Tag Archives: fraud reporting

Charting the Road Ahead

There are a number of good reasons why fraud examiners and forensic accountants should work hard at including inclusive, well written descriptions of fraud scenarios in their reports; some of these reasons are obvious and some less so. A well written fraud report, like little else, can put dry controls in the context of real life situations that client managers can comprehend no matter what their level of actual experience with fraud. It’s been my experience that well written reports, couched in plain business language, free from descriptions of arcane control structures, and supported by hard hitting scenario analysis can help spark anti-fraud conversations throughout the whole of a firm’s upper management.

A well written report can be a vital tool in transforming that discussion from, for example, relatively abstract talk about the need for an identity management system to a more concrete and useful one dealing with the report’s description of how the theft of vital business data has actually proven to benefit a competitor.

Well written, comprehensive fraud reports can make fraud scenarios real by concretely demonstrating the actual value of the fraud prevention effort to enterprise management and the Board. They can also graphically help set the boundaries for the expectations of what management will expect the prevention function to do in the future if this, or similar scenarios, actually re-occur. The written presentation of the principal fraud or loss scenario treated in the report necessarily involves consideration of the vital controls in place to prevent its reoccurrence which then allows for the related presentation of a qualitative assessment of the present effectiveness of the controls themselves. A well written report thus helps everyone understand how all the control failures related to the fraud interacted and reinforced each other; it’s, therefore, only natural that the fraud examiner or analyst recommend that the report’s intelligence be channeled for use in the enterprise’s fraud and loss prevention program.

Strong fraud report writing has much in common with good story telling. A narrative is shaped explaining a sequence of events that, in this case, has led to an adverse outcome. Although sometimes industry or organization specific, the details of the specific fraud’s unfolding always contains elements of the unique and can sometimes be quite challenging for the examiner even to narrate. The narrator/examiner should especially strive to clearly identify the negative outcomes of the fraud for the organization for those outcomes can sometimes be many and related. Each outcome should be explicitly explicated and its impact clearly enumerated in non-technical language.

But to be most useful as a future fraud prevention tool the examiner’s report needs to make it clear that controls work as separate lines of defense, at times in a sequential way, and at other times interacting with each other to help prevent the re-occurrence of the adverse event. The report should attempt to demonstrate in plain language how this structure broke down in the current instance and demonstrate the implications for the enterprise’s future fraud prevention efforts. Often, the report might explain, how the correct operation of just one control may provide adequate protection or mitigation. If the controls operate independently of each other, as they often do, the combined probability of all of them failing simultaneously tends to be significantly lower than the probability of failure of any one of them. These are the kinds of realities with the power to significantly and positively shape the fraud prevention program for the better and, hence, should never be buried in individual reports but used collectively, across reports, to form a true combined resource for the management of the prevention program.

The final report should talk about the likelihood of the principal scenario being repeated given the present state of preventative controls; this is often best-estimated during discussions with client management, if appropriate. What client management will truly be interested in is the probability of recurrence, but the question is actually better framed in terms of the likelihood over a long (extended) period of time. This question is best answered by involved managers, in particular with the loss prevention manager. If the answer is that this particular fraud risk might materialize again once every 10 years, the probability of its annual occurrence is a sobering 10 percent.

As with frequency estimation, to be of most on-going help in guiding the fraud prevention program, individual fraud reports should attempt to estimate the severity of each scenario’s occurrence. Is it the worst case loss, or the most likely or median loss? In some cases, the absolute worst case may not be knowable, or may mean something as disastrous as the end-of-game for the organization. Any descriptive fraud scenario presented in a fraud report should cover the range of identified losses associated with the case at hand (including any collateral losses the business is likely to face). Documented control failures should always be clearly associated with the losses. Under broad categories, such as process and workflow errors, information leakage events, business continuity events and external attacks, there might have to be a number of developed, narrative scenarios to address the full complexity of the individual case.

Fraud reports, especially for large organizations for which the risk of fraud must always remain a constant preoccupation, can be used to extend and refine fraud prevention programs. Using the documented results of the fraud reporting process, report data can be converted to estimates of losses at different confidence intervals and fed to the fraud prevention program’s estimated distributions for frequency and severity. The bottom line is that organizations of all sizes shouldn’t just shelve their fraud reports but use them as vital input tools to build and maintain the ongoing process of fraud risk assessment for ultimate inclusion in the enterprise’s loss prevention and fraud prevention programs.

The Multi-Purpose Final Report

ACFE training has long told us that a prudently crafted final examination report can have a variety of important uses. As we know, when the fraud investigation has been completed, the investigator writes a formal report. The report itself plus expert opinions and testimony are then used as needed to support the resolution of issues that can relate to a whole host of matters potentially concerning taxes, employment, regulatory reporting, litigation (civil and criminal), and insurance claims.

Because the report can be used for such varied purposes, it should always be constructed under the assumption that it will be challenged in court. This requires that the report meet very high standards; any errors or misstatements in it may be used to undermine the credibility of both the report and of the investigator who wrote it.

Frauds typically result in business losses. For income tax purposes, such losses may be classified as either deductions or offsets to reportable revenues depending on the type of loss and the taxing authority. In cases of misappropriation, almost any type of asset can be fraudulently converted, and in some cases, a valuation expert might be needed to determine the dollar amount of the loss.

In cases of occupational fraud, the financial records can be so damaged from the fraud scheme that an exact determination of the loss is impossible. In such cases, the report may attempt to estimate the loss using any reasonable means available because taxing authorities often permit estimation of losses in cases of destroyed records.

Some occupational fraud schemes result in so much damage to the financial records that the entity will not have enough information to file tax returns. This can happen, for example, if the revenue records are either destroyed or rendered unreliable as a result of fraudulent transactions and journal entries. In such cases, it might be necessary to conduct a major reconstruction of the accounting records before losses can be determined, reliable financial statements can be generated, and tax returns can be filed. In fact, in some cases, the fraud investigator’s report might need to focus on the loss due to destruction of the financial records and leave open the issue of misappropriation pending reconstruction of the financial records. Of course, depending on the scope of the investigation and the available information, the investigator might both reconstruct the financial records and report on any misappropriation losses.

Another tax-related issue involves the embezzlement of funds set aside to pay payroll taxes. The U.S. federal tax system sometimes refers to such funds as trust fund taxes because under tax law, these funds belong to the Internal Revenue Service (IRS) from the moment they are collected. The business and the owners merely serve as trustees in collecting the taxes on behalf of the IRS.

Employers who terminate an employee for committing fraud can eventually battle the employee in litigation. In some cases, the former employee may sue for wrongful termination of employment, defamation, or discrimination. In other cases, an employee who is to be fired might have collective bargaining rights that require an arbitration process with a right of appeal. Fired employees may also attempt to claim government unemployment compensation benefits.

As a general rule, employees who are fired for serious misconduct (e.g., fraud) are not entitled to benefits. However, employees may argue that their termination was not deserved and may request a hearing to argue their side of the story. If this occurs, a fraud investigation report could serve as important evidence.

Whether a fired employee receives unemployment benefits may be important in determining the amount the company is required to pay for unemployment insurance. As a result, an employer who routinely fires employees runs the risk of incurring considerable increases in the cost of unemployment insurance. To make things even worse, if a fired employee was the one in charge of making unemployment insurance contributions but did not make them on time, a penalty rate of 150 percent could be applied to the employer’s future contributions. The exact consequences depend on the particular state involved because rules for unemployment insurance for state and federal governments differ. As a result of the possible tax and legal consequences as well as of possibly embarrassing publicity, employers are frequently reluctant to fire dishonest employees. Instead, they do things to encourage dishonest employees to leave voluntarily after taking measures to prevent them from continuing the fraud. In some cases, employers actually give dishonest employees favorable recommendations for future jobs.

Sometimes, a fraud investigation report may trigger mandatory reporting of the fraud to a government agency. For example, §1233.3 (a) of Title 12 (Banks and Banking) of the U.S. Electronic Code of Federal Regulations states the following:

‘A regulated entity shall submit to the Director a timely written report upon discovery by the regulated entity that it has purchased or sold a fraudulent loan or financial instrument, or suspects a possible fraud relating to the purchase or sale of any loan or financial instrument.’

A fraud investigation report can sometimes be more helpful in ruling out fraud than in ruling it in. For example, a report might read, “A detailed examination of the financial records did not reveal any intentional irregularities or evidence of fraud or misappropriation.” On the other hand, when there is fraud, the report might read something like, “There was a series of irregular computerized journal entries made in the accounts receivables ledgers and corresponding shortages in the cash account. The employee in charge of the computerized journal entries left the company before this investigation began and was not available for an interview. The owner states that only she and the former employee had access to the journal in question.”

The wording in this report suggests that the former employee may have embezzled funds from collections on account by making irregular journal entries. But the report cannot guarantee that s/he did so, nor can it definitively conclude that a fraud occurred. As a general rule in advance of an occupational fraud investigation, interested parties should not assume that the investigation will result in a report that gives a definitive answer to whether a fraud occurred. A more reasonable outcome is a report that identifies missed or damaging records or missing assets.

Fraud reports can be very helpful in both criminal and civil litigation. However, they can be less than satisfying in trying to persuade authorities to prosecute a suspect. What happens too often is that police or prosecutors browse through a fraud investigation report looking for a clear statement that identifies the guilty person. But, of course, such statements don’t appear in independent fraud investigation reports written by CFEs.

In many cases, a fraud investigation report is enough to at least persuade authorities to look at a case, especially with the hope of getting a quick confession. But if the suspect denies everything or lawyers up, law enforcement quickly realizes that they will need to hire a forensic accountant (because it is unlikely that they have one of their own) and will be forced to try to understand what they consider to be arcane and obscure accounting concepts.

The saying in law enforcement circles (as with the news media) is “if it bleeds, it leads.” In a metropolitan area, police quickly send a dozen squad cars, a SWAT team, and a helicopter to pursue someone who robs a liquor store of $100 with a penknife. But the same police respond with glassy eyes if the owner of the same liquor store reports that his accountant has robbed the business of $100,000 using a computer to manipulate the accounting records.

Although it does happen, most victims do not sue their fraudsters, primarily because fraudsters are typically judgment proof, meaning they do not have sufficient assets to repay their victims. However, criminal courts can and do order restitution, which can provide a strong motive for the victim to prosecute the perpetrator. In some jurisdictions, courts order convicted fraudsters to make regular restitution payments directly to the court, which then distributes them to the victim.

Finally, many companies have insurance with coverage for losses related to fraud. This coverage can include losses such as those due to the costs of preparing a proof of loss, losses due to embezzlement, losses of valuable papers and records, and loss of income. Independent fraud investigation reports can be very helpful in supporting insurance claims. Furthermore, one nice thing about embezzlement coverage is that some polices are written so that it is necessary only to prove that a loss has occurred, not who the guilty party is. The usefulness of a fraud investigation report with respect to losses of valuable papers and records, and loss of income, depends on the scope of the investigation. In many cases, the scope does not include determining the amount of losses of income or damage to valuable papers and records.

MAC Documents

As our upcoming Ethics 2019 lecture for January-February 2019 makes clear, many of the most spectacular cases of fraud during the last two decades that were, at least initially, successfully concealed from auditors involved the long running falsification of documents. Bernie Madoff and Enron come especially to mind. In hindsight, the auditors involved in these individual cases failed to detect the fraud for multiple reasons, one of which was a demonstrated lack of professional skepticism coupled with a general lack of awareness.

Fraud audit and red flag testing procedures are designed to validate the authenticity of documents and the performance of internal controls. Red flag testing procedures are based on observing indicators in the internal documents and in the internal controls. In contrast, fraud audit testing procedures verify the authenticity of the representations in the documents and internal controls. While internal controls are an element of each, they are not the same as the testing procedures performed in a traditional audit. Considering that fraud audit testing procedures are the basis of the fraud audit program, the analysis of documents will differ between the fraud audit and the traditional verification audit. Business systems are driven by paper documents, both imaged paper documents and electronic documents. Approvals are handwritten, created mechanically, or created electronically through a computerized business application. Therefore, the ability to examine a document for the red flags indicative of a fraud scenario is a critical component in the process of fraud detection.

The ACFE points out that within fraud auditing, there are levels of document examination: the forensic document examination performed by a certified document examiner and the document examination performed by an independent external auditor conducting a fraud audit are distinct. Clearly, the auditor is not required to have the skills of a certified document examiner; however, the auditor should understand the difference between questioned document examination and the examination of documents for red flags.

Questioned, or forensic, document examination is the application of science to the law. The forensic document examiner, using specialized techniques, examines documents and any handwriting on the documents to establish their authenticity and to detect alterations. The American Academy of Forensic Sciences (AAFS) Questioned Document Section and the American Society of Questioned Document Examiners (ASQDE) provide guidance and standards to assurance professionals in the field of document examination. For example, the American Society for Testing and Materials, International (ASTM) Standard E444-09 (Standard Guide for Scope of Work of Forensic Document Examiners) indicates there are four components to the work of a forensic document examiner. These components are the following:

1. Establish document genuineness or non-genuineness, expose forgery, or reveal alterations, additions, or deletions.
2. Identify or eliminate persons as the source of handwriting.
3. Identify or eliminate the source of typewriting or other impression, marks, or relative evidence.
4. Write reports or give testimony, when needed, to aid the users of the examiner’s services in understanding the examiner’s findings.

CFEs will find that some forensic document examiners (FDEs) limit their work to the examination and comparison of handwriting, however, most inspect and examine the whole document in accordance with the ASTM standard.

The fraud examiner or auditor also focuses on the authenticity of the document, with two fundamental differences:

1. The degree of certainty. With forensic document examination, the forensic certainty is based on scientific principles. Fraud audit document examination is based on visual observations and informed audit experience.
2. Central focus. Fraud audit document examination focuses on the red flags associated with a hypothetical fraud scenario. Forensic document examination focuses on the genuineness of the document or handwriting under examination.

Awareness of the basic principles and objectives of forensic document examination is of assistance to any auditor or examiner in determining if, when and how to use the services of a certified document examiner in the process of conducting a fraud audit.

ACFE training indicates that documentary red flags are among the most important of all red flags. Examiners and auditors need to be aware not only of how a fraud scenario occurs, but also of how to employ the correct methodology in identifying and describing the documents related to a given scenario. These capabilities are critical as well in order to be successful in the identification of document related red flags. Specifically, a document must link to the fraud scenario and to the key controls of the involved business process(es).

The target document should be examined for the following: document condition, document format, document information, and industry standards. To these characteristics the concepts of missing, altered, and created content should be applied. The second aspect of the document examination is linking the document to the internal controls. Linking the document examination to the internal controls is a critical aspect of developing the decision tree aspect of the fraud audit program. Using a document examination methodology aids the fraud auditor in building his or her fraud audit program.

The ACFE’s acronym MAC is a useful aid to assist the auditor in identifying red flags and the corresponding audit response. The ‘M’ stands for missing, either missing the entire document or missing information on a document; the ‘A’ for altered information on a document; and the ‘C’ for created documents or information on a document. Specifically:

A missing document is a red flag. Missing documents occur because the document was never created, was destroyed, or has been misfiled. Documents are either the basis of initiating the transaction or support the transaction.

The frequency of missing documents must be linked to the fraud scenario. In some instances, missing one document may be a red flag, although typically repetition is necessary to warrant fraud audit testing procedures. The audit response should focus on the following attributes assuming the document links to a key control:

— Is the document externally or internally created? The existence of externally created documents can be confirmed with the source, assuming the source is not identified as involved in the fraud scenario.
— Is the document necessary to initiate the transaction or is the document a supporting one? Documents used to initiate a transaction had to have existed at some point; therefore, logic dictates that the document was destroyed or misfiled.
— One, two, or all three of the following questions could apply to internal documents:

• Is there a pattern of missing documents associated with the same entity?
• Is there a pattern of missing documents associated with an internal employee?
• Does the document support a key anti-fraud control, therefore being a trigger red flag, or is the missing document related to a non-key control?

With regard to missing information on a document, several questions arise, one of which is: are there tears, torn pieces, soiled areas, or charred areas that cause information to be missing? To address any of these situations, finding a similar document type is needed to determine if the intent of the document has changed because of the missing information.  Another question is: is information obliterated (e.g., covered, blotted, or wiped out)? Overwriting is commonly used to obscure existing writing. Correction fluid is also a common method, but the underlying writing can be read and photographed using transmitted light from underneath the document.

Scratching out writing with a pen will obliterate writing successfully if it results in the page being torn. Spilled liquids can also obliterate writing.

‘A’, altered, pertains to changing or adding information to the original document. The information may be altered manually or through the use of desktop publishing capabilities. For example, manual changes tend to be visible through a difference in handwriting, and electronic documents would generally be altered via the software used to create the document.

Any altering of information would be detected through the same red flags as adding information. In the context of fraud, forgery is the first thing that comes to mind in any discussion of the altering of documents. Forgery is a legal term applied to fraudulent imitation. It is an alteration of writing as to convey a false impression that a document itself, not its contents, is authentic, thereby imposing a legal liability. It is an alteration of a document with the intent to defraud. It should be noted that it is possible for a document examiner to identify a document or signature as a forgery, but it is much less common for the examiner to identify the forger. This is due to the nature of handwriting, whereby a forger is attempting to imitate the writing habit of another person, thereby suppressing his own writing characteristics and style, and in essence, disguising his or her writing.

A ‘C’, or created document is any document prepared by the perpetrator of the fraud scenario. This type of changed document can include added or created documents or added and created text on a document. The document can be prepared by an external source (e.g., a vendor in an over-billing scheme) or an internal source (e.g., a purchasing agent who creates false bids).

Some signs of document creation can include the age of the document being inconsistent with the purported creation date, or the document lacking the sophistication typically associated with normal business standards. Added or created text can inserted with the use of ink or whatever type of writing instrument was used on the original. It can also be added through cutting and pasting sections of text, then photocopying the document to eliminate any outline. When pages are suspected of being added in this manner, a comparison of the type of paper used for the original and the photocopy should be made. In terms of computer-generated and machine-produced documents differences in the software used may result in textual differences.

As the MAC acronym seeks to demonstrate, fraudulent document information can be categorized as missing information, incorrect information, or information inconsistent with normal business standards. Therefore, the investigating CFE or auditor needs to have the requisite business and industry knowledge to correctly associate the appropriate red flags with the relevant documentary information consistent with the fraud scenario under investigation.

An Ancient Skill

I remember Professor Jerome Taylor in his graduate class at the University of Chicago introducing us to the complexities of what the ancients called the trivium.  Because the setting for the process of fraud examination is so often fraught with emotion and confusion, even a beginning fraud examiner quickly realizes that presenting evidence collected during examination fieldwork merely as a succession of facts often isn’t enough to fully convince clients and to adequately address their many concerns (many of which always seem to emerge all at once). To capture stakeholders’ attention, and to elicit a satisfactory response, CFEs need to possess some degree of rhetorical skill.

Rhetoric refers to the use of language to persuade and instruct. Throughout the Middle Ages, European universities taught rhetoric to beginning students as one of three foundational topics composing what was known as the trivium. Logic and grammar, the other two foundational topics, refer to the mechanics of thought and analysis, and to the mechanics of language, respectively. We CFEs and forensic accountants essentially follow the trivium in our work, whether we realize it or not. After gathering evidence through fieldwork, we apply logic to analyze that evidence and to present our vision of the facts to our client organizations in our final reports. We also use grammatical rules to structure text within our reports and memorandum.

Applying the trivium requires a balanced approach; too much focus on any one of the three components to the exclusion of the others can lead to ineffective communication. Fraud examiners need to consider all three trivium components evenly and avoid the common trap of collecting too much evidence or performing too much analysis in the belief that such concentrations will help strengthen our final reports.

The ancient Greeks defined three key components of rhetoric, the speech itself (text), the speaker delivering the speech (author), and those who listen to the speech (audience). Collectively, these components form what’s called the rhetorical triangle. For CFEs, the triangle’s three points equate to the final report or memorandum, the CFE him or herself, and our clients or stakeholders. All three of the rhetorical triangle components are interrelated, and they are each essential to the success of all investigative and/or assurance work. Each should be considered before any engagement and kept in mind throughout the engagement life cycle but especially during the report writing and presentation process.

Although the investigative team lead would be considered the primary author, each of the engagement team members plays a supporting role by authoring observations and preliminary findings that are then compiled into an integrated report. The person performing the important task of draft reviewer also has a role to play, ensuring that the final report meets ACFE and other applicable standards and fulfills the overall purpose defined in the planning document.

The character of the intended audience should be considered with each engagement. Audience members are not homogeneous; each may have different perspectives and expectations. For this reason, CFEs need to consult with them and consider their perspectives even before the engagement begins to the extent feasible.

Once engagement fieldwork has been completed, the authors compose a written report containing the results of the investigative field work. The report represents perhaps the most important outcome communication from the examination process, and the best chance to focus the client’s attention.

When crafting the final report, three separate but interrelated components, designated ‘appeals’, need to be considered and applied: ethos, logos, and pathos.

Ethos is an appeal to the audience’s perception of the honesty, authority, and expertise of the report’s author. Closely related to reputation, ethos is established when the audience determines that the author is qualified, trustworthy, and believable. Because the term ethics derives from ethos, adhering to ACFEs standards and Code of Ethics supports this appeal.

Some helpful formulations, in the form of questions, to keep in mind regarding the ethos component when formulating your report are:

–What assumptions does your audience likely make about you and the investigative process, what you produce, and the level of service you and your team provide?
–Is there a way to take advantage of their positive assumptions to improve the fraud investigation process for the future?
–What can you do to overcome their negative assumptions, if any?
–Do you create the expectation that what you produce and the level of service you provide will be above average or even exceptional?
–Are you using all the available channels to create an impression of excellence?

For CFEs with an on-going or long-term employment or other relationship with the client, the need to consider ethos begins long before the start of any particular engagement. Ethos is supported by the structure and governance of the fraud examination or forensic accounting function as well as by the selection of team members, including alignment between the type of engagements to be performed and the team’s qualifications, education, and training. The ethos appeal is also established by choosing to comply with examination and audit standards and with other professional requirements to demonstrate a high level of credibility, build trust, and gain a favorable reputation over time.

Logos appeals to the audience’s sense of logic, encompassing factors such as the reason and analysis used, the underlying meaning communicated, and the supporting facts and figures presented. The written document’s visual appeal, diagrams, charts, and other elements, as well as how the information is organized, presented, and structured, also factor into logos. Story conveys meaning. From the time we’re born we learn about the world around us through narratives. This aspect of logos continues to be important throughout our lives. We experience the world through our senses, particularly our eyes. Design and visual attractiveness are key to engaging an audience made up of the visual animals we are.

–Is what you are presenting easy to understand?
–Is your presentation design simple and pleasing to the eye?

Investigators need for logos is addressed by their written report’s executive summary; detailed observations, and findings as well as appendices with secondary information that can be used to further instruct the audience. The report describes the origin, drivers and overall purpose of the engagement, its findings, and conclusions. Ultimately, from a rhetorical standpoint, examiners try to tell a convincing, self-contained short story that conveys key messages to the audience. The structure and format of the report, together with its textual content and visual elements, also support the logos appeal.

Like ethos, the logos appeal is fulfilled long before an individual engagement begins. It starts with the rational, periodic assessment and identification of business processes at high-risk for fraud; areas requiring management’s attention, resulting in the development and implementation of effective anti-fraud controls. CFEs are then prepared to undertake engagements, executing steps to collect valid and relevant evidence to justify conclusions and to guide and support the client’s initiation of successful prosecutions.

Pathos is an appeal to the audience’s emotions, either positive (joy, excitement, hopefulness) or negative (anger, sadness). It is used to establish compassion or empathy. Unlike logos, pathos focuses on the audience’s irrational modes of response. The Greeks maintained that pathos was the strongest and most reliable form of persuasion. Pathos can be especially powerful when it is used well and connects with the audience’s underlying values and perspective. Used incorrectly, however, pathos can distort or detract from the impact of actual factual evidence.

Examiners should strive to walk a mile in someone else’s shoes and look for ways to better understand the client/audience’s perspective. Attention to pathos can help support not only examination objectives, but the overarching goal of creating a satisfactory investigative outcome. CFEs should also be mindful of their overall tone and word selection, and ensure they balance negative and positive comments giving credit to individuals and circumstances where credit is due.

To some extent, pathos is interdependent with ethos and logos: The sting of negative results can be reduced somewhat by the positive effect of the other two appeals. For example, clients/audience members are more likely to accept bad news from someone they trust and respect, and who they know has followed a rational, structured approach to the engagement. But at the same time, ethos and logos can be offset by negative pathos. Preferred practice generally consists of holding regular meetings with corporate counsel and/or other critical stakeholders over the course of the investigation, maintaining transparency, and providing stakeholders with an opportunity to address investigative findings or provide evidence that counters or clarifies the CFEs observations.

In summary, while all three elements of rhetorical appeal play an important role in communication and while none should be neglected, CFEs and forensic accountants should pay particular attention to pathos. The dominance of feelings over reason is part of human nature, and examiners should consider this powerful element when planning and executing engagements and reporting the results. By doing so, certified investigators can help ensure audiences accept our message and make informed judgements related to fraud recovery, prosecution and possible restitution.

Confidential Sources & Informants

There has been much in the news recently concerning the confidential sources and informants involved in current Federal on-going criminal and non-criminal investigations.  During the more complex of our examinations, we, as practicing fraud examiners and forensic accountants, can also expect to encounter the same types of sources and informants. Both sources and informants serve the same purpose, to provide information helpful in the development of a case. However, there are notable differences between confidential sources and confidential informants; the two terms should not be used interchangeably.

A confidential source furnishes information simply consequent on being a member of an occupation or profession and has no culpability in the alleged offense. For example, confidential sources might include barbers, attorneys, accountants, and law enforcement personnel. A confidential informant on the other hand has a direct or indirect involvement in the matter under investigation, and s/he might (incidentally) also be culpable. The distinction between the two sources is their involvement or noninvolvement in the offense. As every CFE knows, informants can pose treacherous legal issues for the fraud examiner.

There is no question that information provided by a well-placed informant can be invaluable to any case; secretly photographed or recorded conversations provided by an informant are the most convincing type of evidence. This information is generally viewed as something the use of which is sure to be successful for a criminal prosecutor, because there is little that a white-collar criminal can dispute when caught red-handed in the fraudulent act.

The ACFE identifies several types of informants with which a CFE might expect to become directly or indirectly involved: the basic lead, the participant, the covert, and the accomplice/witness.

—Basic Lead Informants. This type of informant supplies information to the investigator about illicit activities that they have encountered. The reasons that the informant decides to supply information are varied; some informants simply want to “do their part” to stop an unscrupulous activity, while others are interested in harming the criminals against whom they are informing. For instance, many informants in drug, prostitution, or illegal gambling endeavors are involved in those activities as well and intend to eliminate some of their competition. Whatever the reason, these informants’ only role in an investigation is to supply useful information.

—Participant informants.  The participant informant is directly involved in gathering preliminary evidence in the investigation. The informant in this instance not only supplies an investigation with information, but the informant is also involved in setting up a “sting” operation, initiating contact with the criminal for arrest purposes. A participant informant is just what the name suggests, a participant in the investigation of criminal activity.

—Covert informants. A covert informant also supplies information on criminal behavior to an investigator or to authorities. The difference between covert informants and other types of informants is that a covert informant is one who has been embedded in a situation or scenario for a period, sometimes for years, and is called upon only sporadically for newly uncovered information (i.e., tip-offs) and leads. These types of informants are often referred to as moles because of the nature of their insulated situation as inside sources. There are two instances in which covert informants are commonly used: in organized crime and in hate-extremist group investigations. Covert informants are often culled to get information about upcoming criminal activities by such groups.

—Accomplice/witness informants. The accomplice/witness informant is often called upon to provide information concerning criminal activity. Unlike other types of informants, the accomplice/witness informant seeks to avoid prosecution for an offense by providing investigators with helpful information. For example, the government might promise leniency if the accomplice/witness informant offers details about a co-conspirator.

There are three essential procedures for the investigator to keep in mind and follow when using sources and informants. First, strive to keep the informant’s identity as confidential as possible. Second, independently verify the information provided by the source or informant. Third, develop witness and documentary evidence from independently verified information. For example, an informant might indicate that an investigative target committed fraud. If the fraud examiner subsequently conducts an interview and gets a confession out of the target, the information is no longer dependent on the informant’s claim.

If the confidential source or informant has provided documents, names of potential witnesses, or other evidence, all reasonable steps must be taken to protect the identity of that source. Care should be taken to ensure that the questioning of other witnesses is done in a manner that does not reveal its origin. This can usually be accomplished by phrasing questions in a certain way. For example, Smith furnished confidential information about Jones, the co-owner of Jones Brothers Construction Company. When the fraud examiner confronts Jones, she does not want him to know that she has talked to Smith.

If necessary, in this example, the fraud examiner would display the evidence from witnesses and documents that would not reveal the source or informant’s identity. The information from the source or informant is basically useless unless the fraud examiner can verify its authenticity and independently corroborate it. Suppose a source furnishes the fraud examiner with copies of documents showing that Jones Brothers Construction Company’s building code violations dropped by 80 percent since a bribery arrangement allegedly began. This kind of evidence would corroborate the source’s story. If a source told the fraud examiner that Jones frequently had drinks with Walters, the city’s chief building inspector, the fraud examiner would want to find out some way to verify this information. Recall that the third objective when using sources is to develop the witness’s information and other evidence so that it makes a cohesive case.

Fraud examiners should make every effort to develop and cultivate a wide range of sources. Business and financial institution executives, law enforcement and other governmental personnel, medical and educational professionals, and internal and external auditors are always good contacts for practicing fraud examiners.

The fraud examiner should strive to make contacts in her community, well in advance of needing the information they can provide; my contacts on LinkedIn and in the Central Virginia ACFE Chapter have proven their investigative value again and again!  If the fraud examiner receives an allegation and needs confidential information, s/he might obtain assistance from a source cultivated earlier.  Additionally, we need sources to feel confident that they can share information with us without being compromised. In theory, the source will never have to testify; s/he has no firsthand knowledge. Firsthand information comes either from a witness or from a document.

The fraud examiner might also encounter new sources when tracking leads during a specific investigation. S/he might interview a stockbroker from whom the target purchased stock but who does not want his identity revealed. The fraud examiner shou1d not encourage a person to provide confidential information, but rather try to get verifying reports on the record. But if the fraud examiner promises confidentiality for a source’s information, she must abide by that promise.

The ACFE advises that active recruitment of informants is generally not desirable because doing so might appear unseemly to a jury. It is better to encourage an informant to come forward. It is also desirable to develop an informant relationship, but such relationships must be handled carefully. The fraud examiner must be careful to clearly document the adequate predication for an informant’s involvement. Generally, the most fundamental questions concerning informants will focus on the degree of their culpability or the lack of it. There have been cases where the informant is guiltier than the target; in such cases the court might rule that the informant’s information cannot be introduced.

Finally, it’s recommended that all contact with informants and-sources be reported on a memorandum, although the confidential source or informant’s identity should not be included in the report. Instead of including the source or informant’s identity, the fraud examiner should use symbols to denote the source’s identity. It is further recommended that sources be preceded with an “S,” followed by a unique identifier (i.e., source #1 would be “S-l”; source #2 would be “S-2”). The symbols for informants would then be “I-1” and “I-2.”

Generally, disclosure of the identities of sources and informants should be on a strict need to-know basis. For that reason, the person’s identity should be maintained in a secure file with limited access, and it should be cross-indexed by the source’s symbol number. The reliability of the source, if known, and whether the person can furnish relevant information should always be documented in writing.

Tailoring Difficult Conversations

We CFE’s and forensic accountants, like other investigative professionals, are often called upon to be the bearers of bad news; it just goes with the territory.  CFE’s and forensic accountants are somewhat unique, however, in that, since fraud is ubiquitous, we’re called upon to communicate negative messages to such a diverse range of client types; today the chairman of an audit committee, tomorrow a corporate counsel, the day after that an estranged wife whose spouse has run off after looting the family business.

If there is anything worse than getting bad news, it may be delivering it. No one relishes the awkward, difficult, anxiety-producing exercise of relaying messages that may hurt, humiliate, or upset someone with whom the deliverer has a professional relationship. And, what’s more,  it often proves a thankless task. This was recognized in a Greek proverb almost 2,500 years ago, “Nobody loves the messenger who brings bad news.”

Physicians, who are sometimes required to deliver worse news than most CFE’s ever will, often engage in many hours of classwork and practical experience studying and role-playing how to have difficult conversations with patients and their families They know that the message itself, may be devastating but how they deliver it can help the patient and his or her family begin to process even the most painful facts.   CFE’s are in the fortunate position of typically not having to deliver news that is quite so shattering.  Nevertheless, there is no question that certain investigative results can be extremely difficult to convey and to receive.  The ACFE tells us that learning how to prepare for and deliver such messages can create not only a a better investigator but facilitate a better investigative outcome.

Preparation to deliver difficult investigative results should begin well in advance, even before there is such a result to deliver. If the first time an investigator has a genuine interaction with the client is to confirm the existence of a fraud, that fact in itself constitutes a problem.  On the other hand, if the investigator has invested time in building a relationship before that difficult meeting takes place, the intent and motivations of both parties to the interaction are much better mutually understood. Continuous communication via weekly updates to clients from the moment irregularities are noted by examination is vital.

However, despite best efforts in building relationships and staying in regular contact with clients, some meetings will involve conveying difficult news. In those cases, preparation is critical to accomplishing objectives while dealing with any resultant fallout.  In such cases, the ACFE recommends focusing on investigative process as well as on content. Process is professionally performing the work, self-preparation for delivering the message, explaining the conclusions in meaningful and realistic ways, and for anticipating the consequences and possible response of the person receiving the message. Content is having the right data and valid conclusions so  the message is correct and complete.

Self-preparation involves considering the type of person who is receiving the difficult message and in determining the best approach for communicating it. Some people want to hear the bottom line first and the supporting information after that; others want to see a methodical building of the case item by item, with the conclusion at the end. Some are best appealed to via logic; others need a more empathetic delivery. Discussions guided by the appropriate approach are more likely to be productive. Put as much effort as possible into getting to know your client since personality tends to drive how he or she wants to receive information, interact with others, and, in turn, values things and people. When there is critical investigative information that has to be understood and accepted, seasoned examiners consider delivery tailored specifically to the client to be paramount.

Once the ground work has been laid, it’s time to have the discussion. It’s important, regarding the identified fraud, to remember to …

–Seek opportunities to balance the discussion by recognizing the client’s processes that are working well as well as those that have apparently failed;

–Offer to help or ask how you can help to address the specific issues raised in the discussion;

–Make it clear that you understand the client’s challenges. Be precise and factual in describing the causes of the identified irregularity;

–Maintain open body language. Avoid crossing your arms, don’t place your hands over your mouth or on your face, and keep your palms facing each other or slightly upwards instead of downwards. Don’t lean forward as this appears extra aggressive. Breathe deeply and evenly. If possible, mimic the body language of the message recipient, if the recipient is remaining calm. If the recipient begins to show signs of defensiveness or strong aggression, and your efforts to calm
the situation are not successful, you might suggest a follow-up meeting after both of you have digested what was said and to consider mutually acceptable options to move forward.

–Present the bottom-line message three times in different ways so your listener has time to absorb it.

–Let the client vent if he or she wishes. The ACFE warns against a tendency to interrupt the client’s remarks of explanation or sometimes of denial; “we don’t hire people who would do something like that!” Allowing the client time to vent frees him or her to get down to business moving afterward.

–Focus on problems with the process as well as on the actions of the suspect(s) to build context for the fraud scenario.

–Always demonstrate empathy. Take time to think about what’s going through your hearer’s mind and help him or her think through the alleged scenario and how it occurred, what’s going to happen next with the investigation, and how the range of issues raised by the investigation might be resolved.

Delivering difficult information is a minefield, and there are ample opportunities to take a wrong step and see explosive results. Emotional intelligence, understanding how to read people and relate to them, is vital in delivering difficult messages effectively. This is not an innate trait for many people, and it is a difficult one to learn, as are many of the other so-called soft skills. Yet they can be critical to the successful practice of fraud examination. Examiners rarely get in trouble over their technical skills because such skills are generally easier for them to master.  Examiners tend to get in trouble over insufficient soft skills. College degrees and professional certifications are all aimed at the technical skills. Sadly, very little is done on the front end to help examiners with the equally critical soft skills which only arise after the experience of actual practice.  For that reason, watching a mentor deliver difficult messages or deal with emotional people is also an effective way to absorb good practices. ACFE training utilizes the role-playing of potentially troublesome presentations to a friendly group (say, the investigative staff) as another way to exercise one’s skills.

Delivering bad news is largely a matter of practice and experience, and it’s not something CFEs and forensic accountants have the choice to avoid. At the end of the day, examiners need to deliver our news verbally and in writing and to facilitate our clients understanding of it. The underlying objective is to ensure that the fact of the alleged fraud is adequately identified, reported and addressed, and that the associated risk is understood and effectively mitigated.

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.

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.

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 Facts Speak for Themselves

fact-findingOne of the most frequent topics our Chapter receives questions about from new members and from our on-line guests concerns the documenting and reporting of investigative results.  What types of reports do fraud examiners and forensic accountants typically produce based on what types of documentation? What should be included in the various types of documentation and reports and what should be avoided?

The ACFE tells us that documenting an investigation is as important as performing it. A poorly documented case file can lead to a disappointing conclusion, a dissatisfied client, and can even damage the investigator’s reputation. Various means by which the fraud examiner or forensic accounting investigator may report her findings have been established by over two decades of practice.  The form of the report, whether oral or written, is always a matter to be discussed with the client and with counsel. While it’s not the responsibility of the fraud examiner to advise on the legal perils associated with various forms of reporting, there are certain issues of which new investigators should be aware as their clients debate the form of reporting that will conclude the investigator’s examination.

The ACFE suggests that practitioners try to determine at the outset whether a written report is expected and, if so, its form and timing. In the usual circumstance that this point can’t be decided at the inception of the engagement, the examiner should conduct the investigation in a manner that will facilitate a comprehensive oral report, including the key documents and any exhibits necessary to illustrate the findings. Many investigations begin small, but there’s no way to know with certainty where they will lead and what will be required at the conclusion. Although the client may not have requested a report at the outset of the investigation, some event during the investigation may change the client’s mind, and the investigator should to be prepared to respond. For example, you may determine during an investigation that an officer of the company violated a law or regulation, thereby requiring the company to consider self-reporting and possibly

bringing a civil action against the officer and other third parties. Alternatively, you may be subpoenaed for your part in an investigation that has captured the attention of regulatory agencies or law enforcement. While you can testify only as to what procedures you recall performing and the attendant findings, your client, and your own reputation, will be better served if you always have through and proper documentation. Try to perform an investigation as if you might be asked later to report formally on your findings and on the exact procedures performed.

Members also ask about the types of reports.  The most common reports are:

Written reports

  • Report of investigation. This form of written report is given directly to the client, which may be the company’s management, board, audit committee of the board, in-house counsel or outside counsel. The report should stand on its own; that is, it should identify all the relevant evidence that was used in concluding on the allegations under investigation. This is important because the client may rely on the report for various purposes such as corporate filings, lawsuits, employment actions, or alterations to procedures and controls.
  • Expert report filed in a civil court proceeding. The American Institute of Certified Public Accountants (AICPA) publishes an excellent practice aid on the full range of expert reports.
  • Affidavits. These are voluntary declarations of facts and are communicated in written form and sworn to by the witness (declarant) before an officer authorized by the court.
  • Informal reports. These consist of memos to file, summary outlines used in delivery of an oral report, interview notes, spreadsheets listing transactions along with explanatory annotations, and other less-formal written material prepared by the investigation team.

Oral reports

  • Oral reports are usually delivered by the investigation engagement leader to those overseeing an investigation, such as a company’s board, or to those who represent the company’s interests, such as outside counsel.
  • Oral reports involve giving a deposition, as a fact witness or expert witness, during which everything that is said, by all parties to the deposition, is transcribed by a court reporter.

Reports documenting an investigation differ considerably from audit opinions issued under generally accepted auditing standards (GAAS). The investigative report writer is not constrained by the required language of a governing standard, and investigative reports differ from one another in organization and content depending on the client’s stated needs. In contrast, financial audit reports adhere to set formula prescribed by GAAS. The uses of written reports also differ. The client could do any of the following things with an investigative report:

  • Distribute the report to a select group of individuals associated with the company in various capacities;
  • Voluntarily give the report to a prosecutor as a referral for prosecution;
  • Enter the report as evidence in a civil fraud proceeding;
  • Give the report to outside counsel for use in preparing regulatory findings, entering negotiations, or providing other legal services on behalf of the company.

However the client decides to use the report, its basic elements usually include the following organizaton:

  • Identify your client;
  • In the case of a lawsuit, identify the parties;
  • State in broad terms what you were asked to do;
  • Describe your scope, including the period examined;
  • Include mention of any restriction as to distribution and use of the report;
  • Identify the professional standards under which the work was conducted;
  • Identify exclusions in the reliance on your report (the report is not a financial audit, etc.);
  • State that your work should not be relied on to detect all fraud;
  • Include the procedures you performed, technical pronouncements relied upon, and findings.

Although a summary can be helpful to the reader it may be perilous for the report writer in terms of keeping critical information and perspectives intact. Caution is advised when preparing two types of summary sections: executive summary and conclusion.  If you do write a summary, be careful not to offer an opinion on the factual findings unless specifically requested to do so by the client. The facts should speak for themselves.

It may be appropriate to include in a concluding section of the Report of Investigation certain recommendations for additional investigative procedures or a description of control breakdowns you have observed. Also, a carefully written executive summary at the beginning of the report can be extremely helpful to the reader, especially when it precedes a long and complex report. The executive summary should offer in simple, straightforward language an accurate statement of significant findings. Each summarized finding should include a reference to the full description of findings included in the complete Report of Investigation.

Fraud examination reports are powerful tools which can assist client management in a myriad of ways but, like anything else, if ineptly prepared, represent a minefield for the beginning practitioner.