Tag Archives: data analytics

Analytics Confronts the Normal

The Information Audit and Control Association (ISACA) tells us that we produce and store more data in a day now than mankind did altogether in the last 2,000 years. The data that is produced daily is estimated to be one exabyte, which is the computer storage equivalent of one quintillion bytes, which is the same as one million terabytes. Not too long ago, about 15 years, a terabyte of data was considered a huge amount of data; today the latest Swiss Army knife comes with a 1 terabyte flash drive.

When an interaction with a business is complete, the information from the interaction is only as good as the pieces of data that get captured during that interaction. A customer walks into a bank and withdraws cash. The transaction that just happened gets stored as a monetary withdrawal transaction with certain characteristics in the form of associated data. There might be information on the date and time when the withdrawal happened; there may be information on which customer made the withdrawal (if there are multiple customers who operate the same account). The amount of cash that was withdrawn, the account from which the money was extracted, the teller/ATM who facilitated the withdrawal, the balance on the account after the withdrawal, and so forth, are all typically recorded. But these are just a few of the data elements that can get captured in any withdrawal transaction. Just imagine all the different interactions possible on all the assorted products that a bank has to offer: checking accounts, savings accounts, credit cards, debit cards, mortgage loans, home equity lines of credit, brokerage, and so on. The data that gets captured during all these interactions goes through data-checking processes and gets stored somewhere internally or in the cloud.  The data that gets stored this way has been steadily growing over the past few decades, and, most importantly for fraud examiners, most of this data carries tons of information about the nuances of the individual customers’ normal behavior.

In addition to what the customer does, from the same data, by looking at a different dimension of the data, examiners can also understand what is normal for certain other related entities. For example, by looking at all the customer withdrawals at a single ARM, CFEs can gain a good understanding of what is normal for that particular ATM terminal.  Understanding the normal behavior of customers is very useful in detecting fraud since deviation from normal behavior is a such a primary indicator of fraud. Understanding non-fraud or normal behavior is not only important at the main account holder level but also at all the entity levels associated with that individual account. The same data presents completely different information when observed in the context of one entity versus another. In this sense, having all the data saved and then analyzed and understood is a key element in tackling the fraud threat to any organization.

Any systematic, numbers-based system of understanding of the phenomenon of fraud as a past occurring event is dependent on an accurate description of exactly what happened through the data stream that got accumulated before, during, and after the fraud scenario occurred. Allowing the data to speak is the key to the success of any model-based system. This data needs to be saved and interpreted very precisely for the examiner’s models to make sense. The first crucial step to building a model is to define, understand, and interpret fraud scenarios correctly. At first glance, this seems like a very easy problem to solve. In practical terms, it is a lot more complicated process than it seems.

The level of understanding of the fraud episode or scenario itself varies greatly among the different business processes involved with handling the various products and functions within an organization. Typically, fraud can have a significant impact on the bottom line of any organization. Looking at the level of specific information that is systematically stored and analyzed about fraud in financial institutions for example, one would arrive at the conclusion that such storage needs to be a lot more systematic and rigorous than it typically is today. There are several factors influencing this. Unlike some of the other types of risk involved in client organizations, fraud risk is a censored problem. For example, if we are looking at serious delinquency, bankruptcy, or charge-off risk in credit card portfolios, the actual dollars-at-risk quantity is very well understood. Based on past data, it is relatively straightforward to quantify precise credit dollars at risk by looking at how many customers defaulted on a loan or didn’t pay their monthly bill for three or more cycles or declared bankruptcy. Based on this, it is easy to quantify the amount at risk as far as credit risk goes. However, in fraud, it is virtually impossible to quantify the actual amount that would have gone out the door as the fraud is stopped immediately after detection. The problem is censored as soon as some intervention takes place, making it difficult to precisely quantify the potential risk.

Another challenge in the process of quantifying fraud is how well the fraud episode itself gets recorded. Consider the case of a credit card number getting stolen without the physical card getting stolen. During a certain period, both the legitimate cardholder and the fraudster are charging using the card. If the fraud detection system in the issuing institution doesn’t identify the fraudulent transactions as they were happening in real time, typically fraud is identified when the cardholder gets the monthly statement and figures out that some of the charges were not made by him/her. Then the cardholder calls the issuer to report the fraud.  In the not too distant past, all that used to get recorded by the bank was the cardholder’s estimate of when the fraud episode began, even though there were additional details about the fraudulent transactions that were likely shared by the cardholder. If all that gets recorded is the cardholder’s estimate of when the fraud episode began, ambiguity is introduced regarding the granularity of the actual fraud episode. The initial estimate of the fraud amount becomes a rough estimate at best.
In the case in which the bank’s fraud detection system was able to catch the fraud during the actual fraud episode, the fraudulent transactions tended to be recorded by a fraud analyst, and sometimes not too accurately. If the transaction was marked as fraud or non-fraud incorrectly, this problem was typically not corrected even after the correct information flowed in. When eventually the transactions that were actually fraudulent were identified using the actual postings of the transactions, relating this back to the authorization transactions was often not a straightforward process. Sometimes the amounts of the transactions may have varied slightly. For example, the authorization transaction of a restaurant charge is sometimes unlikely to include the tip that the customer added to the bill. The posted amount when this transaction gets reconciled would look slightly different from the authorized amount. All of this poses an interesting challenge when designing a data-driven analytical system to combat fraud.

The level of accuracy associated with recording fraud data also tends to be dependent on whether the fraud loss is a liability for the customer or to the financial institution. To a significant extent, the answer to the question, “Whose loss is it?” really drives how well past fraud data is recorded. In the case of unsecured lending such as credit cards, most of the liability lies with the banks, and the banks tend to care a lot more about this type of loss. Hence systems are put in place to capture this data on a historical basis reasonably accurately.

In the case of secured lending, ID theft, and so on, a significant portion of the liability is really on the customer, and it is up to the customer to prove to the bank that he or she has been defrauded. Interestingly, this shift of liability also tends to have an impact on the quality of the fraud data captured. In the case of fraud associated with automated clearing house (ACH) batches and domestic and international wires, the problem is twofold: The fraud instances are very infrequent, making it impossible for the banks to have a uniform method of recording frauds; and the liability shifts are dependent on the geography.  Most international locations put the onus on the customer, while in the United States there is legislation requiring banks to have fraud detection systems in place.

The extent to which our client organizations take responsibility also tends to depend on how much they care about the customer who has been defrauded. When a very valuable customer complains about fraud on her account, a bank is likely to pay attention.  Given that most such frauds are not large scale, there is less need to establish elaborate systems to focus on and collect the data and keep track of past irregularities. The past fraud information is also influenced heavily by whether the fraud is third-party or first-party fraud. Third-party fraud is where the fraud is committed clearly by a third party, not the two parties involved in a transaction. In first-party fraud, the perpetrator of the fraud is the one who has the relationship with the bank. The fraudster in this case goes to great lengths to prevent the banks from knowing that fraud is happening. In this case, there is no reporting of the fraud by the customer. Until the bank figures out that fraud is going on, there is no data that can be collected. Also, such fraud could go on for quite a while and some of it might never be identified. This poses some interesting problems. Internal fraud where the employee of the institution is committing fraud could also take significantly longer to find. Hence the data on this tends to be scarce as well.

In summary, one of the most significant challenges in fraud analytics is to build a sufficient database of normal client transactions.  The normal transactions of any organization constitute the baseline from which abnormal, fraudulent or irregular transactions, can be identified and analyzed.  The pinpointing of the irregular is thus foundational to the development of the transaction processing edits which prevent the irregular transactions embodying fraud from even being processed and paid on the front end; furnishing the key to modern, analytically based fraud prevention.

New Rules for New Tools

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

Some examples …

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

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

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

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

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

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

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

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

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

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

The Who, the What, the When

CFEs and forensic accountants are seekers. We spend our days searching for the most relevant information about our client requested investigations from an ever-growing and increasingly tangled data sphere and trying to make sense of it. Somewhere hidden in our client’s computers, networks, databases, and spreadsheets are signs of the alleged fraud, accompanying control weaknesses and unforeseen risks, as well as possible opportunities for improvement. And the more data the client organization has, the harder all this is to find.  Although most computer-assisted forensic audit tests focus on the numeric data contained within structured sources, such as financial and transactional databases, unstructured or text based data, such as e-mail, documents, and Web-based content, represents an estimated 8o percent of enterprise data within the typical medium to large-sized organization. When assessing written communications or correspondence about fraud related events, CFEs often find themselves limited to reading large volumes of data, with few automated tools to help synthesize, summarize, and cluster key information points to aid the investigation.

Text analytics is a relatively new investigative tool for CFEs in actual practice although some report having used it extensively for at least the last five or more years. According to the ACFE, the software itself stems from a combination of developments in our sister fields of litigation support and electronic discovery, and from counterterrorism and surveillance technology, as well as from customer relationship management, and research into the life sciences, specifically artificial intelligence. So, the application of text analytics in data review and criminal investigations dates to the mid-1990s.

Generally, CFEs increasingly use text analytics to examine three main elements of investigative data: the who, the what, and the when.

The Who: According to many recent studies, substantially more than a half of business people prefer using e-mail to use of the telephone. Most fraud related business transactions or events, then, will likely have at least some e-mail communication associated with them. Unlike telephone messages, e-mail contains rich metadata, information stored about the data, such as its author, origin, version, and date accessed, and can be documented easily. For example, to monitor who is communicating with whom in a targeted sales department, and conceivably to identify whether any alleged relationships therein might signal anomalous activity, a forensic accountant might wish to analyze metadata in the “to,” “from,” “cc,” or “bcc” fields in departmental e-mails. Many technologies for parsing e-mail with text analytics capabilities are available on the market today, some stemming from civil investigations and related electronic discovery software. These technologies are like the social network diagrams used in law enforcement or in counterterrorism efforts.

The What: The ever-present ambiguity inherent in human language presents significant challenges to the forensic investigator trying to understand the circumstances and actions surrounding the text based aspects of a fraud allegation. This difficulty is compounded by the tendency of people within organizations to invent their own words or to communicate in code. Language ambiguity can be illustrated by examining the word “shred”. A simple keyword search on the word might return not only documents that contain text about shredding a document, but also those where two sports fans are having a conversation about “shredding the defense,” or even e-mails between spouses about eating Chinese “shredded pork” for dinner. Hence, e-mail research analytics seeks to group similar documents according to their semantic context so that documents about shredding as concealment or related to covering up an action would be grouped separately from casual e-mails about sports or dinner, thus markedly reducing the volume of e-mail requiring more thorough ocular review. Concept-based analysis goes beyond traditional search technology by enabling users to group documents according to a statistical inference about the co-occurrence of similar words. In effect, text analytics software allows documents to describe themselves and group themselves by context, as in the shred example. Because text analytics examines document sets and identifies relationships between documents according to their context, it can produce far more relevant results than traditional simple keyword searches.

Using text analytics before filtering with keywords can be a powerful strategy for quickly understanding the content of a large corpus of unstructured, text-based data, and for determining what is relevant to the search. After viewing concepts at an elevated level, subsequent keyword selection becomes more effective by enabling users to better understand the possible code words or company-specific jargon. They can develop the keywords based on actual content, instead of guessing relevant terms, words, or phrases up front.

The When: In striving to understand the time frames in which key events took place, CFEs often need to not only identify the chronological order of documents (e.g., sorted by or limited to dates), but also link related communication threads, such as e-mails, so that similar threads and communications can be identified and plotted over time. A thread comprises a set of messages connected by various relationships; each message consists of either a first message or a reply to or forwarding of some other message in the set. Messages within a thread are connected by relationships that identify notable events, such as a reply vs. a forward, or changes in correspondents. Quite often, e-mails accumulate long threads with similar subject headings, authors, and message content over time. These threads ultimately may lead to a decision, such as approval to proceed with a project or to take some other action. The approval may be critical to understanding business events that led up to a particular journal entry. Seeing those threads mapped over time can be a powerful tool when trying to understand the business logic of a complex financial transaction.

In the context of fraud risk, text analytics can be particularly effective when threads and keyword hits are examined with a view to considering the familiar fraud triangle; the premise that all three components (incentive/pressure, opportunity, and rationalization) are present when fraud exists. This fraud triangle based analysis can be applied in a variety of business contexts where increases in the frequency of certain keywords related to incentive/pressure, opportunity, and rationalization, can indicate an increased level of fraud risk.

Some caveats are in order.  Considering the overwhelming amount of text-based data within any modern enterprise, assurance professionals could never hope to analyze all of it; nor should they. The exercise would prove expensive and provide little value. Just as an external auditor would not reprocess or validate every sales transaction in a sales journal, he or she would not need to look at every related e-mail from every employee. Instead, any professional auditor would take a risk-based approach, identifying areas to test based on a sample of data or on an enterprise risk assessment. For text analytics work, the reviewer may choose data from five or ten individuals to sample from a high-risk department or from a newly acquired business unit. And no matter how sophisticated the search and information retrieval tools used, there is no guarantee that all relevant or high-risk documents will be identified in large data collections. Moreover, different search methods may produce differing results, subject to a measure of statistical variation inherent in probability searches of any type. Just as a statistical sample of accounts receivable or accounts payable in the general ledger may not identify fraud, analytics reviews are similarly limited.

Text analytics can be a powerful fraud examination tool when integrated with traditional forensic data-gathering and analysis techniques such as interviews, independent research, and existing investigative tests involving structured, transactional data. For example, an anomaly identified in the general ledger related to the purchase of certain capital assets may prompt the examiner to review e-mail communication traffic among the key individuals involved, providing context around the circumstances and timing, of events before the entry date. Furthermore, the forensic accountant may conduct interviews or perform additional independent research that may support or conflict with his or her investigative hypothesis. Integrating all three of these components to gain a complete picture of the fraud event can yield valuable information. While text analytics should never replace the traditional rules-based analysis techniques that focus on the client’s financial accounting systems, it’s always equally important to consider the communications surrounding key events typically found in unstructured data, as opposed to that found in the financial systems.

Financing Death One BitCoin at a Time

Over the past decade, fanatic religious ideologists have evolved to become hybrid terrorists demonstrating exceptional versatility, innovation, opportunism, ruthlessness, and cruelty. Hybrid terrorists are a new breed of organized criminal. Merriam-Webster defines hybrid as “something that is formed by combining two or more things”. In the twentieth century, the military, intelligence forces, and law enforcement agencies each had a specialized skill-set to employ in response to respective crises involving insurgency, international terrorism, and organized crime. Military forces dealt solely with international insurgent threats to the government; intelligence forces dealt solely with international terrorism; and law enforcement agencies focused on their respective country’s organized crime entities. In the twenty-first century, greed, violence, and vengeance motivate the various groups of hybrid terrorists. Hybrid terrorists rely on organized crime such as money laundering, wire transfer fraud, drug and human trafficking, shell companies, and false identification to finance their organizational operations.

Last week’s horrific terror bombing in Manchester brings to the fore, yet again, the issue of such terrorist financing and the increasing role of forensic accountants in combating it. Two of the main tools of modern terror financing schemes are money laundering and virtual currency.

Law enforcement and government agencies in collaboration with forensic accountants play key roles in tracing the source of terrorist financing to the activities used to inflict terror on local and global citizens. Law enforcement agencies utilize investigative and predictive analytics tools to gather, dissect, and convey data to distinguish patterns leading to future terrorist events. Government agencies employ database inquiries of terrorist-related financial information to evaluate the possibilities of terrorist financing and activities. Forensic accountants review the data for patterns related to previous transactions by utilizing data analysis tools, which assist in tracking the source of the funds.

As we all know, forensic accountants use a combination of accounting knowledge combined with investigative skills in litigation support and investigative accounting settings. Several types of organizations, agencies, and companies frequently employ forensic accountants to provide investigative services. Some of these organizations are public accounting firms, law firms, law enforcement agencies, The Internal Revenue Service (IRS), The Central Intelligence Agency (CIA), and The Federal Bureau of Investigations (FBI).

Locating and halting the source of terrorist financing involves two tactics, following the money and drying up the money. Obstructing terrorist financing requires an understanding of both the original and supply source of the illicit funds. As the financing is derived from both legal and illegal funding sources, terrorists may attempt to evade detection by funneling money through legitimate businesses thus making it difficult to trace. Charitable organizations and reputable companies provide a legitimate source through which terrorists may pass money for illicit activities without drawing the attention of law enforcement agencies. Patrons of legitimate businesses are often unaware that their personal contributions may support terrorist activities. However, terrorists also obtain funds from obvious illegal sources, such as kidnapping, fraud, and drug trafficking. Terrorists often change daily routines to evade law enforcement agencies as predictable patterns create trails that are easy for skilled investigators to follow. Audit trails can be traced from the donor source to the terrorist by forensic accountants and law enforcement agencies tracking specific indicators. Audit trails reveal where the funds originate and whether the funds came from legal or illegal sources. The ACFE tells us that basic money laundering is a specific type of illegal funding source, which provides a clear audit trail.

Money laundering is the process of obtaining and funneling illicit funds to disguise the connection with the original unlawful activity. Terrorists launder money to spend the unlawfully obtained money without drawing attention to themselves and their activities. To remain undetected by regulatory authorities, the illicit funds being deposited or spent need to be washed to give the impression that the money came from a seemingly reputable source. There are types of unusual transactions that raise red flags associated with money laundering in financial institutions. The more times an unusual transaction occurs, the greater the probability it is the product of an illicit activity. Money laundering may be quite sophisticated depending on the strategies employed to avoid detection. Some identifiers indicating a possible money-laundering scheme are: lack of identification, money wired to new locations, customer closes account after wiring or transferring copious amounts of money, executed out-of-the-ordinary business transactions, executed transactions involving the customer’s own business or occupation, and executed transactions falling just below the threshold trigger requiring the financial institution to file a report.

Money laundering takes place in three stages: placement, layering, and integration. In the placement stage, the cash proceeds from criminal activity enter the financial system by deposit. During the layering stage, the funds transfer into other accounts, usually offshore financial institutions, thus creating greater distance between the source and origin of the funds and its current location. Legitimate purchases help funnel the money back into the economy during the integration stage, the final stage.

Complicating all this is for the investigator is virtual currency. Virtual currency, unlike traditional forms of money, does not leave a clear audit trail for forensic accountants to trace and investigate. Cases involving the use of virtual currency, i.e. Bitcoins and several rival currencies, create anonymity for the perpetrator and create obstacles for investigators. Bitcoins have no physical form and provide a unique opportunity for terrorists to launder money across international borders without detection by law enforcement or government agencies. Bitcoins are long strings of numbers and letters linked by mathematical encryption algorithms. A consumer uses a mobile phone or computer to create an online wallet with one or more Bitcoin addresses before commencing electronic transactions. Bitcoins may also be used to make legitimate purchases through various, established online retailers.

Current international anti-money laundering laws aid in fighting the war against terrorist financing; however, international laws require actual cash shipments between countries and criminal networks (or at the very least funds transfers between banks). International laws are not applicable to virtual currency transactions, as they do not consist of actual cash shipments. According to the website Bitcoin.org, “Bitcoin uses peer-to-peer technology to operate with no central authority or banks”.

In summary, terrorist organizations find virtual currency to be an effective method for raising illicit funds because, unlike cash transactions, cyber technology offers anonymity with less regulatory oversight. Due to the anonymity factor, Bitcoins are an innovative and convenient way for terrorists to launder money and sell illegal goods. Virtual currencies are appealing for terrorist financiers since funds can be swiftly sent across borders in a secure, cheap, and highly secretive manner. The obscurity of Bitcoin allows international funding sources to conduct exchanges without a trace of evidence. This co-mingling effect is like traditional money laundering but without the regulatory oversight. Government and law enforcement agencies must, as a result, be able to share information with public regulators when they become suspicious of terrorist financing.

Forensic accounting technology is most beneficial when used in conjunction with the analysis tools of law enforcement agencies to predict and analyze future terrorist activity. Even though some of the tools in a forensic accountant’s arsenal are useful in tracking terrorist funds, the ability to identify conceivable terrorist threats is limited. To identify the future activities of terrorist groups, forensic accountants, and law enforcement agencies should cooperate with one another by mutually incorporating the analytical tools utilized by each. Agencies and government officials should become familiar with virtual currency like Bitcoins. Because of the anonymity and lack of regulatory oversight, virtual currency offers terrorist groups a useful means to finance illicit activities on an international scale. In the face of the challenge, new governmental entities may be needed to tie together all the financial forensics efforts of the different stake holder organizations so that information sharing is not compartmentalized.

RVACFES May 2017 Event Sold-Out!

On May 17th and 18th the Central Virginia ACFE Chapter and our partners, the Virginia State Police and the Association of Certified Fraud Examiners (ACFE) were joined by an over-flow crowd of audit and assurance professionals for the ACFE’s training course ‘Conducting Internal Investigations’. The sold-out May 2017 seminar was the ninth that our Chapter has hosted over the years with the Virginia State Police utilizing a distinguished list of certified ACFE instructor-practitioners.

Our internationally acclaimed instructor for the May seminar was Gerard Zack, CFE, CPA, CIA, CCEP. Gerry has provided fraud prevention and investigation, forensic accounting, and internal and external audit services for more than 30 years. He has worked with commercial businesses, not-for-profit organizations, and government agencies throughout North America and Europe. Prior to starting his own practice in 1990, Gerry was an audit manager with a large international public accounting firm. As founder and president of Zack, P.C., he has led numerous fraud investigations and designed customized fraud risk management programs for a diverse client base. Through Zack, P.C., he also provides outsourced internal audit services, compliance and ethics programs, enterprise risk management, fraud risk assessments, and internal control consulting services.

Gerry is a Certified Fraud Examiner (CFE) and Certified Public Accountant (CPA) and has focused most of his career on audit and fraud-related services. Gerry serves on the faculty of the Association of Certified Fraud Examiners (ACFE) and is the 2009 recipient of the ACFE’s James Baker Speaker of the Year Award. He is also a Certified Internal Auditor (CIA) and a Certified Compliance and Ethics Professional (CCEP).

Gerry is the author of Financial Statement Fraud: Strategies for Detection and Investigation (published 2013 by John Wiley & Sons), Fair Value Accounting Fraud: New Global Risks and Detection Techniques (2009 by John Wiley & Sons), and Fraud and Abuse in Nonprofit Organizations: A Guide to Prevention and Detection (2003 by John Wiley & Sons). He is also the author of numerous articles on fraud and teaches seminars on fraud prevention and detection for businesses, government agencies, and nonprofit organizations. He has provided customized internal staff training on specialized auditing issues, including fraud detection in audits, for more than 50 CPA firms.

Gerry is also the founder of the Nonprofit Resource Center, through which he provides antifraud training and consulting and online financial management tools specifically geared toward the unique internal control and financial management needs of nonprofit organizations. Gerry earned his M.B.A at Loyola University in Maryland and his B.S.B.A at Shippensburg University of Pennsylvania.

To some degree, organizations of every size, in every industry, and in every city, experience internal fraud. No entity is immune. Furthermore, any member of an organization can carry out fraud, whether it is committed by the newest customer service employee or by an experienced and highly respected member of upper management. The fundamental reason for this is that fraud is a human problem, not an accounting problem. As long as organizations are employing individuals to perform business functions, the risk of fraud exists.

While some organizations aggressively adopt strong zero tolerance anti-fraud policies, others simply view fraud as a cost of doing business. Despite varying views on the prevalence of, or susceptibility to, fraud within a given organization, all must be prepared to conduct a thorough internal investigation once fraud is suspected. Our ‘Conducting Internal Investigations’ event was structured around the process of investigating any suspected fraud from inception to final disposition and beyond.

What constitutes an act that warrants an examination can vary from one organization to another and from jurisdiction to jurisdiction. It is often resolved based on a definition of fraud adopted by an employer or by a government agency. There are numerous definitions of fraud, but a popular example comes from the joint ACFE-COSO publication, Fraud Risk Management Guide:

Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain.

However, many law enforcement agencies have developed their own definitions, which might be more appropriate for organizations operating in their jurisdictions. Consequently, fraud examiners should determine the appropriate legal definition in the jurisdiction in which the suspected offense was committed.

Fraud examination is a methodology for resolving fraud allegations from inception to disposition. More specifically, fraud examination involves:

–Assisting in the detection and prevention of fraud;
–Initiating the internal investigation;
–Obtaining evidence and taking statements;
–Writing reports;
–Testifying to findings.

A well run internal investigation can enhance a company’s overall well-being and can help detect the source of lost funds, identify responsible parties and recover losses. It can also provide a defense to legal charges by terminated or disgruntled employees. But perhaps, most importantly, an internal investigation can signal to every company employee that the company will not tolerate fraud.

Our two-day seminar agenda included Gerry’s in depth look at the following topics:

–Assessment of the risk of fraud within an organization and responding when it is identified;
–Detection and investigation of internal frauds with the use of data analytics;
–The collection of documents and electronic evidence needed during an investigation;
–The performance of effective information gathering and admission seeking interviews;
–The wide variety of legal and regulatory concerns related to internal investigations.

Gerry did his usual tremendous job in preparing the professionals in attendance to deal with every step in an internal fraud investigation, from receiving the initial allegation to testifying as a witness. The participants learned to lead an internal investigation with accuracy and confidence by gaining knowledge about topics such as the relevant legal aspects impacting internal investigations, the use of computers and analytics during the investigation, collecting and analyzing internal and external information, and interviewing witnesses and the writing of effective reports.

Analytics & Fraud Prevention

During our Chapter’s live training event last year, ‘Investigating on the Internet’, our speaker Liseli Pennings, pointed out that, according to the ACFE’s 2014 Report to the Nations on Occupational Fraud and Abuse, organizations that have proactive, internet oriented, data analytics in place have a 60 percent lower median loss because of fraud, roughly $100,000 lower per incident, than organizations that don’t use such technology. Further, the report went on, use of proactive data analytics cuts the median duration of a fraud in half, from 24 months to 12 months.

This is important news for CFE’s who are daily confronting more sophisticated frauds and criminals who are increasingly cyber based.  It means that integrating more mature forensic data analytics capabilities into a fraud prevention and compliance monitoring program can improve risk assessment, detect potential misconduct earlier, and enhance investigative field work. Moreover, forensic data analytics is a key component of effective fraud risk management as described in The Committee of Sponsoring Organizations of the Treadway Commission’s most recent Fraud Risk Management Guide, issued in 2016, particularly around the areas of fraud risk assessment, prevention, and detection.  It also means that, according to Pennings, fraud prevention and detection is an ideal big data-related organizational initiative. With the growing speed at which they generate data, specifically around their financial reporting and sales business processes, our larger CFE client organizations need ways to prioritize risks and better synthesize information using big data technologies, enhanced visualizations, and statistical approaches to supplement traditional rules-based investigative techniques supported by spreadsheet or database applications.

But with this analytics and fraud prevention integration opportunity comes a caution.  As always, before jumping into any specific technology or advanced analytics technique, it’s crucial to first ask the right risk or control-related questions to ensure the analytics will produce meaningful output for the business objective or risk being addressed. What business processes pose a high fraud risk? High-risk business processes include the sales (order-to-cash) cycle and payment (procure-to-pay) cycle, as well as payroll, accounting reserves, travel and entertainment, and inventory processes. What high-risk accounts within the business process could identify unusual account pairings, such as a debit to depreciation and an offsetting credit to a payable, or accounts with vague or open-ended “catch all” descriptions such as a “miscellaneous,” “administrate,” or blank account names?  Who recorded or authorized the transaction? Posting analysis or approver reports could help detect unauthorized postings or inappropriate segregation of duties by looking at the number of payments by name, minimum or maximum accounts, sum totals, or statistical outliers. When did transactions take place? Analyzing transaction activities over time could identify spikes or dips in activity such as before and after period ends or weekend, holiday, or off-hours activities. Where does the CFE see geographic risks, based on previous events, the economic climate, cyber threats, recent growth, or perceived corruption? Further segmentation can be achieved by business units within regions and by the accounting systems on which the data resides.

The benefits of implementing a forensic data analytics program must be weighed against challenges such as obtaining the right tools or professional expertise, combining data (both internal and external) across multiple systems, and the overall quality of the analytics output. To mitigate these challenges and build a successful program, the CFE should consider that the priority of the initial project matters. Because the first project often is used as a pilot for success, it’s important that the project address meaningful business or audit risks that are tangible and visible to client management. Further, this initial project should be reasonably attainable, with minimal dollar investment and actionable results. It’s best to select a first project that has big demand, has data that resides in easily accessible sources, with a compelling, measurable return on investment. Areas such as insider threat, anti-fraud, anti-corruption, or third-party relationships make for good initial projects.

In the health care insurance industry where I worked for many years, one of the key goals of forensic data analytics is to increase the detection rate of health care provider billing non-compliance, while reducing the risk of false positives. From a capabilities perspective, organizations need to embrace both structured and unstructured data sources that consider the use of data visualization, text mining, and statistical analysis tools. Since the CFE will usually be working as a member of a team, the team should demonstrate the first success story, then leverage and communicate that success model widely throughout the organization. Results should be validated before successes are communicated to the broader organization. For best results and sustainability of the program, the fraud prevention team should be a multidisciplinary one that includes IT, business users, and functional specialists, such as management scientists, who are involved in the design of the analytics associated with the day-to-day operations of the organization and hence related to the objectives of  the fraud prevention program. It helps to communicate across multiple departments to update key stakeholders on the program’s progress under a defined governance regime. The team shouldn’t just report noncompliance; it should seek to improve the business by providing actionable results.

The forensic data analytics functional specialists should not operate in a vacuum; every project needs one or more business champions who coordinate with IT and the business process owners. Keep the analytics simple and intuitive, don’t include too much information in one report so that it isn’t easy to understand. Finally, invest time in automation, not manual refreshes, to make the analytics process sustainable and repeatable. The best trends, patterns, or anomalies often come when multiple months of vendor, customer, or employee data are analyzed over time, not just in the aggregate. Also, keep in mind that enterprise-wide deployment takes time. While quick projects may take four to six weeks, integrating the entire program can easily take more than one or two years. Programs need to be refreshed as new risks and business activities change, and staff need updates to training, collaboration, and modern technologies.

Research findings by the ACFE and others are providing more and more evidence of the benefits of integrating advanced forensic data analytics techniques into fraud prevention and detection programs. By helping increase their client organization’s maturity in this area, CFE’s can assist in delivering a robust fraud prevention program that is highly focused on preventing and detecting fraud risks.

Zack is Back on Internal Investigations!

Our Chapter is looking forward with anticipation to our next two-day training event (May 17th and 18th) when we will again have Gerry Zack, one of the ACFE’s best speakers, presenting on the topic ‘Conducting Internal Investigations’.  Gerry was last with us several years ago, when he taught ‘Introduction to Fraud Examination’ to an overflow crowd; judging from the number of early registrations, it looks like this year’s event will be an attendance repeat!

One of the training event segments Gerry presented in detail last time dealt with related party transactions internal to the organization and some of the unique challenges they can pose for fraud examiners.  Such ethical lapses take the form of schemes where individuals who approve one or more transactions for their organizations also benefit personally from them.  Per the ACFE, the business processes most affected by such scenarios are the loan function, the sales function and corporate purchases.

Regarding loan schemes, the key risks fraud examiners should look for are:

— The provision of loans to senior management, other employees, or board members at below-market interest rates or under terms not available in the marketplace;
— Failure to disclose the related party nature of the loan;
— The client organization providing guarantees for private loans made by employees or board members.

In these scenarios, the favorable terms benefit the employee at the expense of the employing organization.  To identify undisclosed loans to senior management, board members, and employees, the CFE could search for related-party loans using data analysis to compare the names on all notes receivables and accounts receivables with employee names from payroll records and board member names from board minutes. If a match occurs, the CFE should assess whether the related-party transaction was appropriately authorized and disclosed in the accounting records and financial statements.  Examiners can also search for undisclosed related-party loans by examining the interest rate, due dates, and collateral terms for notes receivables.  Notes receivable containing zero or unusually low interest rates, or requiring no due dates or insufficient collateral, may indicate related-party transactions.  The CFE can also examine advances made to customers or others who owe money to her client organization. Organizations generally do not advance money to others who owe them money unless a related-party relationship exists.

Gerry’s presentation for related party sales pin-pointed red flags like employees:

— Selling products or services significantly below market price or providing beneficial sales terms that ordinarily would not be granted to arms-length customers.
— Inflating sales for bonuses or stock options using related parties to perpetrate the scheme. Either a sale really has not taken place because the goods were not shipped or there was an obligation to repurchase the goods sold so the sale was incomplete.
— Approving excessive sales allowances or returns as well as accounts receivable adjustments or write-offs for related parties.

To cover up the related-party transaction, employees may deny reviewers access to customers to impede them from acquiring evidence concerning the related-party relationship.  Where the CFE suspects related party sales, s/he should perform analytical procedures to compare price variations among customers to identify those who pay significantly below the average sales price. Examiners can also attempt to identify any customer who pays prices that differ from the approved price sheet. Customer contracts can be directly analyzed for unusual rights of return, obligations to repurchase goods sold, and unusual extended repayment terms. Analytical procedures to identify customers with excessive returns, sales allowances, account receivable adjustments, or write-off’s may also be performed. Any variances in these areas might indicate undisclosed related-party transactions. Gerry also point out that data analysis can be used to efficiently compare employee addresses, telephone numbers, tax identification numbers, and birthdays with customer addresses, telephone numbers, tax identification numbers, and company organization dates. When creating a shell company, many individuals use their own contact information for convenience and their own birth date as the organization date because it is easy to remember. Any matches could indicate a related-party association and should be investigated minutely.

For third party purchases schemes, some of the key red flags are:

— the company paying prices significantly above market for goods or services;
— the company receiving significantly below average quality goods or services that are purchased at market prices for high quality goods or services;
— the company never actually receiving the purchased goods or services.

CFE’s should consider comparing cost variations among vendors to identify those whose costs significantly exceed the average cost. For identified variances, examiners should discover why the cost variations occurred to assess whether a related-party relationship exists. Like the examination steps for customers, it’s important to compare the employee’s address, telephone number, tax identification number, and birth date to vendors’ information to see if a relationship exists. CFE’s can also assess the use of sales intermediaries for products they can purchase directly from the manufacturer at lower costs.

For the comprehensive review of all this information, Gerry stressed that the level and quality of client company documentation is critical.  In reviewing their client organization’s documentation, the CFE may find that the organization does not have in place any policies or procedures prohibiting related-party relationships or transactions without prior approval. The organization also may not provide training to employees around related-party relationships and transactions, or require employees even to certify whether they are involved in any conflicts of interest with the organization. CFE’s should recommend, as a component of the fraud prevention program, that their client organization maintain written policies and procedures defining the process for obtaining approval for related-party relationships and transactions.

Key risks exist if:

— Written related-party policy and procedures are nonexistent or insufficient;
— Employees are not required to certify regularly whether they have a conflict of interest;
— Related-party transactions are not approved in accordance with established organizational policies and procedures;
— Related-party transactions are approved with exceptions to organizational policies and procedures.

The CFE should review approved related-party policies and procedures documentation. If related-party policies or procedures don’t exist or if they don’t sufficiently mitigate the risk of unauthorized or inappropriate related-party relationships or transactions, the examiner should consult with senior management and the board, if necessary, to offer guidance on a pro-active basis toward the development of such policies and procedures as a key fraud prevention measure.  The CFE should also review conflict of interest statements. If an employee documents a conflict of interest in his or her statement, the examiner should assess whether the conflict of interest was appropriately authorized and whether the process recognizes and discloses conflicts of interest.

Third party transactions are but a single topic of many to be covered by Gerry in our May event.  If you are called upon by your employer to investigate instances of fraud, waste and abuse both within your parent company and within related business affiliates, this is a seminar for you.  A well run internal investigation can enhance an enterprise’s well-being and can help detect the source of lost funds, identify responsible parties and recover losses. It can also provide a defense to legal charges by terminated or disgruntled employees. But perhaps most importantly, an internal investigation will signal to other employees that the company will not tolerate fraud. This seminar will prepare you for every step of an internal investigation into potential fraud, from receiving the initial allegation to testifying as a witness. Learn to lead an internal investigation with accuracy and confidence by gaining knowledge about key topics, such as relevant legal aspects of internal investigations, using computers in an investigation, collecting and analyzing internal information, interviewing witnesses and writing reports.

There are only 70 training slots available and our seminars fill up fast!  If you are interested in this vital investigative topic, you can find the seminar agenda, venue information, speaker bio and registration information at http://rvacfes.com/events/conducting-internal-investigations/.

Cyber-security – Is There a Role for Fraud Examiners?

cybersecurityAt a cybersecurity fraud prevention conference, I attended recently in California one of the featured speakers addressed the difference between information security and cybersecurity and the complexity of assessing the fraud preparedness controls specifically directed against cyber fraud.  It seems the main difficulty is the lack of a standard to serve as the basis of a fraud examiner’s or auditor’s risk review. The National Institute of Standards and Technology’s (NIST) framework has become a de facto standard despite the fact that it’s more than a little light on specific details.  Though it’s not a standard, there really is nothing else at present against which to measure cybersecurity.  Moreover, the technology that must be the subject of a cybersecurity risk assessment is poorly understood and is mutating rapidly.  CFE’s, and everyone else in the assurance community, are hard pressed to keep up.

To my way of thinking, a good place to start in all this confusion is for the practicing fraud examiner to consider the fundamental difference between information security and cybersecurity, the differing nature of the threat itself.   There is simply a distinction between protecting information against misuse of all sorts (information security) and an attack by a government, a terrorist group, or a criminal enterprise that has immense resources of expertise, personnel and time, all directed at subverting one individual organization (cybersecurity).  You can protect your car with a lock and insurance but those are not the tools of choice if you see a gang of thieves armed with bricks approaching your car at a stoplight. This distinction is at the very core of assessing an organization’s preparations for addressing the risk of cyberattacks and for defending itself against them.

As is true in so many investigations, the cybersecurity element of the fraud risk assessment process begins with the objectives of the review, which leads immediately on to the questions one chooses to ask. If an auditor only wants to know “Are we secure against cyberattacks?” then the answer should be up on a billboard in letters fifty feet high: No organization should ever consider itself safe against cyber attackers. They are too powerful and pervasive for any complacency. If major television networks can be stricken, if the largest banks can be hit, if governments are not immune, then the CFE’s client organization is not secure either.  Still, all anti-fraud reviewers can ask subtle and meaningful questions of client management, specifically focused on the data and software at risk of an attack. A fraud risk assessment process specific to cybersecurity might delve into the internals of database management systems and system software, requiring the considerable skills of a CFE supported by one or more tech-savvy consultants s/he has engaged to form the assessment team. Or it might call for just asking simple questions and applying basic arithmetic.

If the fraud examiner’s concern is the theft of valuable information, the simple corrective is to make the data valueless, which is usually achieved through encryption. The CFE’s question might be, “Of all your data, what percentage is encrypted?” If the answer is 100 percent, the follow-up question is whether the data are always encrypted—at rest, in transit and in use. If it cannot be shown that all data are secured all of the time, the next step is to determine what is not protected and under what circumstances. The assessment finding would consist of a flat statement of the amount of unencrypted data susceptible to theft and a recitation of the potential value to an attacker in stealing each category of unprotected data. The readers of this blog know that data must be decrypted in order to be used and so would be quick to point out that “universal” encryption in use is, ultimately, a futile dream. There are vendors who, think otherwise, but let’s accept the fact that data will, at some time, be exposed within a computer’s memory. Is that a fault attributable to the data or to the memory and to the programs running in it? Experts say it’s the latter. In-memory attacks are fairly devious, but the solutions are not. Rebooting gets rid of them and antimalware programs that scan memory can find them. So a CFE can ask,” How often is each system rebooted?” and “Does your anti-malware software scan memory?

To the extent that software used for attacks is embedded in the programs themselves, the problem lies in a failure of malware protection or of change management. A CFE need not worry this point; according to my California presenter many auditors (and security professionals) have wrestled with this problem and not solved it either. All a CFE needs to ask is whether anyone would be able to know whether a program had been subverted. An audit of the change management process would often provide a bounty of findings, but would not answer the reviewer’s question. The solution lies in having a version of a program known to be free from flaws (such as newly released code) and an audit trail of

known changes. It’s probably beyond the talents of a typical CFE to generate a hash total using a program as data and then to apply the known changes in order to see if the version running in production matches a recalculated hash total. But it is not beyond the skills of IT expects the CFE can add to her team and for the in-house IM staff responsible keeping their employer’s programs safe. A CFE fraud risk reviewer need only find out if anyone is performing such a check. If not, the CFE can simply conclude and report to the client that no one knows for sure if the client’s programs have been penetrated or not.

Finally, a CFE might want to find out if the environment in which data are processed is even capable of being secured. Ancient software running on hardware or operating systems that have passed their end of life are probably not reliable in that regard. Here again, the CFE need only obtain lists and count. How many programs have not been maintained for, say, five years or more? Which operating systems that are no longer supported are still in use? How much equipment in the data center is more than 10 years old? All this is only a little arithmetic and common sense, not rocket science.

In conclusion, frauds associated with weakened or absent cybersecurity systems are not likely to become a less important feature of the corporate landscape over time. Instead, they are poised to become an increasingly important aspect of doing business for those who create automated applications and solutions, and for those who attempt to safeguard them on the front end and for those who investigate and prosecute crimes against them on the back end. While the ramifications of every cyber fraud prevention decision are broad and diverse, a few basic good practices can be defined which the CFE, the fraud expert, can help any client management implement:

  • Know your fraud risk and what it should be;
  • Be educated in management science and computer technology. Ensure that your education includes basic fraud prevention techniques and associated prevention controls;
  • Know your existing cyber fraud prevention decision model, including the shortcomings of those aspects of the model in current use and develop a schedule to address them;
  • Know your frauds. Understand the common fraud scenarios targeting your industry so that you can act swiftly when confronted with one of them.

We can conclude that the issues involving cybersecurity are many and complex but that CFE’s are equipped  to bring much needed, fraud related experience to any management’s table as part of the team in confronting them.

Dr. Fraudster & the Billing Anomaly Continuum

healthcare-fraudThis month’s member’s lecture on Medicare and Medicaid Fraud triggered a couple of Chapter member requests for more specifics about how health care fraud detection analytics work in actual practice.

It’s a truism within the specialty of data analytics having to do with health care billing data that the harder you work on the front end, the more successful you’ll be in materializing information that will generate productive results on the back end.  Indeed, in the output of health care analytics applications, fraud examiners and health care auditors now have a new set of increasingly powerful tools to use in the audit and investigation of all types of fraud generally and of health care fraud specifically; I’m referring, of course, to analytically supported analysis of what’s called the billing anomaly continuum.

The use of the anomaly continuum in the general investigative process starts with the initial process of detection, proceeds to investigation and mitigation and then (depending on the severity of the case) can lead to the follow-on phases of prevention, response and recovery.   We’ll only discuss the first three phases here as most relevant for the fraud examination process and leave the prevention, response and recovery phases for a later post.

Detection is the discovery of clues within the data.  The process involves taking individual data segments related to the whole health care process (from the initial provision of care by the health care provider all the way to the billing and payment for that care by the insurance provider) and blending them into one data source for seamless analysis.  Any anomalies in the data can then be noted.  The output is then evaluated for either response or for follow-up investigation.  It is these identified anomalies that will go on at the end of the present investigative process to feed the detection database for future analysis.

As an example of an actual Medicare case, let’s say we have a health care provider whom we’ll call Dr. Fraudster, some of whose billing data reveals a higher than average percentage of complicated (and costly) patient visits. It also seems that Dr. Fraudster apparently generated some of this billings while travelling outside the country.  There were also referred patient visits to chiropractors, acupuncturists, massage therapists, nutritionists and personal trainers at a local gym whose services were also billed under Dr. Fraudster’s tax ID number as well as under standard MD Current Procedural Terminology (CPT) visit codes.  In addition, a Dr. Outlander, a staff physician, and an unlicensed doctor, was on Dr. Fraudster’s staff and billed for $5 an hour.  Besides Outlander, a Dr. Absent was noted as billing out of Dr. Fraudster’s clinic even though he was no longer associated with the clinic.

First off, in the initial detection phase, its seems Dr. Fraudster’s high-volume activity flagged an edit function that tracks an above-average practice growth rate without the addition of new staff on the claim form.  Another anomalous activity picked up was the appearance of wellness services presented as illness based services.  Also the billed provision of services while travelling is also certainly anomalous.

The following investigation phase involves ascertaining whether various activities or statements are true.  In Dr. Fraudster’s case, evidence to collect regarding his on-staff associate, Dr. Outlander, may include confirmation of license status, if any; educational training, clinic marketing materials and payroll records.  The high percentage of complicated visits and the foreign travel issues need to be broken down and each activity analyzed separately in full detail.  If Dr. Fraudster truly has a high complication patient population, most likely these patients would be receiving some type of prescription regime.  The lack of a diagnosis requirement with associated prescriptions in this case limited the scope of the real-life investigation.  Was Dr. Fraudster prescribing medications with no basis?  If he uses an unlicensed Doctor on his staff, presents wellness services as illness related services, and sees himself (perhaps) as a caring doctor getting reluctant insurance companies to pay for alternative health treatments, what other alternative treatment might he be providing with prescribed medications?  Also, Dr. Fraudster had to know that the bills submitted during his foreign travels were false.  Statistical analysis in addition to clinical analysis of the medical records by actual provider and travel records would provide a strong argument that the doctor had intent to misrepresent his claims.

The mitigation phase typically builds on issues noted within the detection and investigation phases.  Mitigation is the process of reducing or making a certain set of circumstances less severe.  In the case of Dr. Fraudster, mitigation occurred in the form of prosecution.  Dr. Fraudster was convicted of false claims and removed from the Medicare network as a licensed physician, thereby preventing further harm and loss.  Other applicable issues that came forward at trial were evidence of substandard care and medical unbelievability patterns (CPE codes billed that made no sense except to inflate the billing).  What made this case even more complicated was tracking down Dr. Fraudster’s assets.  Ultimately, the real-life Dr. Fraudster did receive a criminal conviction; civil lawsuits were initiated, and he ultimately lost his license.

From an analytics point of view, mitigation does not stop at the point of conviction of the perpetrator.  The findings regarding all individual anomalies identified in the case should be followed up with adjustment of the insurance company’s administrative adjudication and edit procedures (Medicare was the third party claims payer in this case).  What this means is that feedback from every fraud case should be fed back into the analytics system.  Incorporating the patterns of Dr. Fraudster’s fraud into the Medicare Fraud Prevention Model will help to prevent or minimize future similar occurrences, help find currently on-going similar schemes elsewhere with other providers and reduce the time it takes to discover these other schemes.  A complete mitigation process also feeds detection by reducing the amount of investigative time required to make the existence of a fraud known.

As practicing fraud examiners, we are provided by the ACFE with an examination methodology quite powerful in its ability to extend and support all three phases of the health care fraud anomaly identification process presented above.  There are essentially three tools available to the fraud examiner in every health care fraud examination, all of which can significantly extend the value of the overall analytics based health care fraud investigative process.  The first is interviewing – the process of obtaining relevant information about the matter from those with knowledge of it.  The second is supporting documents – the examiner is skilled at examining financial statements, books and records.   The examiner also knows the legal ramifications of the evidence and how to maintain the chain of custody over documents.  The third is observation – the examiner is often placed in a position where s/he can observe behavior, search for displays of wealth and, in some instances, even observe specific offenses.

Dovetailing the work of the fraud examiner with that of the healthcare analytics team is a win for both parties to any healthcare fraud investigation and represents a considerable strengthening of the entire long term healthcare fraud mitigation process.

Mining the General Ledger

miningI was chatting via Skype over this last week-end with a former officer of our Chapter who left the Richmond area many years ago to found his own highly successful forensic accounting practice on the west coast.  During our conversation, he remarked that he never fails to intensively indoctrinate trainees new to his organization in an understanding of the primary importance of the general ledger in any investigation of financial fraud.  With a good sense of those areas of the financial statements most vulnerable to fraud, and with whatever clues the investigative team has gleaned from an initial set of interviews focusing on those accounting entries initially arousing suspicion, he tells his trainees that they’re ready to turn their attention to a place with the potential to provide a cornucopia of useful information. That place is the client firm’s own accounting system general ledger.

My old colleague pointed out that for a fraud examiner or forensic accountant on the search for fraud, there are several great things about the general ledger. One is that virtually all sophisticated financial reporting systems have one. Another is that, as the primary accounting tool of the company, it reflects every transaction the company has entered.

He went on to say that unless the fraud has been perpetrated simply through last-minute topside adjustments, it’s captured in the general ledger somewhere. What’s vital is knowing how, and where, to look. The important thing to keep in mind is the way the ACFE tells us that financial fraud starts and grows. That guidance says that ledger entries entered at particular points of time — say, the final days leading up to the end of a quarter — are more likely to reflect falsified information than entries made at earlier points. Beyond that, a fraudulent general ledger entry in the closing days of a quarter may reflect unusual characteristics. For example, the amounts involved say, having been determined, as they were, by the need to cross a certain numerical threshold rather than by a legitimate business transaction may by their very nature look a bit strange.  Perhaps they’re larger than might be expected or rounded off. It also may be that unusual corporate personnel were involved—executives who would not normally be involved in general ledger entries. Or, if the manipulating executives are not thinking far enough ahead, the documentation behind the journal entries themselves may not be complete or free from suspicion. For example, a non-routine, unusually large ledger entry with rounded numbers that was atypically made at the direction of a senior executive two days before the end of a quarter should arouse some suspicion.

Indeed, once a suspicious general ledger entry has been identified, determining its legitimacy can be fairly straightforward. Sometimes it might involve simply a conversation with the employee who physically made the entry.  My colleague went on to point out that, in his experience, senior executives seeking to perpetrate financial fraud often suffer from a significant handicap: they don’t know how to make entries to the accounting system. To see that a fraudulent entry is made, they have to ask some employee sitting at a computer screen somewhere to do it for them, someone who, if properly trained, may want to fully understand the support for a non-routine transaction coming from an unusual source. Of course, if the employee’s boss simply orders him or her to make the entry, resistance may be awkward. But, if suspicions are aroused, the direction to enter the entry may stick in the employee’s memory, giving the employee the ability to later describe in convincing detail exactly how the ledger entry came to be made. Or, concerned about the implications and the appearance of his own complicity, the employee may include with the journal entry an explanation that captures his skepticism. The senior executive directing the entry may be oblivious to all this. S/he thinks she has successfully adjusted the general ledger to create the needed earnings. Little does she know that within the ledger entry the data-entering employee has embedded incriminating evidence for the forensic accountants to find.

The general ledger may reflect as well large transactions that simply by their nature are suspicious. The investigators may want to ask the executive responsible about such a transaction’s business purpose, the underlying terms, the timing, and the nature of the negotiations. Transaction documentation might be compared to the general ledger’s entry to make sure that nothing was left out or changed. If feasible, the forensic accountants may even want to reach out to the entry’s counter-party to explore whether there are any unrecorded terms in side letters or otherwise undisclosed aspects of the transaction.

As we all know, an investigation will not ordinarily stop with clues gleaned from the general ledger. For example, frequently a useful step is to assess the extent to which a company has accounted for significant or suspicious transactions in accordance with their underlying terms. Such scrutiny may include a search for undisclosed terms, such as those that may be included in side letters or pursuant to oral agreements. In searching for such things, the investigators will seek to cast a wide net and may try to coax helpful information from knowledgeable company personnel outside the accounting function. As our former Central Virginia Chapter officer put it, “I like to talk to the guys on the loading dock. They’ll tell you anything.”

As I’m sure most readers of this blog are aware, while such forensic accounting techniques, and there are many others, can be undertaken independently of what employee interviews turn up, usually the two will go hand in hand. For example, an interview of one employee might yield suspicions about a particular journal entry, which is then dug out of the accounting system and itself investigated. Or an automated search of the general ledger may yield evidence of a suspicious transaction, resulting in additional interviews of employees. Before long, the investigative trail may look like a roadmap of Washington DC. Clues are discovered, cross-checked against other information, and explored further. Employees are examined on entries and, as additional information surfaces, examined again. As the investigation progresses, shapes start to appear in the fog. Patterns emerge. And those executives not being completely candid look increasingly suspicious.

So, with thanks to our good friend for sharing, in summary, if there is predication of a fraud, what sorts of things might a thorough forensic examination of the general ledger reveal?

–The journal entries that the company recorded to implement the fraud;

–The dates on which the company recorded fraudulent transactions;

–The sources for the amounts recorded (e.g., an automated sub-accounting system, such as purchasing or treasury, versus a manually prepared journal entry);

–The company employee responsible for entering the journal entries into the accounting system;

–Adjusting journal entries that may have been recorded.