vulnerabilities within three months of the scan run date, while low vulnerabilities are less of a priority. The fewer vulnerabilities the perimeter network has,
the less chance that an external hacker will breach the organization’s network.

Educating employees about their cybersecurity responsibilities is not a simple check-sheet matter. Smaller businesses not only need help in implementing an effective information security policy, they also need to ensure employees are aware of the policy and of their responsibilities. The policy and training should cover:

–Awareness of phishing attacks;
–Training on ransomware management;
–Travel tips;
–Potential threats of social engineering;
–Password protection;
–Risks of storing sensitive data in the cloud;
–Accessing corporate information from home computers and other personal devices;
–Awareness of tools the organization provides for securely sending emails or sharing large files;
–Protection of mobile devices;
–Awareness of CEO spoofing attacks.

In addition, small businesses should verify employees’ level of awareness by conducting simulation exercises. These can be in the form of a phishing exercise in which organizations themselves send fake emails to their employees to see if they will click on a web link, or a social engineering exercise in which a hired individual tries to enter the organization’s physical location and steal sensitive information such as information on computer screens left in plain sight.

In small organizations, sensitive information tends to proliferate across various platforms and folders. For example, employees’ personal information typically resides in human resources software or with a cloud service provider, but through various downloads and reports, the information can proliferate to shared drives and folders, laptops, emails, and even cloud folders like Dropbox or Google Drive. Assigned management at the organization should check that the organization has identified the sites of such proliferation to make sure it has a good handle on the state of all the organization’s sensitive information:

–Inventory all sensitive business processes and the related IT systems. Depending on the organization’s industry, this information could include customer information, pricing data, customers’ credit card information, patients’ health information, engineering data, or financial data;
–For each business process, identify an information owner who has complete authority to approve user access to that information;
–Ensure that the information owner periodically reviews access to all the information he or she owns and updates the access list.

Organizations should make it hard to get to their sensitive data by building layers or network segments. Although the network perimeter is an organization’s first line of defense, the probability of the network being penetrated is today at an all-time high. Management should check whether the organization has built a layered defense to protect its sensitive information. Once the organization has identified its sensitive information, management should work with the IT function to segment those servers that run its sensitive applications.  This segmentation will result in an additional layer of protection for these servers, typically by adding another firewall for the segment. Faced with having to penetrate another layer of defense, an intruder may decide to go elsewhere where less sensitive information is stored.

An organization’s electronic business front door also can be the entrance for fraudsters and criminals. Most of today’s malware enters through the network but proliferates through the endpoints such as laptops and desktops. At a minimum, internal small business management must ensure that all the endpoints are running anti-malware/anti-virus software. Also, they should check that this software’s firewall features are enabled. Moreover, all laptop hard drives should be encrypted.

In addition to making sure their client organizations have implemented these core controls, assurance professionals should advise small business client executives to consider other protective controls:

–Monitor the network. Network monitoring products and services can provide real-time alerts in case there is an intrusion;
–Manage service providers. Organizations should inventory all key service providers and review all contracts for appropriate security, privacy, and data breach notification language;
–Protect smart devices. Increasingly, company information is stored on mobile devices. Several off-the-shelf solutions can manage and protect the information on these devices. Small businesses should ensure they are able to wipe the sensitive information from these devices if they are lost or stolen;
–Monitor activity related to sensitive information. Management IT should log activities against their sensitive information and keep an audit log in case an incident occurs and they need to review the logs to evaluate the incident.

Combined with the controls listed above, these additional controls can help any small business reduce the probability of a data breach. But a security program is only as strong as its weakest link Through their assurance and advisory work, CFE’s and forensic accountants can proactively help identify these weaknesses and suggest ways to strengthen their smaller client organization’s anti-fraud defenses.

The Conflicted Board

Our last post about cyberfraud and business continuity elicited a comment about the vital role of corporate governance from an old colleague of mine now retired and living in Seattle.  But the wider question our commenter had was, ‘What are we as CFEs to make of a company whose Board willfully withholds for months information about a cyberfraud which negatively impacts it customers and the public? From the ethical point of view, does this render the Board somehow complicit in the public harm done?’

Governance of shareholder-controlled corporations refers to the oversight, monitoring, and controlling of a company’s activities and personnel to ensure support of the shareholders’ interests, in accordance with laws and the expectations of stakeholders. Governance has been more formally defined by the Organization for Economic Cooperation and Development (OECD) as a set of relationships between a company’s management, its Board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set (including about ethical continuity), and the means of attaining those objectives and monitoring performance. Good corporate governance should provide proper incentives for the Board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.

The role and mandate of the Board of Directors is of paramount importance in the governance framework. Typically, the directors are elected by the shareholders at their annual meeting, which is held to receive the company’s audited annual financial statements and the audit report thereon, as well as the comments of the chairman of the Board, the senior company officers, and the company auditor.

A Board of Directors often divides itself into subcommittees that concentrate more deeply in specific areas than time would allow the whole Board to pursue. These subcommittees are charged with certain actions and/or reviews on behalf of the whole Board, with the proviso that the whole Board must be briefed on major matters and must vote on major decisions. Usually, at least three subcommittees are created to review matters related to (1) governance, (2) compensation, and (3) audit, and to present their recommendations to the full Board. The Governance Committee deals with codes of conduct and company policy, as well as the allocation of duties among the subcommittees of the Board. The Compensation Committee reviews the performance of senior officers, and makes recommendations on the nature and size of salaries, bonuses, and related remuneration plans. Most important to fraud examiners and assurance professionals, the Audit Committee reviews internal controls and systems that generate financial reports prepared by management; the appropriateness of those financial reports; the effectiveness of the company’s internal and external auditors; its whistle-blowing systems, and their findings; and recommends the re-election or not of the company’s external auditors.

The Board must approve the selection of a Chief Executive Officer (CEO), and many Boards are now approving the appointment of the Chief Financial Officer (CFO) as well because of the important of that position. Generally, the CEO appoints other senior executives, and they, in turn, appoint the executives who report to them. Members of these committees are selected for their expertise, interest, and character, with the expectation that the independent judgment of each director will be exercised in the best interest of the company. For example, the ACFE tells us, members of the Audit Committee must be financially literate, and have sufficient expertise to understand audit and financial matters. They must be of independent mind (i.e., not be part of management or be relying upon management for a significant portion of their annual income), and must be prepared to exercise that independence by voting for the interest of all shareholders, not just those of management or of specific limited shareholder groups.

Several behavioral expectations extend to all directors, i.e., to act in the best interest of the company (shareholders & stakeholders), to demonstrate loyalty by exercising independent judgment, acting in good faith, obedient to the interests of all and to demonstrate due care, diligence, and skill.

All directors are expected to demonstrate certain fiduciary duties. Shareholders are relying on directors to serve shareholders’ interests, not the directors’ own interests, nor those of management or a third party. This means that directors must exercise their own independent judgment in the best interests of the shareholders. The directors must do so in good faith (with true purpose, not deceit) on all occasions. They must exercise appropriate skill, diligence, and an expected level of care in all their actions.

Obviously, there will be times when directors will be able to make significant sums of money by misusing the trust with which they have been bestowed and at the expense of the other stakeholders of the company. At these times a director’s interests may conflict with those of the others. Therefore, care must be taken to ensure that such conflicts are disclosed, and that they are managed so that no harm comes to the other shareholders. For example, if a director has an interest in some property or in a company that is being purchased, s/he should disclose this to the other directors and refrain from voting on the acquisition. These actions should alert other directors to the potential self-dealing of the conflicted director, and thereby avoid the non-conflicted directors from being misled into thinking that the conflicted director was acting only with the corporation’s interests in mind.

From time to time, directors may be sued’ by shareholders or third parties who believe that the directors have failed to live up to appropriate expectations. However, courts will not second-guess reasonable decisions by non-conflicted directors that have been taken prudently and on a reasonably informed basis. This is known as the business judgment ru1e and it protects directors charged with breach of their duty of care if they have acted honestly and reasonably. Even if no breach of legal rights has occurred, shareholders may charge that their interests have been ‘oppressed’ (i.e., prejudiced unfairly, or unfairly disregarded) by a corporation or a director’s actions, and courts may grant what is referred to as an oppression remedy of financial compensation or other sanctions against the corporation or the director personally. If, however, the director has not been self-dealing or misappropriating the company’s opportunities, s/he will likely be protected from personal liability by the business judgment rule.

Some shareholders or third parties have chosen to sue directors ‘personally in tort’ for their conduct as directors, even when they have acted in good faith and within the scope of their duties, and when they believed they were acting in the best interests of the corporations they serve.  Recently, courts have held that directors cannot escape such personal liability by simply claiming that they did the action when performing their corporate responsibilities. Consequently, directors or officers must take care when making all decisions that they meet normal standards of behavior.

Consequently, when management and the Board of a company who has been the victim of a cyber-attack decides to withhold information about the attack (sometimes for weeks or months), fundamental questions about compliance with fiduciary standards and ethical duty toward other stakeholders and the public can quickly emerge.   The impact of recent corporate cyber-attack scandals on the public has the potential to change future governance expectations dramatically. Recognition that some of these situations appear to have resulted from management inattention or neglect (the failure to timely patch known software vulnerabilities, for example) has focused attention on just how well a corporation can expect to remediate its public face and ensure ongoing business continuity following such revelations to the public.

My colleague points out that so damaging were the apparently self-protective actions taken by the Boards of some of these victim companies in the wake of several recent attacks to protect their share price, (thereby shielding the interests of existing executives, directors, and investors in the short term) that the credibility of their entire corporate governance and accountability processes has been jeopardized, thus endangering, in some cases, even their ability to continue as viable going concerns.

In summary, in the United States, the Board of Directors sits at the apex of a company’s governing structure. A typical Board’s duties include reviewing the company’s overall business strategy, selecting and compensating the company’s senior executives; evaluating the company’s outside auditor, overseeing the company’s financial statements; and monitoring overall company performance. According to the Business Roundtable, the Board’s ‘paramount duty’ is to safeguard the interests of the company’s shareholders.  It’s fair to ask if a Board that chooses not to reveal to its stakeholders or to the general investor public a potentially devastating cyber-fraud for many months can be said to have meet either the letter or the spirit of its paramount duty.

Cyberfraud & Business Continuity

We received an e-mail inquiry from a follower of our Chapter’s LinkedIn page last week asking specifically about recovery following a cyberfraud penetration and, in general, about disaster planning for smaller financial institutions. It’s a truism that with virtually every type of business process and customer moving away from brick-and-mortar places of business to cloud supported business transactions and communication, every such organization faces an exponential increase in the threat of viruses, bots, phishing attacks, identity theft, and a whole host of other cyberfraud intrusion risks.  All these threats illustrate why a post-intrusion continuity plan should be at or near the top of any organization’s risk assessment, yet many of our smaller clients especially remain stymied by what they feel are the costs and implementational complexity of developing such a plan. Although management understands that it should have a plan, many say, “we’ll have to get to that next year”, yet it never seems to happen.

Downtime due to unexpected penetrations, breeches and disasters of all kinds not only affect our client businesses individually, but can also affect the local, regional, or worldwide economy if the business is sufficiently large or critical. Organizations like Equifax do not operate in a vacuum; they are held accountable by customers, vendors, and owners to operate as expected. Moreover, the extent of the impact on a business depends on the products or services it offers. Having an updated, comprehensive, and tested general continuity plan can help organizations mitigate operational losses in the event of any disaster or major disruption. Whether it’s advising the organization about cyberfraud in general or reviewing the different elements of a continuity plan for fraud impact, the CFE can proactively assist the client organization on the front end in getting a cyberfraud-recovery continuity plan in place and then in ensuring its efficient operation on the back end.

Specifically, regarding the impact of cyberfraud, the ACFE tells us that, until relatively recently, many organizations reported not having directly addressed it in their formal business continuity plans. Some may have had limited plans that addressed only a few financial fraud-related scenarios, such as employee embezzlement or supplier billing fraud, but hadn’t equipped general employees to deal with even the most elemental impacts of cyberfraud.   However, as these threats increasingly loomed, and as their on-line business expanded, more organizations have committed themselves to the process of formally addressing them.

An overall business continuity plan, including targeted elements to address cyberfraud, isn’t a short-term project, but rather an ongoing set of procedures and control definitions that must evolve along with the organization and its environment. It’s an action plan, complete with the tools and resources needed to continue those critical business processes necessary to keep the entity operating after a cyber disruption. Before advising our clients to embark on such a business continuity plan project, we need to make them aware that there is a wealth of documentation available that they can review to help in their planning and execution effort. An example of such documentation is one written for the industry of our Chapter’s inquirer, banking; the U.S. Federal Financial Institutions Examination Council’s (FFIEC’s) Business Continuity Planning Handbook. And there are other such guides available on-line to orient the continuity process for entities in virtually every other major business sector.  While banks are held to a high standard of preparedness, and are subject to regular bank examination, all types of organizations can profit from use of the detailed outline the FFIEC handbook provides as input to develop their own plans. The publication encourages organizations of all sizes to adopt a process-oriented approach to continuity planning that involves business impact analysis as well as fraud risk assessment, management, and monitoring.

An effective plan begins with client commitment from the top. Senior management and the board of directors are responsible for managing and controlling risk; plan effectiveness depends on management’s willingness to commit to the process from start to finish. Working as part of the implementation team, CFEs can make sure both the audit committee and senior management understand this commitment and realize that business disruption from cyber-attack represents an elevated risk to the organization that merits senior-level attention. The goal of this analysis is to identify the impact of cyber threats and related events on all the client organizations’ business processes. Critical needs are assessed for all functions, processes, and personnel, including specialized equipment requirements, outsourced relationships and dependencies, alternate site needs, staff cross-training, and staff support such as specialized training and guidance from human resources regarding related personnel issues. As participants in this process, CFEs acting proactively are uniquely qualified to assist management in the identification of different cyberfraud threats and their potential impacts on the organization.

Risk assessment helps gauge whether planned cyberfraud-related continuity efforts will be successful. Business processes and impact assumptions should be stress tested during this phase. Risks related to protecting customer and financial information, complying with regulatory guidelines, selecting new systems to support the business, managing vendors, and maintaining secure IT should all be considered. By focusing on a single type of potential cyber threat’s impact on the business, our client organizations can develop realistic scenarios of related threats that may disrupt the cyber-targeted processes.  At the risk assessment stage, organization should perform a gap analysis to compare what actions are needed to recover normal operations versus those required for a major business interruption. This analysis highlights cyber exposures that the organization will need to address in developing its recovery plan. Clients should also consider conducting another gap analysis to compare what is present in their proposed or existing continuity plan with what is outlined (in the case of a bank) in the recommendations presented in the FFIEC handbook. This is an excellent way to assess needs and compliance with these and/or the guidelines available for other industries. Here too, CFEs can provide value by employing their skills in fraud risk assessment to assist the organization in its identification of the most relevant cyber risks.

After analyzing the business impact analysis and risk assessment, the organization should devise a strategy to mitigate the risks of business interruption from cyberfraud. This becomes the plan itself, a catalog of steps and checklists, which includes team members and their roles for recovery, to initiate action following a cyber penetration event. The plan should go beyond technical issues to also include processes such as identifying a lead team, creating lists of emergency contacts, developing calling trees, listing manual procedures, considering alternate locations, and outlining procedures for dealing with public relations.  As members of the team CFEs, can work with management throughout response plan creation and installation, consulting on plan creation, while advising management on areas to consider and ensuring that fraud related risks are transparently defined and addressed.

Testing is critical to confirm cyber fraud contingency plans. Testing objectives should start small, with methods such as walkthroughs, and increase to eventually encompass tabletop exercises and full enterprise wide testing. The plan should be reviewed and updated for any changes in personnel, policies, operations, and technology. CFEs can provide management with a fraud-aware review of the plan and how it operates, but their involvement should not replace management’s participation in testing the actual plan. If the staff who may have to execute the plan have never touched it, they are setting themselves up for failure.

Once the plan is created and tested, maintaining it becomes the most challenging activity and is vital to success in today’s ever-evolving universe of cyber threats. Therefore, concurrent updating of the plan in the face of new and emerging threats is critical.

In summary, cyberfraud-threat continuity planning is an ongoing process for all types of internet dependent organizations that must remain flexible as daily threats change and migrate. The plan is a “living” document. The IT departments of organizations are challenged with identifying and including the necessary elements unique to their processes and environment on a continuous basis. Equally important, client management must oversee update of the plan on a concurrent basis as the business grows and introduces new on-line dependent products and services. CFEs can assist by ensuring that their client organizations keep cyberfraud related continuity planning at the top of mind by conducting periodic reviews of the basic plan and by reporting on the effectiveness of its testing.

The Right Question, the Right Way

As every CFE knows, an integral part of the fraud examination process involves obtaining information from people. Regardless of the interview’s objective, all CFEs should embrace the role of interviewer and use the time-tested techniques recommended to us by the ACFE. But asking the right questions does not necessarily ensure key information will be uncovered; an effective interviewer also recognizes the need to separate truth from deception. Consequently, crafting effective questions, understanding the communication dynamics at play, actively participating in the interview process, and remaining alert to signs of deception will help examiners increase the effectiveness and efficiency of our interviews and of our overall engagements.

Some interviewers try to gather as much information using as few questions as possible and end up receiving convoluted or vague responses. Others seek confirmation of every detail, which can quickly turn an interview into an unproductive probing of minutia. Balancing thoroughness and efficiency is imperative to obtaining the necessary and relevant facts without overburdening the interviewee. Because the location of this line varies by interviewee, CFEs can find this balance most effectively by ensuring they ask only clear questions throughout the interview.

Some individuals might respond to a question in a way that doesn’t provide a direct answer or that veers off topic. Sometimes these responses are innocent; sometimes they are not. To make the most of an interview, examiners must remain in control of the situation, regardless of how the interviewee responds.  Being assertive does not require being impolite, however. In some instances, wording questions as a subtle command (e.g., “Tell me about…. or “Please describe….) can help establish the interview relationship. Additionally, remaining in control does not mean dissuading the interviewee from exploring pertinent topics that are outside the planned discussion points.  Interview questions can be structured in several ways, each with its own strengths, weaknesses, and ideal usage. Open questions ask the interviewee to describe or explain something. Most examination interviews should rely heavily on open questions, as these provide the best view of how things operate and the perspective of the staff member involved in a particular area. They also enable the reviewer to observe the interviewee’s demeanor and attitude, which can provide additional information about specific issues. However, if the CFE believes an individual might not stay on topic or may avoid providing certain information, open questions should be used cautiously.  In contrast, closed questions can be answered with a specific, definitive response, most often “yes” or “no.” They are not meant to provide the big picture but can be useful in gathering details such as amounts and dates. Examiners should use closed questions sparingly in an informational interview, as they do not encourage the flow of information as effectively as open questions.

Occasionally, the questioner might want to direct the interviewee toward a specific point or evoke a certain reply. Leading questions can be useful in such circumstances by exploring an assumption, a fact or piece of information, that the interviewee did not provide previously. When used appropriately, such questions can help the interviewer confirm facts that the interviewee might be hesitant to discuss. Examples of leading questions include: “So there have been no changes in the process since last year?” and “You sign off on these exception reports, correct?” If the interviewee does not deny the assumption, then the fact is confirmed. However,  before using leading questions, the interviewer should raise the topic with open questions and allow the interviewee the chance to volunteer information.

The examiner should establish and maintain an appropriate level of eye contact with the interviewee throughout the interview to personalize the interaction and build rapport. However, the appropriate level of eye contact varies by culture and even by person; consequently, the examiner should pay attention to the interviewee to determine the level of eye contact that makes him or her comfortable.

People tend to mirror each other’s body language subconsciously as a way of bonding and creating rapport. CFEs can help put interviewees at ease by subtly reflecting their body language. Further, the skilled interviewer can assess the level of rapport established by changing posture and by watching the interviewee’s response. This information can help CFEs determine whether to move into sensitive areas of questioning or to continue establishing a connection with the individual.

Confirming periodically that the examiner is listening can encourage interviewees to continue talking. For example, the interviewer can provide auditory confirmation with a simple “mmm hmmm” and nonverbal confirmation by nodding or leaning toward the interviewee during his or her response.

When the interviewee finishes a narrative response, the examiner can encourage additional information by echoing back the last point the person made. This confirms that the interviewer is actively listening and absorbing the information, and it provides a starting point for the person to continue the response.

Occasionally, the examiner might summarize the information provided to that point so that the interviewee can affirm, clarify, or correct the interviewer’s understanding.

Most often, the greatest impediment to an effective interview is the interviewer him or herself.  While it is clearly important for the interviewer to observe, to listen, and to assess the subject in a variety of ways, the role of the interviewer, and the effect he or she has on the interview process, cannot be minimized.

The interviewer typically focuses on the subject as the person who will provide the information he or she seeks. The interviewer concentrates on establishing rapport, listening effectively, analyzing the subject’s verbal and nonverbal communication, and gauging how much or how little the subject is telling her. These are valid areas of concentration for the interviewer. One significant risk is that the interviewer may pay too little attention to the negative influences s/he can bring to the interview, process. The terms interview and communication are interchangeable, and effective communication is a two-way street. What makes the interviewer an effective communicator and effective interviewer is not just the signals he or she picks up from the subject but also the signals, the information, the tone, and the body language he or she sends to the subject. It is highly presumptuous of the interviewer to think he or she has little or no effect on the subject and that the subject is not evaluating, assessing, and analyzing the interviewer.

The interviewer’s style of dress, jewelry, and grooming may tell the subject as much about the interviewer as does the interviewer’s demeanor. If the interviewer is overdressed for the occasion, does it make the subject feel inferior or intimidated? If too casual, does the interviewer send a signal of the lack of importance of the interview and, as a result, does the subject become too relaxed or not as attentive? Attire should have a desired effect. For example, when interviewing an enforcement officer or other professional who is familiar with uniforms and clothing as indicators of status, it may be appropriate to wear a coat and tie. In general, it is best to always to err on the side of conservative dress for the circumstances.

The examiner should not attempt to interview two or more persons at one time unless there is no other option. It is more difficult to control an interview with two or more subjects. One subject may be more dominant than the other. The subjects will influence each other’s memories. Some subjects will not want to embarrass themselves in front of a peer or supervisor. The environment for confidential communications will be adversely affected.

When the interviewer responds to the subject’s responses, he sends signals. At times, it might be advisable to not write notes down at the time the individual tells the interviewer something sensitive. Rather, the interviewer might consider devoting his attention to the subject and writing down the sensitive information after the conversation has moved away from the sensitive area.  The interviewer should never become argumentative, antagonistic, or belligerent. The use of the  “Good Cop, Bad Cop” routine can have unwanted results, especially long term. The CFE interviewer should use tact, speak clearly and with authority but without use of threatening language. The interviewer should consistently set a professional tone.

Finally, all individuals want to be shown respect. Maintaining the personal dignity of the subject is critical for the success of the interview and follow-up efforts. Everyone wants respect, from homeless persons to top executives. To be shown respect, especially if the subject is not accustomed to it, is disarming and contributes to that essential, professional tone.