Tag Archives: fraud response

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.

Inflexible Reporting

Our Chapter and the ACFE have published a number of articles and posts over the last few years about the various types of pressures that can push ethically challenged employees over the line between temptation and the perpetration of an actual accounting fraud. One category of such pressure stems directly from the nature of our present system of periodic financial reporting which, it can be argued, not only creates unnecessary volatility in the stock and financial markets but ends up requiring rational investors to demand a premium for securities investments by emphasizing the short term risk that near term, inflexable, quarterly earnings targets will not be met. The pressure to meet these short term targets can only give rise to operational inefficiencies which in turn drive up the inherent inefficiency in the transmission of information from public companies to financial markets based on a model which hasn’t changed much since its original definition during the Great Depression years of the 1930’s.

I’ve seen articles in the Journal of Accountancy and in other authoritative financial publications pointing toward a better way and, with the advent of and widening support for the electronic reporting of financial results to the SCC (the XBRL initiative), we can hope we’re well into the drawn of a new age. That there’s been pushback to this effort is understandable. Those familiar with the technical and professional minefield of the present quarterly reporting process can only feel sympathy with those financial officers who have to go through it, quarter by quarter and year after year. Questions originally abounded about process and mechanics like how is electronically published financial information going to be verified and what real controls are there over its reliability? What happens if there’s an honest mistake?

Think about all this from the point of view of the fraud examiner. If enterprises, listed and non-listed, can make the transition from a periodic to a real-time, electronic based financial reporting system, the resulting efficiencies and the decrease in numerous types of fraud related risk would be truly striking. Real-time financial reporting would free our clients from the tyranny of the present, economically nonsensical, reporting of quarterly results. How much of the incentive to commit financial fraud to meet the numbers does that immediately alleviate? As one financial expert after another has pointed out over the years, there’s just no justification for focusing on a calendar quarter as the unit in which to take stock of financial performance, beyond the fact that that’s what’s presently codified in the law. By contrast, what if financial information were published and available to all users on a real-time basis? The immediate availability of such information, continuously updated, on whatever basis is appropriate for the individual enterprise and its industry, would force companies to adopt a reporting unit that ready makes sense to them and to their principal information users. For some companies that unit might be a week, a month, a quarter, semi-annually or a year. So be it. Let a thousand flowers bloom; the upshot is that what would end up being reported would make sense for the company, its industry and for the information users rather than the one-size fits all, set in stone, prescription of the present law.

An additional advantage, and one with immediate implications for fraud prevention, would be the opportunity for increased efficiency in financial markets as investment dollars could be allocated not according to quarterly results or according to the best guess estimates of financial analysts, but by reliable financial information provided directly by the company all the time; goodbye to many of the present information control vulnerabilities that support insider trading because information is not widely and efficiently disseminated. The point is that by employing digital, cloud-based analytics report building tools properly, users of all kinds could customize a set of up-to-date financial reports (in whatever format) on whatever time period, that suits their fancy.

But many have also pointed out that if there is to be such a shift from periodic to real-time financial reporting, there needs to be a fundamental change in basic attitudes toward financial reporting. Those who report and those who inspect financial information will have to change their focus from methods by which the numbers themselves are checked (audited) to methods (as with XBRL) that focus on the reliability of the system that generates the numbers. That’s where fraud examiners and other financial insurance professionals come in. On-line financial information will be published with such frequency and so rapidly, that there will be no time to “check” individual numbers; the emphasis for assurance professionals will, therefore, need to shift away from checking numbers and balances to analysis of and reporting on the integrity of the system of internal controls over the reporting system itself; understanding of the details of the internal control system over financial reporting will gain a level of prominence it’s never had before.

Fraud examiners need to be aware of these issues when counseling clients about the profound impact that digitally based, on-line reporting of financial information is and will have on their fraud prevention and fraud risk assessment programs. As with all else in life, real time financial reporting will inevitably decrease the risk of some fraud scenarios and increase the risk of others.

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.

First Steps to Prosecution

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cyberfraud & Business Continuity

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

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

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

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

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

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

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

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

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

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