Category Archives: Fraud Interviewing

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.

Asked and Answered

Some months ago, I was involved as a member of an out-of-town fraud examination team during which the question of note taking during an investigative interview arose. A younger member of the team (a junior internal auditor) wanted to know about approaches to the documentation of not just one, but possibly of the several prospective interview sessions it initially appeared might be necessary regarding the examination.

As the ACFE tells us, notes, whether handwritten or recorded, always send an unambiguous signal to the subject that the interviewer is memorializing his or her comments. Interviews without notes are significantly limited in their value and may even signal to the interview subject that it may later be just a question of her word against the interviewer’s. If the interviewer takes only cryptic or shorthand notes and later reviews those notes with the subject to confirm what was said, the interviewer should recognize that the notes, while confirmed and edited to a certain extent, will still be less than complete.

On the other hand, tape recording an interview is a significant obstacle to full cooperation. People are reluctant to be recorded. For the most part, the use of tape recorders to take notes is not recommended in situations involving a potential fraud. Most subjects will resist the use of recorders and, even in circumstances where the subject may have agreed to their use, their responses will be more guarded than if a recorder was not used. If a recorder is used, be sure to begin the taping by recording the date, time, names of the individuals present, and an acknowledgment by the subject that they know the interview is being recorded and they have agreed to be recorded.

Once the interviewer has determined how s/he will document the interview, s/he should ask the subject if it is okay to take notes or record the session. It is the polite and professional thing to do and it serves two purposes:

–It is part of the process by which the subject is encouraged to be a participant;
–If the subject balks or tells the interviewer she does mind that the interviewer takes notes, it can open a line of questioning by the interviewer to determine the exact cause of the subject’s objections;

The subject should always be advised that note taking is critical to the integrity of the process and that notes ensure that what the subject says is documented properly. Failure to take notes limits the information to the memory and interpretation of the interviewer.  In a professional setting, most subjects will understand the critical nature of notes. Very few people will say it is not all right to take notes, regardless of how they feel about it. If they are absolutely opposed to the taking of notes, find out why and concentrate on what the subject says and reduce the interview to notes as quickly as possible after the interview. With a hostile subject who opposes note taking, the interviewer can ask if it is okay for her to make selected notes regarding dates or things the interviewer might not remember later. The interviewer can explain that it is important that s/he understand the subject’s position or communication correctly. If the subject is still adamant about the interviewer not taking notes, it should be documented in the interviewer’s report.

As the fraud interviewer develops his or her interviewing skill set, s/he should concentrate on taking verbatim notes which, among other things, include, at a minimum, nouns, pronouns, and verbs. Some practitioners recommend that the interviewer not attempt to write everything down. The argument is that, in doing so, the interviewer will not have an opportunity to observe the subject’s nonverbal communications.

The generally accepted recommendation is, therefore, where feasible, that the interviewer take down verbatim as much of what the subject says as is possible. This includes repeated words and parenthetical comments. This practice allows the interviewer to later review what the subject said as opposed to what the interviewer thought the subject said. Note taking also provides additional documentation of what the subject is communicating and (when reviewed after the fact in the light of additional knowledge) of what the subject has excluded.

During the act of taking notes, the interviewer should exercise caution. Taking notes intermittently can signal to the subject that the interviewer takes notes only when the information is important. Conversely, if, during the interview, a very sensitive area is broached, or if the subject indicates that s/he is uncomfortable with an area or issue, the interviewer can put her pencil down, lean forward, establish good eye contact, and listen to the subject. The simple suspension of note taking may place the subject at ease. As soon as the interview moves to a less sensitive area, the interviewer should try to reduce the previously mentioned sensitive area to notes. If the subject associates note taking with core interview information, the subject may interpret continued note taking as encouragement to continue talking.

The interviewer should not write down interpretive comments while taking notes. The interviewer should however make notes, where appropriate, in cases where verbal and
nonverbal indications of both resistance or cooperation are found.

The interviewer should always take notes with the possibility in mind that the notes may be subjected to third party scrutiny. This scrutiny may extend to opposing counsel in the event of litigation. The interviewer’s notes may or may not be privileged materials. With this in
mind, the interviewer should consider the following:

–Begin each separate set of interview notes on a clean page;
–Identify the date, time, and place of the interview and all the individuals present at the interview;
–Obtain as much background data on the subject as possible, including telephone numbers, and identify means of contacting him or her, including alternate numbers for family and friends;
–Initial and date the notes;
–Document the interviewer’s questions;
–Take verbatim notes if possible. Concentrate, but do not limit notes of the subject’s responses to:
• Nouns
• Pronouns
• Verb tense
• Qualifiers
• Indicators of responsibility, innocence, or guilt
–Do not document conclusions or interpretations;
–Report any unusual change in body language in an objective manner. Document the changes in body language and tone, if applicable, in conjunction with notes of what the subject or interviewer said at the time the body language or tone changed;
–At the conclusion of the interview, review the notes with the subject to confirm what the subject has said.

Finally, following the interview, your notes should be reproduced in printed form as quickly as possible.  Enough cannot be said for the value of a well-documented set of interview notes for every aspect of a subsequent investigation; their presence or absence can make or break your entire case.

The Auditor and the Fraud Examiner

financial-statementsOur Chapter averages about three new members a month, a majority of whom are drawn from the pool of relatively recent college graduates in accounting or finance, most of whom possessing an interest in fraud examination and having a number of courses in auditing under their belts.  From the comments I get it seems that our new members are often struck by the apparent similarities between fraud examination and auditing imparted by their formal training and yet hazy about the differences between the two in actual practice.

But, unlike the financial statement focus in financial auditing, fraud examination involves resolving fraud allegations from inception to disposition. Fraud examination methodology requires that all fraud allegations be handled in a uniform, legal fashion and be resolved on a timely basis. Assuming there is sufficient reason (predication) to conduct a fraud examination, specific examination steps usually are employed. At each step of the fraud examination process, the evidence obtained and the effectiveness of the fraud theory approach are continually assessed and re-assessed. Further, the fraud examination methodology gathers evidence from the general to the specific. As such, the suspect (subject) of the inquiry typically would be interviewed last, only after the fraud examiner has obtained enough general and specific information to address the allegations adequately.  However, just like a financial statement audit, a fraud investigation consists of a multitude of steps necessary to resolve allegations of fraud: interviewing witnesses, assembling evidence, writing reports, and dealing with prosecutors and the courts. Because of the legal ramifications of the fraud examiners’ actions, the rights of all individuals must be observed throughout. Additionally, fraud examinations must be conducted only with adequate cause or predication.

Predication is the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe a fraud has occurred, is occurring, or will occur. Predication is the basis upon which an examination is commenced. Unlike a financial audit, fraud examinations should never be conducted without proper predication. Each fraud examination begins with the prospect that the case will end in litigation. To solve a fraud without complete and perfect evidence, the examiner must make certain assumptions. This is not unlike the scientist who postulates a theory based on observation and then tests it. In the case of a complex fraud, fraud theory is almost indispensable. Fraud theory begins with a hypothesis, based on the known facts, of what might have occurred. Then that hypothesis or key assumption is tested to determine whether it’s provable.

The fraud theory approach involves the following steps, in the order of their occurrence:

  • Analyze available data.
  • Create a hypothesis.
  • Test the hypothesis.
  • Refine and amend the hypothesis.
  • Accept or reject the hypothesis based on the evidence.

With that said, fraud examinations incorporate many auditing techniques; however, the primary differences between an audit and a fraud investigation are the scope, methodology, and reporting. It’s also true that many of the fraud examiners in our Chapter (as in every ACFE Chapter) have an accounting background. Indeed, some of our members are employed primarily in the audit function of their organizations. Although fraud examination and auditing are related, they are not the same discipline. So how do they differ?  First, there’s the question of timing.  Financial audits are conducted on a regular recurring basis while fraud examinations are non-recurring; they’re conducted only with sufficient predication.

The scope of the examination in a financial audit is general (the scope of the audit is a general examination of financial data) while the fraud examination is conducted to resolve specific allegations.

An audit is generally conducted for the purpose of expressing an opinion on the financial statements or related information.  The fraud examination’s goal is to determine whether fraud has occurred, is occurring, or will occur, and to determine who is responsible.

The external audit process is non-adversarial in nature. Fraud examinations, because they involve efforts to affix blame, are adversarial in nature.

Audits are conducted primarily by examining financial data. Fraud examinations are conducted by (1) document examination; (2) review of outside data, such as public records; and (3) interviews.

Auditors are required to approach audits with professional skepticism. Fraud examiners approach the resolution of a fraud by attempting to establish sufficient proof to support or refute an allegation of fraud.

As a general rule during a financial fraud investigation, documents and data should be examined before interviews are conducted. Documents typically provide circumstantial evidence rather than direct evidence. Circumstantial evidence is all proof, other than direct admission, of wrongdoing by the suspect or a co-conspirator.  In collecting evidence, it’s important to remember that every fraud examination may result in litigation or prosecution. Although documents can either help or harm a case, they generally do not make the case; witnesses do. However, physical evidence can make or break the witnesses. Examiners should ensure that the evidence is credible, relevant, and material when used to support allegations of fraud.

From the moment evidence is received, its chain of custody must be maintained for it to be accepted by the court. This means that a record must be made when the item is received or when it leaves the care, custody, or control of the fraud examiner. This is best handled by a memorandum of interview by the custodian of the records when the evidence is received.

Fraud examiners are not expected to be forensic document experts; however, they should possess adequate knowledge superior to that of a lay person.

In fraud investigations, examiners discover facts and assemble evidence. Confirmation is typically accomplished by interviews. Interviewing witnesses and conspirators is an information-gathering tool critical in the detection of fraud. Interviews in financial statement fraud cases are different than those in most other cases because the suspect being interviewed might also be the boss.

In conclusion, auditing procedures are indeed often used in a financial statement fraud examination. Auditing procedures are the acts or steps performed by an auditor in conducting the review. According to the third standard of fieldwork of generally accepted auditing standards, “The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.”  Common auditing procedures routinely used during fraud examination, as during financial statement examination, are confirmations, physical examination, observation, inquiry, scanning, inspection, vouching, tracing, re-performance, re-computation, analytical procedures, and data mining; these are all vital tools in the arsenal of both practitioners as well as of all financial assurance professionals.

Liar’s Poker

Liar's-PokerOur Chapter Member’s Lecture for CPE credit for this month (Interviewing for Prosecution) elicited a number of questions about the distinction between lying and deception from attendees of our May Training Event so I thought I’d address them in a post.

Our May-June lecture states that everyone lies and, in most people, lying produces stress. The human body will attempt to relieve this stress (even in practiced liars) through verbal and nonverbal clues. So a practiced interviewer will be able to draw inferences from subjects’ behavior about the honesty of their statements. The ACFE tells us that conclusions concerning behavior must be tempered by a number of factors. The physical environment in which the interview is conducted can affect behavior. If the respondent is comfortable, fewer behavioral quirks might be exhibited. The more intelligent the respondent, the more reliable verbal and nonverbal clues will be. If the respondent is biased toward the interviewer, or vice versa, this will also affect behavior. People who are mentally unstable or under the influence of drugs will be unsuitable to interview because their behavioral symptoms are generally unreliable. Likewise, the behavioral symptoms of juveniles are generally unreliable.

Additionally, during an investigation, it’s always important to never lose sight of the fact  that people do things for a reason. The fraud examiner might not understand the reasons a fraudster commits his or her crime, but the motivations make sense to the perpetrator. For example, a perpetrator might commit fraud because his life has spiraled out of control, although it might not be out of control under a reasonable person’s definition. In the perpetrator’s view, his life has become so problematic that fraud is the only way he can restore balance. And during the fraud examination, if the examiner can get the perpetrator to talk about the lack of control in her life, the examiner can use this information to compel the fraudster to admit guilt and provide valuable insight into ways to prevent similar frauds in the future.

When conducting interviews leading to possible prosecution with suspects, interviewers should seek to understand the possible motives of various suspects. To do this, interviewers should suspend their own value system. This will better position the interviewer to persuade the suspect to reveal information providing insight into what might have pressured or motivated them and how they might have rationalized their actions. In an interview situation, the examiner should not suggest reasons for the crime. Instead, the examiner should let the individual share his motivations, even if the suspect reveals his motivations in an indirect manner. Remember to:

  • Leave your ego at the door.
  • Talk to the suspected perpetrator as an adult.
  • Do not patronize the suspect.
  • Use good communication skills to develop rapport with subjects so that they will feel comfortable talking to you.
  • Avoid being confrontational with the suspect. If the interviewer is confrontational, the perpetrator will be less likely to make an admission.

When conducting an interview with a suspect, the interviewer should begin by asking questions about the standard procedures and the normal, actual practice of the operations at issue. This is necessary to gain an understanding of the way the relevant process is intended to work and how it actually works. Additionally, asking such basic questions early in the interview will help the interviewer observe the interviewee’s “normal” behavior so that the interviewer can notice any changes in the subject’s mannerisms and word choice. Next, the interviewer might ask non-accusatory questions related to the issue at hand, such as:

  • Why do you think someone would do something like this?
  • What do you think should happen to a person who would do something like this?
  • Of all of the people who work in this area, who could be involved?

The answers to these questions can help the interviewer understand the possible motives of various suspects, narrow the pool of suspects, or obtain an admission. For example, a suspect who answers the question ”Why do you think someone would do something like this?” with a sympathetic answer might be trying to appeal to the interviewer’s sense of compassion to reduce or minimize her punishment.

One of our attendees brought up the issue of fraudsters’ seemingly irrational behavior.  It’s a good point.  During the interview, fraud examiners should be aware that there are times when otherwise rational people behave irrationally. It’s important in the interview process because it will help humanize the misconduct. Unless the perpetrator has a mental or emotional disorder, it’s acceptable to expect that the perpetrator committed the fraud for a reason. Situational fraudsters-those who rationalize their right to an illegal enrichment and perpetrate fraud when the opportunity arises–do not tend to view themselves as criminals. In contrast to deviant fraudsters, who are more proactive than situational fraudsters and who are always on the alert for opportunities to commit fraud, situational fraudsters rationalize their crimes. As indicated above, situational fraudsters feel that they need to commit fraud to regain control over their lives. Thus, an interviewer will be more likely to obtain a confession from a situational fraudster if he can genuinely communicate that he understands how anyone under similar circumstances might commit such a crime. Genuineness, however, is key. If the fraudster in any way detects that the interviewer is presenting a trap, he generally will not make an admission of wrongdoing.

Deception refers to actions designed to mislead or deceive someone into believing an inaccuracy or untruth. Studies tell us that people lie an average of three times during a ten-minute conversation. By definition, fraud involves deception for personal gain. Most humans commit deceptive acts to protect themselves from various consequences of the truth.  Lying refers to the deliberate act of departing from the truth. A lie is an untruthful statement, especially one made with an intention to deceive others. The capacity to lie is noted early and nearly universally in human development. At about the age of five, most children begin to be able to lie convincingly. Before this, they seem simply unable to comprehend why others do not have the same view of events that they do and assume that there is only one point of view-their own. When children first learn how lying works, they lack the moral understanding of when to refrain from doing it. In this stage of development, children will sometimes tell outrageous and unbelievable lies, because they lack the conceptual framework to judge whether a statement is believable, or even to understand the concept of believability. Developing a proper understanding of these concepts takes years of watching people tell lies and the results of these lies. It is this observation, however, that typically allows young children to learn that stating an untruth can avoid punishment for misdeeds, often even before they understand why it works.

Finally, many people consider withholding the truth to be the same as lying, and while they both do involve deception, there is a distinct difference between the two: Lying requires an active approach to deception, whereas withholding the truth involves a passive approach. For example, a fraudster might withhold the truth by disappearing to Brazil after embezzling enough money to retire. Thus, if the perpetrator is missing, he cannot be confronted or punished for his actions. Most people would prefer avoiding the truth when compared to lying because it is easier to be silent than to lie. Additionally, it’s difficult to be consistent with lies, and a person who has committed fraud is generally aware of this risk and wants to avoid it at all costs!  Remember, people can become so engaged in managing how others perceive them that they become unable to separate the truth from fiction in their own minds.

Lunch & a Common Interest

lunch

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My wife and I were just finishing up lunch at Maggiano’s here in Richmond last week when an old consulting colleague of mine came up to our table.  Chatting as he accompanied us out of the restaurant and into the parking lot, he told me that he’s currently working as an investigative team member for a local forensic accounting firm on a case of suspected embezzlement.   The client’s management and audit committee are hyper sensitive to employee privacy rights, having experienced a prior grievance lawsuit over alleged wrongful termination and defamation, and my friend had some questions about the common interest privilege and how best to proceed with the investigation in such an environment.

The ACFE tells us that there are a number of important precautions any investigator can take to avoid liability when conducting sensitive investigations.  The right to investigate for fraud is implicit in U.S accounting and legal systems. No special authority is required, although some states regulate the activities of private investigators and others. Generally, an employer, fraud examiner, forensic accountant or other investigator may lawfully interview witnesses, collect evidence where lawfully available, collect and review documents, and examine public records, without fear of liability, if the investigator acts prudently and in good faith. It’s also important that any investigation be based on sufficient “predication.” Predication means that the individual has a sufficient basis and legitimate reason to take each step in the investigation. Anyone who acts irresponsibly, without predication, or in violation of the rights of the subject, can be liable for a number of different civil actions.

Defamation is an unprivileged publication of a falsehood about a person that tends to harm the reputation of that person. The law of defamation actually consists of two torts: libel and slander. Libel is basically defamation that appears in written form, while slander involves defamatory remarks that are only spoken. Aside from the method of publication the elements of these two causes of action are essentially the same. In general, the elements of a defamation claim are:

— A false and defamatory statement is made about the plaintiff;
— This statement is communicated (“published”) to a third party; and
— The plaintiff suffers harm to her reputation or good name as a result.

In any internal fraud-related review, it’s likely that there will be unflattering allegations made against certain persons at some point in the investigation. It’s therefore important that investigative team members understand exactly what constitutes defamation so that they can avoid this potential liability. Statements of pure opinion are not defamatory because, according to the first element of the cause of action, a statement must be false in order to support a defamation suit. An opinion cannot really be proved true or false. Therefore, only statements of fact can give rise to a defamation claim. This does not mean that an investigator can shield herself from liability by phrasing all accusations as statements of opinion – “in my opinion, Allen cooked the books. ” Although the preceding statement purports to be an opinion, it implies a fact, that Allen manipulated the books. Therefore, this statement could be found to be defamatory. On the other hand, a statement that a particular employee is “difficult” or that she “seemed uncomfortable” are more likely to be found to be statements of opinion, and thus not actionable.

The second element of the cause of action requires that the statement be published, i.e., communicated to a third person or persons. The crux of defamation law is that the plaintiff’s reputation is harmed by a false statement. If no one else hears the statement, the plaintiff’s reputation cannot be harmed. This is why publication is a required element of the cause of action. Although the term “publication” is used, this does not mean that the statement has to be published in the traditional sense; it’s enough that the statement is communicated to a third person, either in writing (libel) or through spoken word (slander). In some cases, even hand signals have been found to amount to a publication. If a statement is never communicated to a third person, it cannot be defamatory. Thus, if during an interview an investigator accuses the subject of having stolen money, this will not amount to defamation as long as no one else hears the comment. On the other hand, if during an interview of Smith, the interviewer says, “It appears Jones took the money,” this could amount to defamation, since the accusation against Jones has now been published to Smith.

Aside from truth, the most important defense to a defamation action for my investigating friend is the common interest privilege. If a person makes a statement: (1) in good faith; (2) regarding a subject in which the person making the statement has a legitimate interest or duty; (3) to another person with a corresponding interest or duty, then that statement is exempt from a defamation claim. The statement will be privileged even if it is false, even if it injures the reputation of the employee, and even if it is published to a third person.

The common interest privilege extends to communications about internal investigations among persons with a legitimate interest in the investigation. Interested persons include the investigative team, members of the company’s management who requested the investigation, those who have an interest in the results of the investigation, and those who have authority to implement the recommendations or otherwise make decisions based on the results of the investigation. Some courts also have concluded that a government agency that receives a required or mandated report from the company has a common interest in that report. The law recognizes that these persons have a legitimate need to communicate about the investigation, and that the nature of such an investigation necessarily involves the discussion of the actual or suspected wrongdoing of employees. If every allegation were subject to a defamation suit, this would have a chilling effect on the ability of companies to investigate internal misconduct. Therefore, statements made in good faith among these interested persons are privileged from defamation suits.

But please bear in mind that the common interest privilege is qualified, which means that it can be lost. In order to be privileged, the communication must have been made in good faith. If the person who made the communication knew that it was false or had a reckless disregard for whether it was true or not, then this statement is not privileged, and the speaker can be successfully sued for defamation. Furthermore, the communication is only privileged among those with a “need to know.” If a statement is disseminated outside the group of interested persons, it loses its privilege. Therefore, it’s extremely important to limit the distribution of any internal report to those discussed in the preceding paragraph.

In summary, the common interest privilege is a qualified privilege, meaning that it can be lost if the defendant acts with malice in publicizing falsehoods about the plaintiff. Contrast the common interest privilege with statements made in connection with judicial proceedings; judicial proceeding statements are absolutely privileged. This means that they cannot be the subject of a defamation suit, regardless of the speaker’s motives. The judicial privilege attaches to all statements made by judges, jurors, attorneys, witnesses and other parties to a judicial proceeding. It applies to all aspects of the proceedings, including pretrial depositions and hearings, as well as to all papers or pleadings filed in the case. The idea is that we do not want to hinder the courts’ ability to get at the truth, so all those who testify in a judicial proceeding are absolutely privileged from defamation claims. But keep in mind that intentional falsehoods can still be punished in these settings under perjury laws.

Communication is Who We Are

BusinessMeet2One of the most frequently requested topics for ACFE lead instruction concerns the art of fraud interviewing, one of the most complex and crucial disciplines of the many comprising the fraud examination process.  And at the heart of the interviewing process lies communication.  As we all know, communication is the process of effectively sending and receiving information, thoughts, and feelings. First and foremost, an effective interviewer is an effective communicator and being an effective communicator depends on building rapport. According to the ACFE, if you don’t establish rapport with a subject at the outset of the fraud interview, the possibilities of your spotting anything are very low. Rapport is the establishment of a connection between two individuals that is based on some level of trust and a belief in the existence of a relationship that is mutually beneficial to both parties.

The interviewer who thinks s/he will find a cooperative subject without making a connection with that individual is in for a disappointment. Rapport is determined by our attitude toward the subject. Just as we as interviewers use our powers of perception to “read” the subject, the subject reads us as well. If he senses condemnation, superiority, hostility, or deceit, you can expect little but superficial cooperation from any interaction.  Besides, above all else, as the experts tell us, we are professionals. As professionals, personal judgments have no place in an interview setting. Our job is to gather information empirically, objectively, and without prejudice towards our subjects.  Why do we identify with and speak more freely to some people than to others? We’re naturally drawn to those with whom we share similar characteristics and identities. Techniques and tools are important, but only to the extent that they complement our attitude toward the interview process. So, effective communication is, in this important sense,  not what we do – it’s who we are.

And along with rapport, the analysis of the quality of the interaction between both interview participants is critical to the communication process.  An interview is a structured session, ideally between one interviewer and one subject, during which the interviewer seeks to obtain information from a subject about a particular matter.  And just as we signal each other with voice pitch and body language patterns when we’re sad, angry, delighted, or bored, we also display distinct patterns when trying to deceive each other. Fortunately for those of us who interview others as part of our profession, if we learn to recognize these patterns, our jobs are made much simpler. Of course there is no single behavior pattern one can point to and say “Aha! This person is being deceptive!” What the professional can point to is change in behavior. Should a subject begin showing signs of stress as our questions angle in a certain direction, for example, we know we have hit an area of sensitivity that probably requires further exploration.  If you interview people regularly, you probably already know that it is more likely for a subject to omit part of the story than actually lie to you. Omission is a much more innocuous form of deceit and causes less anxiety than fabricating a falsehood. So even more importantly than recognizing behavior associated with lying, the interviewer must fine tune her skills to also spot concealment patterns.

ACFE experts tell us that each party to a fraud interview may assume that they understand what the other person is conveying. However, the way we communicate and gather information is based in part on which of our senses is dominant. The three dominant senses, sight, hearing, and touch influence our perceptions and expressions more than most people realize. A sight dominant subject may “see” what you are saying and tell you he wants to “clear” things up. An auditory dominant person may “hear” what your point is and respond that it “sounds” good to him. A touch dominant person may have a “grasp” of what you are trying to convey, but “feel uncomfortable” about discussing it further.

By analyzing a subject’s use of words, an interviewer can identify his dominant sense and choose her words to match. This helps strengthen the rapport between interviewer and subject, increasing the chances of a good flow of information. Essential, of course, to analyzing and identifying a subject’s dominant senses are good listening skills. Effective communication requires empathetic listening by the interviewer.  Empathetic listening and analysis of the subject’s verbal and nonverbal communication allows us to both hear and see what the other person is attempting to communicate. It is the information that’s not provided and that’s concealed, that is most critical to our professional efforts.

In developing your listening abilities, and by practicing them with others with whom you communicate every day, the vast array and inexhaustible variations of the human vocabulary are bound to strike you. The most effective way to communicate is with clear, concise sentences that create no questions. However, the words we choose to use, and the way that we say them, are limited only by what is important to us. A subject, reluctant or cooperative, will speak volumes with what they say, and even more significantly, what they don’t say. Analysis of the latter often reveals more than the information the subject actually relates. For instance, the omission of personal pronouns could mean unwillingness on the part of the subject to identify himself with the action.

One final note of caution.  If you ask the experts about the biggest impediment to an effective interview, they will probably give you a surprising answer. Most experienced interviewers will tell you that often the greatest impediment to a successful interview is the interviewer herself. Most interviewers use all of their energies observing and evaluating the subject’s responses without realizing how their own actions and attitudes can contaminate an interview. In fact, it’s virtually impossible to conduct an interview without contaminating it to some extent. Every word used, the phrasing of a question, tone, body language, attire, the setting – all send signals to the subject.  The effective interviewer, however, has learned to contaminate as little as possible. By  retaining an objective demeanor, by asking questions which reveal little about what s/he already knows, by choosing a private setting and interviewing one subject at a time, s/he keeps the integrity of the interview intact to the best of her ability.

Plum Street Dialogue #2 – The Worst Case Hypothesis

patio-set-5Over the years I’ve been involved in on-going discussions with any number of practicing certified fraud examiners, many of whom have provided me with excellent insights on every aspect of the profession.   Using the notes I’m constantly taking, I thought it might be fun (and instructive) to cast some of their thoughts on actual practice in the form of a series of fictitious dialogues on everything fraud examination.  This second is a discussion on the topic of the preliminaries of a fraud examination, especially hypothesis formulation; the dialogue is between three composite fraud examiners, Glenn, Alex and Terrie.  Our three friends meet, as before, after work, in the garden behind Glenn’s house on Plum Street in the Fan District of Richmond, Virginia.

Glenn:  (Switching on the patio floor fan) At least it’s not as humid as it was for our last meeting.  How’s the iced tea?  Anyway, I thought we might talk this afternoon about hypothesis testing.

Terrie: How so?

Glenn: Well, let’s say an allegation lands on your desk that Susie, who works in the purchasing department at XYZ Services, is taking kickbacks from a supplier.  To my mind, the first thing to do is to analyze the available data.  So, what available data would we analyze with respect to Susie?

Alex:  I guess I’d look at all the accounts she’s working on or controls … then, I always try to think like a crook.

Terrie: That’s exactly right.  Management, especially accounting type people, have a particular blind spot.  They don’t think that anybody would be stupid enough to steal money and put it in their own bank account, for example. Well, the only person more stupid than somebody that would put stolen money in their own bank account is the fraud examiner who doesn’t look in that bank account.  So, what we’ve got here in Susie’s case, we’ve got a purchasing official at XYZ Services Company that we suspect may be taking a kickback. And, to investigate, we can do anything we want. What do we do?  As you say, look at her bank account. Then at the accounts on the books and the related documentation her actions affect.

Alex: So, now, thinking like a crook. If Susie were taking a kickback from Steve to buy Steve’s merchandise over a period of time, what is Susie going to do with respect to Steve? Is she going to buy more from Steve than anybody else? So one of the things we can do in analyzing data related to her is we’ll look at the trends to see if one type of vendor is getting the business and other vendors are dropping off. That’s one thing we can do with our own books and records. Analyzing data. Why would Steve pay Susie a kickback? He has a better profit on his product. So in other words, let’s say that Susie is in charge of buying widgets, and let’s say on the open market widgets are a $100 a dozen. Is Susie going to be paying Steve a $100 a dozen for her widgets? Nope, I think she would be paying him more.  The market price is $100 a dozen. Why in the world would anyone pay Susie a kickback if they could win her business on the basis of the best product at the lowest price? So if widgets are $100 a dozen and Susie is taking a kickback, then Steve is always going to be charging a minimum of $100 a dozen plus the cost of Susie’s kickback.

Terrie:  In this example, to me, the price of the widgets is very, very important. Because if widgets are $100 a dozen and the vendor is paying a kickback, we’re either paying more than $100 a dozen or not getting the same quality widgets that we would have gotten on the open market. So, the individual red flags are that the company might be experiencing poor quality, higher prices, and poor delivery terms; maybe all three. If we look we’ll probably also find a lack of competitive bids.

Alex: Right.  Before we interview the first person, before we talk to the first person, we analyze whatever data related to them we can. I can’t tell you how many, otherwise well-qualified people, if they get an allegation that Susie is taking a kickback, will call Susie in and sit her down and ask, “Susie, are you taking any kickbacks?” Sure, you have to ask Susie that question eventually but not until you’ve done all your homework by laying the proper foundation for the question; that means document, document, document.

Glenn:  At this point I create a hypothesis and the hypothesis is always the worst case scenario.  My hypothesis is that Susie is taking kickbacks. We can also have a hypothesis that Mary is embezzling money. We can have a hypothesis that Cheryl is paying bribes to someone. We can use the concept of a hypothesis with virtually any kind of fraud case, but it’s always the worst case scenario. By creating and working with the worst case scenario, I don’t have any surprises.

Alex: And the next step is testing it.  To me, testing the hypothesis involves creating a “what if’ scenario. Once the basic hypothesis is tested, the fraud examiner might find that all the facts just do not fit a particular scenario. It then becomes necessary to refine and amend the process going forward. One fact seems to fit most fraud scenarios: fraudsters tend to spend their money.  Take a bank clerk that steals a million dollars.  She and her husband apply to join a country club to go with the new custom home they build with her loot.  The country club can’t understand how a bank clerk can afford the country club’s $100,000 entrance fee and so calls the bank; the bank looks into it and the embezzlement unravels.  Conspicuous spending may be the most important red flag that, sooner or later, trips up most fraudsters. Now, in Susie’s case, Susie works for us and she’s taking a kickback from an outside vendor. Okay, which one is the co-conspirator and which one is the target?

Glenn: Well, it depends on your perspective. If we have to give up one person to make this case, are we going to give up our own employee or are we going to give up the outside vendor? I would certainly give up the outside vendor to get our own employee; probably you guys would as well. And so the outside vendor is going to be the co-conspirator and Susie is going to be the target. But, under the law who do you think is guiltier? It doesn’t matter; under the law they’re both equally guilty.

Terrie:  Most of the time the target is interviewed last, after all necessary facts are obtained. If the accused is culpable of the offense, the examiner’s goal is to obtain a legal, admissible, and binding confession of guilt. The fraud examiner must prove or disprove each and every legal element of the offense under investigation. Most fraud and white-collar crime have common elements, such as intent, disguise of purpose, reliance by the victim, voluntary victim action, and concealment of the offense.

Glenn:  Good point … I think we can wrap it up at that and all go in to dinner.  Just one last thought … a pat on the back for accountants.  It’s a lot easier to teach an auditor how to investigate than it is to teach an investigator how to audit. If you stop and think about the audit techniques that we all use, what do you use more than the interview process as an auditor? What do we use more than that? I can’t think of anything. For that reason, it’s been my experience that accountants in general make outstanding investigators. And that said, lawyers don’t investigate white-collar crimes violations; they have to engage an accountant/fraud examiner for that.

Plum Street Dialogue #1 – The Objective of Fraud Examination

patio-set-5Over the years I’ve been involved in on-going discussions with any number of practicing certified fraud examiners, many of whom have provided me with excellent insights on every aspect of the profession.   Using the notes I’m constantly taking, I thought it might be fun (and instructive) to cast some of their thoughts on actual practice in the form of a series of fictitious dialogues on everything fraud examination.  This first is a discussion on the topic of the general objectives of fraud examination imagined between three composite fraud examiners, Glenn, Alex and Terrie.  Our three friends are meeting on a warm summer afternoon in the garden behind Glen’s house on Plum Street in the Fan District of Richmond, Virginia.

Glenn:  Since our topic for this afternoon is the objective of fraud examination, I thought I’d start with a general definition of fraud examination.   I think of fraud examination as a methodology for resolving fraud allegations from inception to disposition. It includes obtaining evidence and taking statements, writing reports, testifying to findings, and assisting in the detection and prevention of fraud. Black’s Law Dictionary defines fraud as, “all multifarious means which human ingenuity can devise and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprise, tricks, cunning, or dissembling, or any unfair way by which another is cheated.” In other words, fraud includes any intentional or deliberate act to deprive another of money or property by means of deception.  So to my way of thinking frauds can be generally classified as three types: occupational frauds, organizational frauds, and confidence schemes.  The objective of fraud examination flows naturally from something like the definition above.

Terrie:  I’ve been doing fraud examination for about fifteen years and most of the frauds I’ve worked on have been occupational frauds.

Glenn: Which are?

Terrie:  Well … occupational frauds are committed by employees or managers of an organization against the organization itself. Several different professionals have responsibility for detecting and deterring occupational fraud. Preventing fraud primarily lies with management or other appropriate authority. The detection of occupational fraud is the primary responsibility of internal and external auditors. The responsibility of the fraud examiner, like me, is to resolve the allegation of fraud.  Prior to the ACFE developing the Certified Fraud Examiner (CFE) designation, fraud examiners were around for some time under different titles such as fraud auditors or investigators, loss prevention personnel, and white-collar crime specialists. Like me, many fraud examiners come from an accounting background. Although fraud examination and auditing are related, they are not the same … a distinction that’s often missed but not as much today as it used to be before the growth of the CFE profession.

Alex:  I just might add that when we talk about fraud examination, what we’re talking about is a methodology to resolve allegations of fraud.  Years ago, when I heard the term fraud auditing, I found myself disagreeing with the term philosophically. But fraud examination is a methodology of resolving allegations from inception to disposition. That’s to say if Mary Smith, an auditor, answers the telephone and someone says, “Bill Jones I believe is embezzling money from our company.” Well, now, we have an anonymous tip or complaint and we have to do something with it. We have to do something with it and what we do and how we do it is, to me,  what fraud examination is all about.

So fraud examination and fraud auditing are not the same.  When we use the term fraud auditing it implies that through the application of standard auditing techniques we can detect fraud. That’s what it implies. Now in your wide experience as fraud examiners and accountants how many of us have detected a fraud from an audit as opposed to from a tip or complaint? First and foremost, I think must examiners would agree that not many frauds are detected by conventional financial audits and there’s a reason for that; fraud auditing and fraud examination are not quite the same.

So, I guess I’m saying what both of your have said,  that fraud examination is a methodology for resolving allegations of fraud from inception to disposition.

Glenn: On the issue of timing, audits are recurring while fraud examinations are nonrecurring.  Fraud examinations are conducted only with sufficient predication …

Terrie:   To me the scope of the audit is the review of financial data, while the fraud examination is conducted to resolve specific allegations. The objective of an audit is to express an opinion on the financial statements, while the objective of the fraud examination is to determine whether or not fraud has or is occurring and to determine whose responsible. The client relationship in an audit is normally non-adversarial. However, since fraud examinations involve efforts to affix blame, they are quite often adversarial in nature. Audits are conducted primarily by examining financial data, while fraud examinations are conducted by document examination, review of outside data such as public record, and interviews.

Auditors are required to approach audits with professional skepticism, while fraud examiners approach the resolution of fraud by attempting to establish sufficient proof to prove or disprove an allegation. Because of the unique nature of fraud, there are axioms of fraud examination that must be considered.  First, unlike other crimes, part of the method of fraud is to conceal its existence. For example, a bank robber uses threats or force, while a bank embezzler not only steals money but also attempts to cover up the theft.  We don’t know we’ve been stung until we’re stung!

Alex:  So, if you’re a fraud examiner, and if you’re a Certified Fraud Examiner, what we don’t do is that we don’t express opinions of whether or not a fraud exists within a specific environment.  That’s because the methods for concealing fraud are so numerous and sometimes ingenious that almost anyone, even a fraud examiner, may be defrauded. Offering opinions regarding the existence of fraud within a specific environment may also leave the examiner personally vulnerable to legal problems.

Glenn:  Now, how about reverse proof?  Secondly, as you guys know, we also have an axiom that’s called reverse proof.  Let’s say you’ve found, based on some predication, you’ve found something that looks like a fraud. It doesn’t matter what it is, but you get onto something that looks like a fraud. Well, how do you know it’s a fraud? Well, you know two ways. You know, one,  by the proof that you have, the direct or circumstantial proof that shows that fraud exists. Then you know by the proof what you don’t have. That is to say that if I’m going to prove that Lucy Jones has committed fraud, before I get through I’ve got to also try to prove that Lucy didn’t do it. I try to look at both sides of that coin, both sides. If all the evidence indicates that she committed a fraud and all the contrary or all the reverse evidence indicates the same thing, then she probably has committed a fraud. So all I’m saying is that to be guilty of fraud under the law we must preclude all other likely explanations.

Terrie, I think you’ve provided us with a pretty good working distinction between the main objective of fraud examination and that of financial auditing.  Good discussion and thanks to you both.  I look forward to getting together again soon!

Fraud as a Human Construct

FingerprintOur certified Chapter members often get questions from clients and employers related to why a fraudster who’s victimized them did what he or she did.  Examiners with the most experience in the process of interviewing those later convicted of fraud comment again and again about the usefulness to their overall investigation of a basic understanding of the fraudster’s basic mind set.  Such knowledge can aid the examiner in narrowing down the preliminary pool of suspects, and, most importantly, assist in gaining an admission in a subsequent admissions seeking interview.  ACFE experts regard fraud (and the process of interviewing) primarily as human constructs, and especially within the content of the interview process, to be able to tie in the pressure that the individual might have been under (as they perceived it) to the interview process, to understand that individual with regard to their rationalization as they were able to affect it, significantly increases the possibility of getting the compliance and cooperation that the examiner wants from the interviewee.

During your investigation, it’s important to remember that people do things for a reason. The fraud examiner might not understand the exact reasons a fraudster commits his crime, but the motivations certainly make sense to the perpetrator. For example, a perpetrator might commit fraud because her life has spiraled out of control, although it might not be out of control under a objective, reasonable person’s definition. But in the perpetrator’s view, her life has become so problematic that fraud is the only way she can see to restore balance. And during the fraud examination, if the examiner can get the suspected perpetrator to talk, human to human,  about the lack of control in her life, the examiner can often use this information to compel the fraudster to admit guilt and provide valuable insight into ways that similar frauds might be prevented in the future.

As a continuation of this line of thought, the examiner should also consider possible human motives when examining evidence. Motive is the power that prompts a person to act. Motive, however, should not be confused with intent, which refers to the state of mind of the accused when performing the act. Motive, unlike intent, is not an essential element of crime, and criminal law generally treats a person’s motive as irrelevant in determining guilt or innocence. Even so, motive is relevant for other purposes: it can help identify the perpetrator; it will often guide the examiner to the proper rationalization for the crime; it further incriminates the accused, and it can be helpful in ensuring successful prosecution.

The examiner should search relevant documents to determine a possible motive. For example, if a fraud examiner has evidence in the form of a paycheck written to a ghost employee, she might suspect a payroll employee who recently complained about not receiving a raise in the past two years. Although such information doesn’t mean that the payroll employee committed fraud, the possible motive can guide the examiner.

ACFE experts also agree that interviewers should seek to understand the possible motives of the various suspects they encounter during an examination. To do this, interviewers should suspend their own value system. This will better position the interviewer to persuade the suspect(s) to reveal information providing insight into what might have pressured or motivated them and how they might have rationalized their actions.  In an interview situation, the examiner should not suggest reasons for the crime. Instead, the examiner should let the individual share his motivations, even if the suspect reveals his motivations in an indirect manner.  So when conducting an interview with a suspect, the interviewer should begin by asking questions about the standard procedures and the actual practice of the operations at issue. This is necessary to gain an understanding of the way the relevant process is intended to work and how it actually works.  Additionally, asking such basic questions early in the interview will help the interviewer observe the interviewee’s “normal” behavior so that the interviewer can notice any changes in the subject’s mannerisms and word choice.

Always remember that there are times when rational people behave irrationally. This is important in the interview process because it will help humanize the misconduct. As indicated above, unless the perpetrator has a mental or emotional disorder, it is acceptable to expect that the perpetrator committed the fraud for a reason.  Situational fraudsters – those who rationalize their right to an illegal enrichment and perpetrate fraud when the opportunity arises – do not tend to view themselves as criminals. In contrast to deviant fraudsters, who are more proactive than situational fraudsters and who are always on the alert for opportunities to commit fraud, situational fraudsters rationalize their crimes. Situational fraudsters feel that they need to commit fraud to regain control over their lives. Thus, an interviewer will be more likely to obtain a confession from a situational fraudster if she can genuinely communicate that she understands how anyone under similar circumstances might commit such a crime. Genuineness, however, is key. If the fraudster in any way detects that the interviewer is presenting a trap, he generally will not make any admission of wrongdoing.

So, in your examinations, never lose sight of the human element; that by definition, fraud involves human deception for personal gain. Why do people deceive to get what they want, or in some cases, what they need? Most humans commit deceptive acts to protect themselves from various consequences of the truth.  Avoiding punishment is the most common reason for deception, but there are other reasons, including to protect another person, to win the admiration or respect of others, avoid embarrassment, enjoy the thrill of accomplishment and to avoid hard work to achieve goals.  When people feel that their self-security is threatened, they might resort to deception to preserve their image. Further, people can become so engaged in managing how others perceive them that they become unable to separate the truth from fiction in their own minds.

The ability to sympathetically cast oneself into the human situation of others is one of the most valuable skills that a fraud examiner can have in determining the truth.

Control Self-Assessment – A Tool for Fraud Prevention

pumpkin-pie-4That control self-assessment (CSA) can be used as an effective facilitation tool to develop fraud risk assessments is, I’m sure, of no surprise to many of the readers of this blog.  But, for those of you who are not so aware … typically, a control self-assessment session to identify fraud risk is a facilitated meeting of managerial and operational staff (the business process experts) coming together to openly discuss fraud risk prevention objectives related to identified risk factors associated with one or more of a company’s business processes.

Fraud prevention objectives for the business process are identified during the session, as well as obstacles impeding the success of those objectives.  Finally, the team formally suggests, for upper management consideration, ways to overcome identified obstacles and a proposed corrective action plan is prepared.  At the start of the self-assessment session, the participants adopt a Team Operating Agreement to ensure that an open and honest discussion takes place in a threat free environment.  It takes a consensus of the participants to approve the operating agreement which all the participants in the session sign; no management decisions regarding actions to be taken are made during the session.

After the Operating Team Agreement is in place, team members typically develop and approve what they perceive to be a list of fraud prevention objectives for the target business process under discussion.  Once the anti-fraud objectives are defined, the participants enter into a discussion (and develop a list) of what they feel to be the existing overall fraud prevention strengths of the subject process.  Next, the team discusses and develops a list of the hindrances currently preventing the process from achieving its anti-fraud related objectives.  Finally, the team develops recommendations for overcoming the identified hindrances.  Sometimes the team ranks its fraud reduction recommendations by order of importance but this step is not critical.

A CSA for fraud prevention is akin to a risk assessment brainstorming session.  For example, the scope of such a session regarding a financial reporting related business process might be tailored to the risks of financial statement fraud and misstatement as well as to the issue of management override of controls over financial statement reporting.  The objective of the CSA is for the team to identify and discuss fraud risks, fraud scenarios and mitigating controls followed by the preparation of a set of recommendations for referral to management.

For each risk factor identified the CSA team should:

–try to identify what might cause a fraud to occur, or detail the risk factor itself;
–determine the specific fraud risk;
–determine potential fraud schemes or scenarios associated with the risk;
–identify affected financial accounts;
–identify staff positions that could potentially be involved;
–try to assess the type, likelihood, significance and inherent risk(s) involved;
–formulate the controls or changes to controls that could mitigate the risk;
–classify the controls by type (i.e., preventative, detective, entity, and process level);
–identify and assess residual risk.

Certified fraud examiners (CFE’s) have an active role to play in tailoring the CSA format for use in risk identification and mitigation as well as in performing actual facilitation of the CSA sessions.   Specifically, CFE’s can help client staff develop a more detailed, in-depth understanding of complex fraud risks that management and operational staff sometimes only vaguely perceive.  Armed with the knowledge developed during the CSA session(s) and coupled with their risk assessment and group facilitation skills, CFE’s can assist management and the audit committee of the client identify, assess, and develop final fraud risk mitigation strategies to strengthen the fraud prevention program of the organization as a whole.  Following what are sometimes multiple CSA sessions, CFE’s can assist the team in detailing the menu of anti-fraud measures developed during the individual sessions in a report to client management embodying the anti-fraud recommendations of the CSA team members to the Executive Management Team and to the audit committee for their consideration.  It’s up to upper management to decide which of the CSA team’s anti-fraud recommendations to implement and which of the team’s identified risks to accept.

Just a few of the advantages of conducting fraud prevention related CSA’s for critical client business processes include:

–building fraud risk awareness among those middle level managers charged with day-to- day management of our client companies business processes;
–mapping organization wide fraud prevention efforts to specific business processes;
–establishing links between information technology (IT) systems development projects and the broader fraud prevention program;
–identifying, documenting and strengthening fraud prevention skill sets across all the business processes of the organization;
–support for the construction of a strong, management supported fraud prevention program that enjoys full management and board support organization wide.