Tag Archives: anti-fraud policy

Cloud Shapes

Just as clouds can take different shapes and be perceived differently, so too is cloud computing perceived differently by our various types of client companies. To some, the cloud looks like web-based applications, a revival of the old thin client. To others, the cloud looks like utility computing, a grid that charges metered rates for processing time. To some, the cloud could be parallel computing, designed to scale complex processes for improved efficiency. Interestingly, cloud services are wildly different. Amazon’s Elastic Compute Cloud offers full Linux machines with root access and the opportunity to run whatever apps the user chooses. Google’s App Engine will also let users run any program they want, as long as the user specifies it in a limited version of Python and uses Google’s database.

The National Institute of Standards and Technology (NIST) defines cloud computing as a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. It is also important to remember what our ACFE tells us, that the Internet itself is in fact a primitive transport cloud. Users place something on the path with an expectation that it will get to the proper destination, in a reasonable time, with all parties respecting the privacy and security of the artifact.

Cloud computing, as everyone now knows, brings many advantages to users and vendors. One of its biggest advantages is that a user may no longer have to be tethered to a traditional computer to use an application, or have to buy a version of an application that is specifically configured for a phone, a tablet or other device. Today, any device that can access the Internet can run a cloud-based application. Application services are available independent of the user’s home or office devices and network interfaces. Regardless of the device being used, users also face fewer maintenance issues. End users don’t have to worry about storage capacity, compatibility or other similar concerns.

From a fraud prevention perspective, these benefits are the result of the distributed nature of the web, which necessitates a clear separation between application and interaction logic. This is because application logic and user data reside mostly on the web cloud and manifest themselves in the form of tangible user interfaces at the point of interaction, e.g., within a web browser or mobile web client. Cloud computing is also beneficial for our client’s vendors. Businesses frequently find themselves using the vast majority of their computing capacity in a small percentage of time, leaving expensive equipment often idle. Cloud computing can act as a utility grid for vendors and optimize the use of their resources. Consider, for example, a web-based application running in Amazon’s cloud. Suppose there is a sudden surge in visitors as a result of media coverage, for example. Formerly, many web applications would fail under the load of big traffic spikes. But in the cloud, assuming that the web application has been designed intelligently, additional machine instances can be launched on demand.

With all the benefits, there are related constraints. Distrust is one of the main constraints on online environments generally. particularly in terms of consumer fraud, waste and abuse protection. Although the elements that contribute to building trust can be identified in broad terms, there are still many uncertainties in defining and establishing trust in online environments. Why should users trust cloud environments to store their personal information and to share their privacy in such a large and segregated environment? This question can be answered only by investigating these uncertainties in the context of risk assessment and by exploring the relationship between trust and the way in which the risk is perceived by stakeholders. Users are assumed to be willing to disclose personal information and have that information used subsequently to store their personal data or to create consumer profiles for business use when they perceive that fair procedures are in place to protect their individual privacy.

The changing trust paradigm represented by cloud computing means that less information is stored locally on our client’s machines and is instead being hosted elsewhere on earth. No one for the most part buys software anymore; users just rent it or receive it for free using the Software as a Service (SaaS) business model. On the personal front, cloud computing means Google is storing user’s mail, Instagram their photographs, and Dropbox their documents, not to mention what mobile phones are automatically uploading to the cloud for them. In the corporate world, enterprise customers not only are using Dropbox but also have outsourced primary business functions that would have previously been handled inside the company to SaaS providers such as Salesforce.com, Zoho.com, and Box.com.

From a crime and security perspective, the aggregation of all these data, exabytes and exabytes of it, means that user’s most personal of information is no longer likely stored solely on their local hard drives but now aggregated on computer servers around the world. By aggregating important user data, financial and otherwise, on cloud-based computer servers, the cloud has obviated the need for criminals to target everybody’s hard drive individually and instead put all the jewels in a single place for criminals and hackers to target (think Willie Sutton).

The cloud is here to stay, and at this point there is no going back. But with this move to store all available data in the cloud come additional risks. Thinking of some of the largest hacks to date, Target, Heartland Payment Systems, TJX, and Sony PlayStation Network; all of these thefts of hundreds of millions of accounts were made possible because the data were stored in the same virtual location. The cloud is equally convenient for individuals, businesses, and criminals.

The virtualization and storage of all of these data is a highly complex process and raises a wide array of security, public policy, and legal issues for all CFEs and for our clients. First, during an investigation, where exactly is this magical cloud storing my defrauded client’s data? Most users have no idea when they check their status on Facebook or upload a photograph to Pinterest where in the real world this information is actually being stored. That they do not even stop to pose the question is a testament to the great convenience, and opacity, of the system. Yet from a corporate governance and fraud prevention risk perspective, whether your client’s data are stored on a computer server in America, Russia, China, or Iceland makes a difference.

ACFE guidance emphasizes that the corporate and individual perimeters that used to protect information internally are disappearing, and the beginning and end of corporate user computer networks are becoming far less well defined. It’s making it much harder for examiners and auditors to see what data are coming and going from a company, and the task is nearly impossible on the personal front. The transition to the cloud is a game changer for anti-fraud security because it completely redefines where data are stored, moved, and accessed, creating sweeping new opportunities for criminal hackers. Moreover, the non-local storage of data raises important questions about deep dependence on cloud-based information systems. When these services go down or become unavailable i.e., a denial of service attack, or the Internet connection is lost, the data become unavailable, and your client for our CFE services is out of business.

All the major cloud service providers are routinely remotely targeted by criminal attacks, including Dropbox, Google, and Microsoft, and more such attacks occur daily. Although it may be your client’s cloud service provider that is targeted in such attack, the client is the victim, and the data taken is theirs’s. Of course, the rights reserved to the providers in their terms of service agreements (and signed by users) usually mean that provider companies bear little or no liability when data breaches occur. These attacks threaten intellectual property, customer data, and even sensitive government information.

To establish trust with end users in the cloud environment, all organizations should address these fraud related risks. They also need to align their users’ perceptions with their policies. Efforts should be made to develop a standardized approach to trust and risk assessment across different domains to reduce the burden on users who seek to better understand and compare policies and practices across cloud provider organizations. This standardized approach will also aid organizations that engage in contractual sharing of consumer information, making it easier to assess risks across organizations and monitor practices for compliance with contracts. policies and law.

During the fraud risk assessment process, CFEs need to advise their individual corporate clients to mandate a given cloud based activity in which they participate to be conducted fairly and to address their privacy concerns. By ensuring this fairness and respecting privacy, organizations give their customers the confidence to disclose personal information on the cloud and to allow that information subsequently to be used to create consumer profiles for business use. Thus, organizations that understand the roles of trust and risk should be advised to continuously monitor user perceptions to understand their relation to risk aversion and risk management. Managers should not rely solely on technical control measures. Security researchers have tended to focus on the hard issues of cryptography and system design. By contrast. issues revolving around the use of computers by lay users and the creation of active incentives to avoid fraud have been relatively neglected. Many ACFE lead studies have shown that human errors are the main cause of information security incidents.

Piecemeal approaches to control security issues related to cloud environments fail simply because they are usually driven by a haphazard occurrence; reaction to the most recent incident or the most recently publicized threat. In other words, managing information security in cloud environments requires collaboration among experts from different disciplines, including computer scientists. engineers. economists, lawyers and anti-fraud assurance professionals like CFE’s, to forge common approaches.

The Human Financial Statement

A finance professor of mine in graduate school at the University of Richmond was fond of saying, in relation to financial statement fraud, that as staff competence goes down, the risk of fraud goes up. What she meant by that was that the best operated, most flawless control ever put in place can be tested and tested and tested again and score perfectly every time. But its still no match for the employee who doesn’t know, or perhaps doesn’t even care, how to operate that control; or for the manager who doesn’t read the output correctly, or for the executive who hides part of a report and changes the numbers in the rest. That’s why CFEs and the members of any fraud risk assessment team (especially our client managers who actually own the process and its results), should always take a careful look at the human component of risk; the real-world actions, and lack thereof, taken by real-life employees in addressing the day-to-day duties of their jobs.

ACFE training emphasizes that client management must evaluate whether it has implemented anti-fraud controls that adequately address the risk that a material misstatement in the financial statements will not be prevented or detected timely and then focus on fixing or developing controls to fill any gaps. The guidance offers several specific suggestions for conducting top-down, risk-based anti-fraud focused evaluations, and many of them require the active participation of staff drawn from all over the assessed enterprise. The ACFE documentation also recommends that management consider whether a control is manual or automated, its complexity, the risk of management override, and the judgment required to operate it. Moreover, it suggests that management consider the competence of the personnel who perform the control or monitor its performance.

That’s because the real risk of financial statement misstatements lies not in a company’s processes or the controls around them, but in the people behind the processes and controls who make the organization’s control environment such a dynamic, challenging piece of the corporate puzzle. Reports and papers that analyze fraud and misstatement risk use words like “mistakes” and “improprieties.” Automated controls don’t do anything “improper.” Properly programmed record-keeping and data management processes don’t make “mistakes.” People make mistakes, and people commit improprieties. Of course, human error has always been and will always be part of the fraud examiner’s universe, and an SEC-encouraged, top-down, risk-based assessment of a company’s control environment, with a view toward targeting the control processes that pose the greatest misstatement risk, falls nicely within most CFE’s existing operational ambit. The elevated role for CFEs, whether on staff or in independent private practice, in optionally conducting fraud risk evaluations offers our profession yet another chance to show its value.

Focusing on the human element of misstatement fraud risk is one important way our client companies can make significant progress in identifying their true financial statement and other fraud exposures. It also represents an opportunity for management to identify the weak links that could ultimately result in a misstatement, as well as for CFEs to make management’s evaluation process a much simpler task. I can remember reading many articles in the trade press these last years in which commentators have opined that dramatic corporate meltdowns like Wells Fargo are still happening today, under today’s increased regulatory strictures, because the controls involved in those frauds weren’t the problem, the people were. That is certainly true. Hence, smart risk assessors are integrating the performance information they come across in their risk assessments on soft controls into management’s more quantitative, control-related evaluation data to paint a far more vivid picture of what the risks look like. Often the risks will wear actual human faces. The biggest single factor in calculating restatement risk as a result of a fraud relates to the complexity of the control(s) in question and the amount of human judgment involved. The more complex a control, the more likely it is to require complicated input data and to involve highly technical calculations that make it difficult to determine from system output alone whether something is wrong with the process itself. Having more human judgment in the mix gives rise to greater apparent risk.

A computer will do exactly what you tell it to over and over; a human may not, but that’s what makes humans special, special and risky. In the case of controls, especially fraud prevention related controls, our human uniqueness can manifest as simple afternoon sleepiness or family financial troubles that prove too distracting to put aside during the workday. So many things can result in a mistaken judgment, and simple mistakes in judgment can be extremely material to the final financial statements.

CFEs, of course, aren’t in the business of grading client employees or of even commenting to them about their performance but whether the fraud risk assessment in question is related to financial report integrity or to any other issue, CFEs in making such assessments at management’s request need to consider the experience, training, quality, and capabilities of the people performing the most critical controls.

You can have a well-designed control, but if the person in charge doesn’t know, or care, what to do, that control won’t operate. And whether such a lack of ability, or of concern, is at play is a judgment call that assessing CFEs shouldn’t be afraid to make. A negative characterization of an employee’s capability doesn’t mean that employee is a bad worker, of course. It may simply mean he or she is new to the job, or it may reveal training problems in that employee’s department. CFEs proactively involved in fraud risk assessment need to keep in mind that, in some instances, competence may be so low that it results in greater risk. Both the complexity of a control and the judgment required to operate it are important. The ability to interweave notions of good and bad judgment into the fabric of a company’s overall fraud risk comes from CFEs experience doing exactly that on fraud examinations. A critical employee’s intangibles like conscientiousness, commitment, ethics and morals, and honesty, all come into play and either contribute to a stronger fraud control environment or cause it to deteriorate. CFEs need to be able, while acting as professional risk assessors, to challenge to management the quality, integrity, and motivation of employees at all levels of the organization.

Many companies conduct fraud-specific tests as a component of the fraud prevention program, and many of the most common forms of fraud can be detected by basic controls already in place. Indeed, fraud is a common concern throughout all routine audits, as opposed to the conduct of separate fraud-only audits. It can be argued that every internal control is a fraud deterrent control. But fraud still exists.

What CFEs have to offer to the risk assessment of financial statement and other frauds is their overall proficiency in fraud detection and the reality that they are well-versed in, and cognizant of, the risk of fraud in every given business process of the company; they are, therefore, well positioned to apply their best professional judgment to the assessment of the degree of risk of financial statement misstatement that fraud represents in any given client enterprise.

The Client Requested Recommendation

We fraud examiners must be very circumspect about drawing conclusions. But who among us has not found him or herself in a discussion with a corporate counsel who wants a recommendation from us about how best to prevent the occurrence of a fraud in the future?  In most situations, the conclusions from a well conducted examination should be self-evident and should not need to be pointed out in the report. If the conclusions are not obvious, the report might need to be clarified. Our job as fraud examiners is to obtain sufficient relevant and reliable evidence to determine the facts with a reasonable degree of forensic certainty. Assuming facts without obtaining sufficient relevant and reliable evidence is generally inappropriate.

Opinions regarding technical matters, however, are permitted if the fraud examiner is qualified as an expert in the matter being considered (many fraud examiners are certified not only as CFE’s but also as CPA’s, CIA’s or CISA’s).  For example, a permissible expert opinion, and accompanying client requested recommendation, might address the relative adequacy of an entity’s internal controls. Another opinion (and accompanying follow-on recommendation) might discuss whether financial transactions conform to generally accepted accounting principles. So, recommended remedial measures to prevent future occurrences of similar frauds are also essentially opinions, but are acceptable in fraud examination reports.

Given that examiners should always be cautious in complying with client examination related requests for recommendations regarding future fraud prevention, there is no question that such well-considered recommendations can greatly strengthen any client’s fraud prevention program.  But requested recommendations can also become a point of contention with management, as they may suggest additional procedures for staff or offend members of management if not presented sensitively and correctly. Therefore, examiners should take care to consider ways of follow-on communication with the various effected stakeholders as to how their recommendations will help fix gaps in fraud prevention and mitigate fraud risks.  Management and the stakeholders themselves will have to evaluate whether the CFE’s recommendations being provided are worth the investment of time and resources required to implement them (cost vs. benefit).

Broadly, an examination recommendation (where included in the final report or not) is either a suggestion to fix an unacceptable scenario or a suggestion for improvement regarding a business process.  At management’s request, fraud examination reports can provide recommendations to fix unacceptable fraud vulnerabilities because they are easy to identify and are less likely to be disputed by the business process owner. However, recommendations to fix gaps in a process only take the process to where it is expected to be and not where it ideally could be. The value of the fraud examiner’s solicited recommendation can lie not only in providing solutions to existing vulnerability issues but in instigating thought-provoking discussions.  Recommendations also can include suggestions that can move the process, or the department being examined to the next level of anti-fraud efficiency.  When recommendations aimed at future prevention improvements are included, examination reports can become an additional tool in shaping the strategic fraud prevention direction of the client being examined.

An examiner can shape requested recommendations for fraud prevention improvement using sources both inside and outside the client organization. Internal sources of recommendations require a tactful approach as process owners may not be inclined to share unbiased opinions with a contracted CFE, but here, corporate counsel can often smooth the way with a well-timed request for cooperation. External sources include research libraries maintained by the ACFE, AICPA and other professional organizations.

It’s a good practice, if you expect to receive a request for improvement recommendations from management, to jot down fraud prevention recommendation ideas as soon as they come to mind, even though they may or may not find a place in the final report. Even if examination testing does not result in a specific finding, the CFE may still recommend improvements to the general fraud prevention process.

If requested, the examiner should spend sufficient time brainstorming potential recommendations and choosing their wording carefully to ensure their audience has complete understanding. Client requested recommendations should be written simply and should:

–Address the root cause if a control deficiency is the basis of the fraud vulnerability;
–Address the business process rather than a specific person;
–Include bullets or numbering if describing a process fraud vulnerability that has several steps;
–Include more than one way of resolving an issue identified in the observation, if possible. For example, sometimes a short-term manual control is suggested as an immediate fix in addition to a recommended automated control that will involve considerable time to implement;
–Position the most important observation or fraud risk first and the rest in descending order of risk;
–Indicate a suggested priority of implementation based on the risk and the ease of implementation;
–Explain how the recommendation will mitigate the fraud risk or vulnerability in question;
–List any recommendations separately that do not link directly to an examination finding but seek to improve anti-fraud processes, policies, or systems.

The ACFE warns that recommendations, even if originally requested by client management, will go nowhere if they turn out to be unvalued by that management. Therefore, the process of obtaining management feedback on proposed anti-fraud recommendations is critical to make them practical. Ultimately, process owners may agree with a recommendation, agree with part of the recommendation, and agree in principle, but technological or personnel resource constraints won’t allow them to implement it.  They also may choose to revisit the recommendation at a future date as the risk is not imminent or disagree with the recommendation because of varying perceptions of risk or mitigating controls.

It’s my experience that management in the public sector can be averse to recommendations because of public exposure of their reports. Therefore, CFEs should clearly state in their reports if their recommendations do not correspond to any examination findings but are simply suggested improvements. More proposed fraud prevention recommendations do not necessarily mean there are more faults with the process, and this should be communicated clearly to the process owners.

Management responses should be added to the recommendations with identified action items and implementation timelines whenever possible. Whatever management’s response, a recommendation should not be changed if the response tends to dilute the examiner’s objectivity and independence and becomes representative of management’s opinions and concerns. It is the examiner’s prerogative to provide recommendations that the client has requested, regardless of whether management agrees with them. Persuasive and open-minded discussions with the appropriate levels of client management are important to achieving agreeable and implementable requested fraud prevention recommendations.

The journey from a client request for a fraud prevention recommendation to a final recommendation (whether included in the examination report or not) is complex and can be influenced by every stakeholder and constraint in the examination process, be it the overall posture of the organization toward change in general, its philosophy regarding fraud prevention, the scope of the individual fraud examination itself, views  of the effected business process owner, experience and exposure of the examination staff, or available technology. However, CFEs understand that every thought may add value to the client’s fraud prevention program and deserves consideration by the examination team. The questions at the end of every examination should be, did this examination align with the organization’s anti-fraud strategy and direction? How does our examination compare with the quality of practice as seen elsewhere? And finally, to what degree have the fraud prevention recommendations we were asked to make added value?

Cyberfraud & Data Breaches – May 2018 Training Event

On May 16th and 17th, our Chapter, supported by our partners, national ACFE and the Virginia State Police, will present our sixteenth Spring training event, this time on the subject of CYBERFRAUD AND DATA BREACHES.  Our presenter will be CARY E. MOORE, CFE, CISSP, MBA; ACFE Presenter Board member and internationally renowned author and authority on every aspect of cybercrime.  CLICK HERE  to see an outline of the training, the agenda and Cary’s bio.  If you decide to do so, you may REGISTER HERE.  Attendees will receive 16 CPE credits, and a printed manual of over 300 pages detailing every subject covered in the training.  In addition, as a door prize, we will be awarding, by drawing, a printed copy of the 2017 Fraud Examiners Manual, a $200 value!

As the relentless wave of cyberattacks continues, all our client organizations are under intense pressure from key stakeholders and regulators to implement and enhance their anti-fraud programs to protect customers, employees and the valuable information in their possession. According to research from IBM Security and the Ponemon Institute, the average total cost per company, per event of a data breach is US $3.62 million. Initial damage estimates of a single breach, while often staggering, may not consider less obvious and often undetectable threats such as theft of intellectual property, espionage, destruction of data, attacks on core operations or attempts to disable critical infrastructure. These knock-on effects can last for years and have devastating financial, operational and brand ramifications.

Given the broad regulatory pressures to tighten anti-fraud cyber security controls and the visibility surrounding cyber risk, a number of proposed regulations focused on improving cyber security risk management programs have been introduced in the United States over the past few years by various governing bodies of which CFEs need to be aware. One of the more prominent is a regulation issued by the New York Department of Financial Services (NYDFS) that prescribes certain minimum cyber security standards for those entities regulated by the NYDFS. Based on the entity’s risk assessment, the NYDFS law has specific requirements around data encryption, protection and retention, third party information security, application security, incident response and breach. notification, board reporting, and annual certifications.

However, organizations continue to struggle to report on the overall effectiveness of their cyber security risk management and anti-fraud programs. The American Institute of Certified Public Accountants (AICPA) has released a cyber security risk management reporting framework intended to help organizations expand cyber risk reporting to a broad range of internal and external users, including the C-suite and the board of directors (BoD). The AICPA’s reporting framework is designed to address the need for greater stakeholder transparency by providing in-depth, easily consumable information about an organization’s cyber risk management  program. The cyber security risk management examination uses an independent, objective reporting approach and employs broader and more flexible criteria. For example, it allows for the selection and utilization of any control framework considered suitable and available in establishing the entity’s cyber security objectives and developing and maintaining controls within the entity’s cyber security risk management program, whether it is the US National Institute of Standards and Technology (NIST)’s Cybersecurity Framework, the International Organization for Standardization (ISO)’s ISO 27001/2 and related frameworks, or internally developed frameworks based on a combination of sources. The examination is voluntary, and applies to all types of entities, but should be considered a leading practice that provides the C-suite, boards and other key stakeholders clear insight into an organization’s cyber security program and identifies gaps or pitfalls that leave organizations vulnerable.

Cyber security risk management examination reports are vital to the fraud control program of any organization doing business on-line.  Such reports help an organization’s BoD establish appropriate oversight of a company’s cyber security risk program and credibly communicate its effectiveness to stakeholders, including investors, analysts, customers, business partners and regulators. By leveraging this information, boards can challenge management’s assertions around the effectiveness of their cyber risk management programs and drive more effective decision making. Active involvement and oversight from the BoD can help ensure that an organization is paying adequate attention to cyber risk management. The board can help shape expectations for reporting on cyber threats and fraud attempts while also advocating for greater transparency and assurance around the effectiveness of the program.

Organizations that choose to utilize the AICPA’s cyber security attestation reporting framework and perform an examination of their cyber security program may be better positioned to gain competitive advantage and enhance their brand in the marketplace. For example, an outsource retail service provider (OSP) that can provide evidence that a well-developed and sound cyber security risk management program is in place in its organization can proactively provide the report to current and potential customers, evidencing that it has implemented appropriate controls to protect the sensitive IT assets and valuable data over which it maintains access. At the same time, current and potential retailor customers of an OSP want the third parties with whom they engage to also place a high level of importance on cyber security. Requiring a cyber security examination report as part of the selection criteria would offer transparency into  outsourcers’ cyber security programs and could be a determining factor in the selection process.

The value of addressing cyber security related fraud concerns and questions by CFEs before regulatory mandates are established or a crisis occurs is quite clear. The knowledgeable CFE can help our client organizations view the new cyber security attestation reporting frameworks as an opportunity to enhance their existing cyber security and anti-fraud programs and gain competitive advantage. The attestation reporting frameworks address the needs of a variety of key stakeholder groups and, in turn, limit the communication and compliance burden. CFE client organizations that view the cyber security reporting landscape as an opportunity can use it to lead, navigate and disrupt in today’s rapidly evolving cyber risk environment.

Please decide to join us for our May Training Event on this vital and timely topic!  YOU MAY REGISTER 0N-LINE HERE.  You can pay with PayPal (you don’t need a PayPal account; you can use any credit card) or just print an invoice and submit your payment by snail mail!

Bribery & Deferred Prosecution

Between January and February 2015, a prominent trade organization focusing on American attorneys conducted a survey of 243 Chief Legal Officers of global companies to assess the corporate counsel’s opinion regarding the greatest threats to their organization’s growth. Respondents were asked to rank their top three concerns. Not surprisingly, economic uncertainty was at the top of the list with 57% of the respondents ranking it in their top three. The unexpected finding was that 53% of the respondents named regulatory compliance and enforcement as a top concern as well.

When asked to specify which laws caused them the most concern 28% identified the Foreign Corrupt Practices Act and 15% identified the UK Bribery Act. This means 43% of the respondents named anti-bribery laws as one of their top three concerns, more than any other law or regulation identified. When asked about the resources spent on regulatory compliance and enforcement, the response was also surprising as only 38% of the corporate counsel who identified regulatory compliance and enforcement as a threat, are expending resources to address the threat. As a follow up to the 2015 survey, the same organization conducted a second survey in early 2017 to gain further insight into corporate counsels’ ability to address regulatory and compliance threats. This time 256 respondents were surveyed, 62% of whom stated that their organization is designing or building some type of robust internal compliance program. Although this is movement in the right direction, over a third of the organizations surveyed still may not be prepared to detect or deter bribery and corruption. Most significantly, they will not be prepared to meet government expectations if a violation occurs and self-reporting is required. Lastly, 54% of the respondents stated that they are building or expanding their in-house systems to address this threat. Many believe that compliance technology is the appropriate answer as regulators prefer technical solutions to these problems, because they are viewed to be sophisticated and ‘state of the art’.

This research should be of special interest to all CFEs because we work so frequently with corporate counsels, but indeed, to assurance professionals in general who like fraud examiners are on the front line in the fight against corruption.

The Foreign Corrupt Practices Act (FCPA) was enacted in 1977 but aggressive enforcement did not really pick up until around 2005 when there were twelve enforcement actions.  The purpose of the FCPA was to prevent the bribery of foreign government officials when negotiating overseas contracts. The FCPA imposes heavy fines and penalties for both organizations and individuals. The two major provisions address: 1) bribery violations and 2) improper books and records and/or having inadequate internal controls. Methods of enforcement and interpretation of the law in the US have continued to evolve over the years.

The FCPA created questions of definition and interpretation, i.e., Who is a “foreign official?” What is the difference between a “facilitation” payment and a bribe? Who is considered a third party? How does the government define adequate internal controls to detect and deter bribery and corruption?

The enactment of the United Kingdom (UK) Bribery Act in July 2010 was the first attempt at an anti-bribery law to address some of these issues. The UK Bribery Act introduced the concept of adequate procedures, that if followed could allow affirmative defense for an organization if investigated for bribery. The UK Bribery Act recommended several internal controls for combating bribery and introduced the incentive of a more favorable result for those who could document compliance. These controls include:

• Established anti-bribery procedures
• Top level commitment to prevent bribery
• Periodic and documented risk assessments
• Proportionate due diligence
• Communication of bribery prevention policies and procedures
• Monitoring of anti-bribery procedures

The concept of an affirmative defense for adequate procedures creates quite a contrast to FCPA which only offers affirmative defense for payments of bona fide expenses or small gifts within the legal limits of the foreign countries involved.

The UK Bribery Act equated all facilitation and influence payments to bribery. Finally, the UK Bribery Act dealt with the problem of defining a foreign official by making it illegal to bribe anyone regardless of government affiliation. Several countries such as Russia, Canada and Brazil have enacted or updated their anti-bribery regulations to parallel the guidelines presented in the UK Bribery Act. The key to the effectiveness of all these acts remains enforcement.

In November 2012 the US Department of Justice and the Securities Exchange Commission released “A Resource Guide to the Foreign Corrupt Practices Act.” The guide book introduced several hallmarks of an effective compliance program. The Resource Guide provided companies with the tools to demonstrate a proactive approach to deter bribery and corruption. Companies in compliance may receive some consideration during the fines and penalty stage.

The guide’s hallmarks include:

• Establish a code of conduct that specifically addresses the risk of bribery and corruption.
• Set the tone by designating a Chief Compliance Officer to oversee all anti-bribery and corruption activities.
• Training all employees to be thoroughly prepared to address bribery and corruption risk.
• Perform risk assessments of potential bribery and corruption pitfalls by geography and industry.
• Review the anti-corruption program annually to assess the effectiveness of policies procedures and controls.
• Perform audits and monitor foreign business operations to assure compliance with the code of conduct.
• Ensure that proper legal contractual terms exist within agreements with third parties that address compliance with anti-bribery and corruption laws and regulations.
• Investigate and respond appropriately to all allegations of bribery and corruption.
• Take proper disciplinary action for violations of anti-bribery and corruption laws and regulations.
• Perform adequate due diligence that addresses the risk of bribery and corruption of all third parties prior to entering a business relationship.

The SEC and DOJ entered into the first ever Non-Prosecution Agreement (NPA) for Foreign Corrupt Practices violations in 2013. This decision was a harbinger from the DOJ and SEC with regard to future enforcement actions. The NPA highlighted the “extensive remedial measurements and cooperation efforts” that the defendant company demonstrated during the investigation. The corporation paid only $882,000 in fines because they were able to “demonstrate a strong tone from the top and a robust anti-corruption program”.

Under a Deferred Prosecution Agreement (DPA) the DOJ files a court document charging the organization while simultaneously requesting that prosecution be deferred to allow the company to demonstrate good conduct going forward. The DPA is an agreement by the organization to: cooperate with the government, accept the factual findings of the investigation, and admit culpability if so warranted. Additionally, companies may be directed to participate in compliance and remediation efforts, e.g., a court-appointed monitor.

If the company completes the term of the DPA, the DOJ will dismiss the charges without imposing fines and penalties. Under the Non-Prosecution Agreement, the DOJ maintains the right to file charges against the organization later should the organization fail to comply. The NPA is not filed with the courts but is maintained by both the DOJ and the company and is posted on the DOJ website. Like the DPA, the organization agrees to monetary penalties, ongoing cooperation, admission to relevant facts, as well as compliance and remediation of policies, procedures and controls. If the company complies with the agreement, the DOJ will drop all charges.

The key differences between a deferred prosecution case and one not featuring deferred prosecution is the initial response of the defendant company to the discovery of improper payments. In a deferred prosecution case the response usually features prompt self-reporting, full cooperation with the government and the quality of the serious remedial steps taken, including termination of implicated personnel and the modification of company behavior in the country where the violations occurred. Additionally, deferred prosecution defendants frequently discover the improper payments while in the process of enhancing their anti-bribery and corruption controls.

Originally allegations of FCPA violations were received through a company’s internal whistleblower hotline. That trend changed with the enactment of the Sarbanes Oxley Act in 2002 and the Dodd-Frank Act in 2012. These laws created other means and mechanisms for reporting suspicions of illegal activity and provided protections from retaliation against whistleblowers. The Dodd-Frank Act also has monetary incentives of 10% to 30% of the amounts recovered by the government to encourage whistleblowers to come forward. Companies considering whether to disclose potential anti-corruption problems to the SEC must now consider the possibility that a potential whistleblower may report it first to the government thus creating greater liability for the organization.

In conclusion, according to recent reporting by the ACFE, corporate compliance programs continue to mature, and are now accepted as a cost of conducting business in a global marketplace. The US government continues to clarify its expectations about corporate responsibility at home and abroad and works with international partners and their compliance programs. Increased cooperation between the public and private sectors to address these issues will assist in leveling the playing field in the global marketplace. Non-government and civil society organizations, i.e. World Bank and Transparency International play a key role in this effort. These organizations set standards, apply pressure on foreign governments to enact stricter anti-bribery and corruption laws, and enforce those laws. Coordination and cooperation among government, business and civil entities like the ACFE, reduce the incidences of bribery and corruption and increase opportunities for companies to compete fairly and ethically in the global marketplace.

Basic Cash Concealment Strategies

One of the topics in which readers of this blog have expressed consistent interest over the years regards the many strategies of cash asset concealment employed by fraudsters; especially by embezzlers of relatively small sums from employers, who seem particularly creative at such manipulations.  Regardless of the method used to hide ill-gotten assets, one fact remains constant; proceeds from illicit activities must be disguised in some way to avoid being discovered. Those the ACFE dubs ‘asset hiders’ have developed many sophisticated techniques for working the system and accomplishing the goal of concealing their gains; in attempting to track down and recover secret stores of cash, the fraud examiner is presented with a true challenge, and the first step in meeting this challenge is to understand how asset hiders work. This post will concentrate on the concealment of raw cash.

There are three primary ways to hide cash assets. They are:

— Currency hoards;
— Cashier’s checks and traveler’s checks;
— Deposits to financial institutions.

The most basic method for hiding cash is the currency hoard, in which a person simply stores cash in a hidden location, usually in his or her home or on her property. This is the proverbial ‘cash under the mattress’ technique. In a typical home, hiding places for currency or other valuables can range from the obvious to the ingenious.

For example, precious metals and jewelry can easily be hidden in a layer of cooking grease at the bottom of a pot. The space beneath the bottom drawer of bureaus, chests, and cabinets is also a commonly used hiding place. Loose bricks in the wall or fireplace can disguise small spaces for hiding things. A more complex scheme is to build a false ceiling below the original ceiling and then use the space between the two as a hiding place.

Another place to hoard currency is in furniture. The hollow spaces of upholstered furniture make these pieces a good hiding place. Many people find false bottoms in drawers or inside stereo speakers useful places for hiding cash.

The basic structure of the home itself provides many opportunities for creating hiding places. One of the most common spots for hiding objects is in the walls. Cunning hiders may construct false walls in closets or pantries, or they may build large cavities into a wall, which is then covered with a mirror or a painting. Installing false light switch plates and electrical outlets provides easy access to spaces between walls and generally appear quite normal, although amateurs often leave tell-tale marks on the plate screws. These marks often provide searchers with signs of tampering and can lead to the discovery of a cache. An even simpler method is to hide currency inside the electrical boxes behind real electrical plates. If a larger space is needed, hiders sometimes remove the box from the wall and build a shelf below it. Significant amounts of currency can be hidden in these spaces. Currency hoards can also be hidden above ceiling light boxes in the space below the attic.

The plumbing system provides other natural hiding places. For example, many bathrooms have access holes under the sink, which are usually covered with a removable chrome disk. These access holes are designed so a cleaning ‘snake’ can be inserted into the main drain when the lines are clogged. This space is easily utilized as a hiding space. Floor drains are also used for hiding currency. Excellent hiding places can be created by installing false pipes that appear to be part of the home’s plumbing. Some individuals hide objects and money in shower curtain rods. Other places frequently used for hiding are air ducts, doors, and stairways. Heating and cooling system ducts are generally easy to access and have plenty of empty space. Hollow core doors are easily rigged for hiding. The top surface of the door can simply be cut away, allowing access to the natural secret compartment inside. Enclosed staircases have dead space underneath that is accessible. If the staircase is not enclosed, there may be usable space for small objects behind each of the risers. Stairs can be hinged, creating a hidden compartment underneath.

Cashier’s and traveler’s checks are another method used to hide assets. These instruments are useful for several reasons:

–They allow asset hiders to easily disguise their financial dealings from asset seekers like law enforcement, CFEs and forensic accountants;
–They help disguise the asset hider’s financial dealings and reduce the amount of currency physically carried;
–Cashier’s checks or traveler’s checks in denominations of less than $10,000 are negotiable financial instruments that can be exchanged almost any place in the world.

Whilst efforts to control the use of wire transfers for money laundering have traditionally been focused on banks, examiners also need to be aware that there are non-bank money transmitters that fraudsters often use to conceal cash assets.  These non-bank transmitters specialize in money transfers for individuals rather than businesses. In addition to other services, most non-bank transmitters sell money orders and traveler’s checks. These companies range from large international enterprises like Western Union to small mom-and-pop neighborhood check cashing businesses.

There are several reasons fraudsters like using non-bank transmitters. First, non-bank transmitters allow individuals to cash personal checks or wire money to family members nationally or in other countries. Check cashing companies and other sellers of money orders, such as convenience stores and grocery stores, provide a much-needed service to people without bank accounts. Second, non-bank transmitters allow individuals to obtain many individual traveler’s checks and money orders in amounts less than $10,000 each. Most states regulate check cashing and the sale of money orders with licensing and bonding requirements. The Money Laundering Suppression Act of 1994 required all money transmitters to register with the U.S. Department of Treasury. Furthermore, like other financial institutions, these businesses are required to file currency transaction reports (CTRs) for transactions of $10,000 or more in currency and coins, and they are required to file Suspicious Activity Reports (SARs) with the Treasury Department for certain classes of suspect transactions.

Check cashing companies have been known to receive illegally earned or stolen currency and use it to cash legitimate checks for their customers, thus avoiding CTRs or to structure transmittals by issuing multiple traveler’s checks and money orders for less than $10,000 each. Third, the transactions of non-bank transmitters will not trigger a mechanism for identifying unreported cash. Although money transmitters are classified as financial institutions, they are not depository institutions but operate through accounts with commercial banks. And, unlike bank accounts, which contain copies of deposits and canceled checks used in locating assets, non-bank money transmitters do not maintain copies of deposits and canceled checks. Unless the money order or traveler’s check appears in the financial records of the asset hider, it will likely go undetected since there is no place for the investigator to begin a search. However, once a money order or traveler’s check has been specifically identified, it can be traced back like any other financial instrument.

Banks and other financial institutions are frequently utilized by secrecy seekers as vehicles for hiding or disguising currency. The methods used may be as simple as renting a safe-deposit box and storing currency or valuables inside.  Searching the safe-deposit box of a suspected embezzler for evidence is not easily accomplished. It requires a court order. But; even if access to the box is denied, the investigator in a hidden asset case can often make educated guesses as to the contents by observing the movements of the hider. For instance, if the subject makes a visit to her safe-deposit box after attending an antique jewelry collector’s exposition, the examiner could surmise a collection of jewelry items is stored therein. Trips made to a safe-deposit box before foreign travel may indicate that the hider is moving money from his or her native country to a foreign location.

The banking system is, without question, the most important vehicle of both lawful and unlawful financial transactions. While most bankers are not active participants in asset hiding, it can be extremely difficult to distinguish between legitimate transactions and those conducted by secrecy seekers. Some bankers even prefer to close their eyes to the sources of their deposits and, in doing so, knowingly accept tainted funds. It’s important to understand how secrecy seekers use bank deposits and funds transfers to hide assets.  For the examiner, it’s important to know that most large banks have computer programs that can retrieve a specific wire transfer record. Many medium-sized banks cannot electronically retrieve specific wire data more than a month old, and some banks would have to search manually for records. However, even small banks usually send their international money transfers through one of the large Money Center banks, thus creating a record. Many large banks have enhanced their record-keeping systems to assure themselves and bank regulators that they are in full compliance with the Bank Secrecy Act. Some institutions have systems that monitor the wire transfer activity of certain accounts and generate periodic reports highlighting the consolidation of incoming wires followed by an outgoing wire transfer. Most of these systems are designed to monitor only customer accounts and do not record funds transfer services provided for non-depositors for which the bank serves only as an intermediary.

To conduct a successful wire transfer search, the examiner should have as much information as possible relating to the transfer in question when contacting the appropriate entity. Having the following information on hand will help make the search much more efficient:

— Date of transfer
— Amount of transfer
— Names of sending and receiving institutions
— Routing numbers of sending and receiving institutions
— Identity of sender and designated receiver
— Input sequence and/or output sequence

While most banks do not actively participate in fraudulent transfers, some signs for the examiner that could indicate collusion between a bank and its customer are:
— Allowing clients whose funds are not of foreign origin to make investments limited to foreigners;
— Acting without power of attorney to allow clients to manage investments or to transmit funds
on behalf of foreign-registered companies or local companies acting as laundries;
— Participating in sequential transactions that fall under the government reporting thresholds;
–Allowing telephone transfers of funds without written authorization and failing to keep a record of such transfers;
— Entering false foreign account number designations with regard to wire transfers.

People, People & People

Our Chapter’s Vice-President Rumbi Petrolozzi’s comment in her last blog post to the effect that one of the most challenging tasks for the forensic accountant or auditor working proactively is defining the most effective and efficient scope of work for a risk-based assurance project. Because resources are always scarce, assurance professionals need to make sure they can meet both quality and scheduling requirements whilst staying within our fixed resource and cost constraints.

An essential step in defining the scope of a project is identifying the critical risks to review and the controls required to manage those risks. An efficient scope focuses on the subset of controls (i.e., the key controls) necessary to provide assurance. Performing tests of controls that are not critical is not efficient. Similarly, failing to test controls that could be the source of major fraud vulnerabilities leads to an ineffective audit.  As Rumbi points out, and too often overlooked, the root cause of most risk and control failures is people. After all, outstanding people are required to make an organization successful, and failing to hire, retain, and train a competent team of employees inevitably leads to business failure.

In an interview, a few decades ago, one of America’s most famous business leaders was asked what his greatest challenges were in turning one of his new companies around from failure to success. He is said to have responded that his three greatest challenges were “people, people, and people.” Certainly, when assurance professionals or management analyze the reasons for data breaches and control failures, people are generally found to be the root cause. For example, weaknesses may include (echoing Rumbi):

Insufficiently trained personnel to perform the work. A common material weakness in compliance with internal control over financial reporting requirements is a lack of experienced financial reporting personnel within a company. In more traditional anti-fraud process reviews, examiners often find that control weaknesses arise because individuals don’t understand the tasks they have to perform.

Insufficient numbers to perform the work. When CPAs find that important reconciliations are not performed timely, inventories are not counted, a backlog in transaction processing exists, or agreed-upon corrective actions to address prior audit findings aren’t completed, managers frequently offer the excuse that their area is understaffed.

Poor management and leadership. Fraud examiners find again and again, that micromanagers and dictators can destroy a solid finance function. At the other end of the spectrum, the absence of leadership, motivation, and communication can cause whole teams to flounder. Both situations generally lead to a failure to perform key controls consistently. For example, poor managers have difficulty retaining experienced professionals to perform account reconciliations on time and with acceptable levels of quality leading directly to an enhanced level of vulnerability to numerous fraud scenarios.

Ineffective human resource practices. In some cases, management may choose to accept a certain level of inefficiency and retain individuals who are not performing up to par. For instance, in an example cited by one of our ACFE training event speakers last year, the financial analysis group of a U.S. manufacturing company was failing to provide management with timely business information. Although the department was sufficiently staffed, the team members were ineffective. Still, management did not have the resolve to terminate poor performers, for fear it would not be possible to hire quality analysts to replace the people who were terminated.

In such examples, people-related weaknesses result in business process key control failures often leading to the facilitation of subsequent frauds. The key control failure was the symptom, and the people-related weakness was the root cause. As a result, the achievement of the business objective of fraud prevention is rendered at risk.

Consider a fraud examiner’s proactive assessment of an organization’s procurement function. If the examiner finds that all key controls are designed adequately and operating effectively, in compliance with company policy, and targeted cost savings are being generated, should s/he conclude the controls are adequate? What if that department has a staff attrition rate of 25 percent and morale is low? Does that change the fraud vulnerability assessment? Clearly, even if the standard set of controls were in place, the function would not be performing at optimal levels.  Just as people problems can lead to risk and control failures, exceptional people can help a company achieve success. In fact, an effective system of internal control considers the adequacy of controls not only to address the risks related to poor people-related management but also to recognize reduction in fraud vulnerability due to excellence in people-related management.

The people issue should be addressed in at least two phases of the assurance professional’s review process: planning and issue analysis (i.e., understanding weaknesses, their root cause, and the appropriate corrective actions).  In the planning phase, the examiner should consider how people-related anti-fraud controls might impact the review and which controls should be included in the scope. The following questions might be considered in relation to anti-fraud controls over staffing, organization, training, management and leadership, performance appraisals, and employee development:

–How significant would a failure of people-related controls be to the achievement of objectives and the management of business risk covered by the examination?
–How critical is excellence in people management to the achievement of operational excellence related to the objectives of the review?

Issue analysis requires a different approach. Reviewers may have to ask the question “why” three or more times before they get to the root cause of a problem. Consider the following little post-fraud dialogue (we’ve all heard variations) …

CFE: “Why weren’t the reconciliations completed on time?”
MANAGER. “Because we were busy closing the books and one staff member was on vacation.”
CFE: “You are still expected to complete the reconciliations, which are critical to closing the books. Even with one person on vacation, why were you too busy?”
MANAGER: “We just don’t have enough people to get everything done, even when we work through weekends and until late at night.”
CFE: “Why don’t you have enough people?”
MANAGER: “Management won’t let me hire anybody else because of cost constraints.”
CFE: “Why won’t management let you hire anybody? Don’t they realize the issue?”
MANAGER: “Well, I think they do, but I have been so busy that I may not have done an effective job of explaining the situation. Now that you are going to write this up as a control weakness, maybe they will.”

The root cause of the problem in this scenario is that the manager responsible for reconciliations failed to provide effective leadership. She did not communicate the problem and ensure she had sufficient resources to perform the work assigned. The root cause is a people problem, and the reviewer should address that directly in his or her final report. If the CFE only reports that the reconciliations weren’t completed on time, senior management might only press the manager to perform better without understanding the post-fraud need for both performance improvement and additional staff.

In many organizations, it’s difficult for a reviewer to discuss people issues with management, even when these issues can be seen to directly and clearly contribute to fraud vulnerably. Assurance professionals may find it tricky, for political reasons to recommend the hiring of additional staff or to explain that the existing staff members do not have the experience or training necessary to perform their assigned tasks. Additionally, we are likely to run into political resistance when reporting management and leadership failure. But, that’s the job assurance professionals are expected to perform; to provide an honest, objective assessment of the condition of critical anti-fraud controls including those related to people.  If the scope of our work does not consider people risks, or if reviewers are unable to report people-related weaknesses, we are not adding the value we should. We’re also failing to report on matters critical to the maintenance and extension of the client’s anti-fraud program.

The Anti-Fraud Blockchain

Blockchain technology, the series of interlocking algorithms powering digital currencies like BitCoin, is emerging as a potent fraud prevention tool.  As every CFE knows, technology is enabling new forms of money and contracting, and the growing digital economy holds great promise to provide a full range of new financial tools, especially to the world’s poor and unbanked. These emerging virtual currencies and financial techniques are often anonymous, and none have received quite as much press as Bitcoin, the decentralized peer-to-peer digital form of money.

Bitcoins were invented in 2009 by a mysterious person (or group of people) using the alias Satoshi Nakamoto, and the coins are created or “mined” by solving increasingly difficult mathematical equations, requiring extensive computing power. The system is designed to ensure no more than twenty-one million Bitcoins are ever generated, thereby preventing a central authority from flooding the market with new Bitcoins. Most people purchase Bitcoins on third-party exchanges with traditional currencies, such as dollars or euros, or with credit cards. The exchange rates against the dollar for Bitcoin fluctuate wildly and have ranged from fifty cents per coin around the time of its introduction to over $16,0000 in December 2017. People can send Bitcoins, or percentages of bitcoin, to each other using computers or mobile apps, where coins are stored in digital wallets. Bitcoins can be directly exchanged between users anywhere in the world using unique alphanumeric identifiers, akin to e-mail addresses, and there are no transaction fees in the basic system, absent intermediaries.

Anytime a purchase takes place, it is recorded in a public ledger known as the “blockchain,” which ensures no duplicate transactions are permitted. Crypto currencies are called such because they use cryptography to regulate the creation and transfer of money, rather than relying on central authorities. Bitcoin acceptance continues to grow rapidly, and it is possible to use Bitcoins to buy cupcakes in San Francisco, cocktails in Manhattan, and a Subway sandwich in Allentown.

Because Bitcoin can be spent online without the need for a bank account and no ID is required to buy and sell the crypto currency, it provides a convenient system for anonymous, or more precisely pseudonymous, transactions, where a user’s true name is hidden. Though Bitcoin, like all forms of money, can be used for both legal and illegal purposes, its encryption techniques and relative anonymity make it strongly attractive to fraudsters and criminals of all kinds. Because funds are not stored in a central location, accounts cannot readily be seized or frozen by police, and tracing the transactions recorded in the blockchain is significantly more complex than serving a subpoena on a local bank operating within traditionally regulated financial networks. As a result, nearly all the so-called Dark Web’s illicit commerce is facilitated through alternative currency systems. People do not send paper checks or use credit cards in their own names to buy meth and pornography. Rather, they turn to anonymous digital and virtual forms of money such as Bitcoin.

A blockchain is, essentially, a way of moving information between parties over the Internet and storing that information and its transaction history on a disparate network of computers. Bitcoin, and all the other digital currencies, operates on a blockchain: as transactions are aggregated into blocks, each block is assigned a unique cryptographic signature called a “hash.” Once the validating cryptographic puzzle for the latest block has been solved by a coin mining computer, three things happen: the result is timestamped, the new block is linked irrevocably to the blocks before and after it by its unique hash, and the block and its hash are posted to all the other computers that were attempting to solve the puzzle involved in the mining process for new coins. This decentralized network of computers is the repository of the immutable ledger of bitcoin transactions.  If you wanted to steal a bitcoin, you’d have to rewrite the coin’s entire history on the blockchain in broad daylight.

While bitcoin and other digital currencies operate on a blockchain, they are not the blockchain itself. It’s an insight of many computer scientists that in addition to exchanging digital money, the blockchain can be used to facilitate transactions of other kinds of digitized data, such as property registrations, birth certificates, medical records, and bills of lading. Because the blockchain is decentralized and its ledger immutable, all these types of transactions would be protected from hacking; and because the blockchain is a peer-to-peer system that lets people and businesses interact directly with each other, it is inherently more efficient and  cheaper than current systems that are burdened with middlemen such as lawyers and regulators.

A CFE’s client company that aims to reduce drug counterfeiting could have its CFE investigator use the blockchain to follow pharmaceuticals from provenance to purchase. Another could use it to do something similar with high-end sneakers. Yet another, a medical marijuana producer, could create a blockchain that registers everything that has happened to a cannabis product, from seed to sale, letting consumers, retailers and government regulators know where everything came from and where it went. The same thing can be done with any normal crop so, in the same way that a consumer would want to know where the corn on her table came from, or the apple that she had at lunch originated, all stake holders involved in the medical marijuana enterprise would know where any batch of product originated and who touched it all along the way.

While a blockchain is not a full-on solution to fraud or hacking, its decentralized infrastructure ensures that there are no “honeypots” of data available, like financial or medical records on isolated company servers, for criminals to exploit. Still, touting a bitcoin-derived technology as an answer to cybercrime may seem a stretch considering the high-profile, and lucrative, thefts of cryptocurrency over the past few years. Its estimated that as of March 2015, a full third of  all Bitcoin exchanges, (where people store their bitcoin), up to then had been hacked, and nearly half had closed. There was, most famously, the 2014 pilferage of Mt. Gox, a Japanese based digital coin exchange, in which 850,000 bitcoins worth $460,000,000 disappeared. Two years later another exchange, Bitfinex, was hacked and around $60 million in bitcoin was taken; the company’s solution was to spread the loss to all its customers, including those whose accounts had not been drained.

Unlike money kept in a bank, cryptocurrencies are uninsured and unregulated. That is one of the consequences of a monetary system that exists, intentionally, beyond government control or oversight. It may be small consolation to those who were affected by these thefts that the bitcoin network itself and the blockchain has never been breached, which perhaps proves the immunity of the blockchain to hacking.

This security of the blockchain itself demonstrates how smart contracts can be written and stored on it. These are covenants, written in code, that specify the terms of an agreement. They are smart because as soon as its terms are met, the contract executes automatically, without human intervention. Once triggered, it can’t be amended, tampered with, or impeded. This is programmable money. Such smart contracts are a tool with the potential to change how business in done. The concept, as with digital currencies, is based on computers synced together. Now imagine that rather than syncing a transaction, software is synced. Every machine in the network runs the same small program. It could be something simple, like a loan: A sends B some money, and B’s account automatically pays it back, with interest, a few days later. All parties agree to these terms, and it’s locked in using the smart contract. The parties have achieved programmable money!

There is no doubt that smart contracts and the blockchain itself will augment the trend toward automation, though it is automation through lines of code, not robotics. For businesses looking to cut costs and reduce fraud, this is one of the main attractions of blockchain technology. The challenge is that, if contracts are automated, what will happen to traditional firm control structures, processes, and intermediaries like lawyers and accountants? And what about managers? Their roles would all radically change. Most blockchain advocates imagine them changing so radically as to disappear altogether, taking with them many of the costs currently associated with doing business. According to a recent report in the trade press, the blockchain could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading, and regulatory compliance by $15-20 billion per annum by 2022.  Whereas most technologies tend to automate workers on the periphery, blockchain automates away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.

Whether blockchain technology will be a revolution for good or one that continues what has come to seem technology’s inexorable, crushing ascendance will be determined not only by where it is deployed, but how. The blockchain could be used by NGOs to eliminate corruption in the distribution of foreign aid by enabling funds to move directly from giver to receiver. It is also a way for banks to operate without external oversight, encouraging other kinds of corruption. Either way, we as CFEs would be wise to remember that technology is never neutral. It is always endowed with the values of its creators. In the case of the blockchain and crypto-currency, those values are libertarian and mechanistic; trust resides in algorithmic rules, while the rules of the state and other regulatory bodies are often viewed with suspicion and hostility.

With a Little Help

by Rumbi Petrozzello, CPA/CFF, CFE
2018 Vice-President – Central Virginia Chapter ACFE

In November, my husband and I headed out to our usual spot, on Fourth Avenue in Brooklyn, to cheer for those running the New York marathon. A marathon, for those who don’t know, is 26.2 miles long. People who complete marathons get nothing but respect from me – success in marathoning only comes with a lot of dedication and training. Many people spend at least six months following a training plan that is not just about building distance. For instance, when learning (and it is learning) how to complete 26.2 miles of running (or walking for that matter) people must learn how to remain fueled and hydrated while running. This training also then applies to making lifestyle adjustments such as changing one’s diet and sleeping habits. Years ago, when I was training for the New York Marathon, friends knew to not call after 10PM because I was going to bed early to get enough sleep before early morning runs. I tried not to go out on Friday nights, because I went on my long runs on Saturday mornings and wanted to be energized for them. I spent a lot of time and energy doing research, talking to friends who were seasoned runners and even took running classes to improve my performance and chances of success during the race. Despite the very popular tag line “Just Do It”, a lot of work goes into even getting to that point.

The past few months, I have been doing quite a bit of work that involves assessing the controls that companies have over their systems to detect, deter and prevent fraud and error. Going in, the time energy and money that companies have put into all of this is impressive. They will have an audit committee, an internal audit function and a lot of documentation around what their systems are. There will be volumes of documentation on procedures and protocols and, at the very least, on paper, things look fantastic. However, when we start talking to employees about what their reality is, things often are very different. Some of the issues we found included:

• Staff who did not quite understand what some technical terms meant and, so ignored the parts they didn’t understand. We spoke with people who were very happy to perform and review controls, but they didn’t know how best to do that, and no one was telling them the how;

• Some staff did not understand why they were being asked to change things and, believing that what they had been doing for years constituted a good system, stuck with that;

• In some cases, it wasn’t clear just who was responsible for ownership of a process and that meant, often, that nothing ended up getting done;

• In other instances, staff were given such vague instructions that they resorted to making it up as they went along.

Having the rules is completely useless if your people don’t know what do with them and, just as importantly, why they’re doing what they’ve been asked to do in the first place. What is vital in all of this, is the proper training. As CFEs and Forensic Accountants, we are perfectly positioned to work with clients to ensure that controls and systems go beyond theory. So it’s vitally important for success to constantly work with clients to strengthen systems and controls. This can be done by recommending that our corporate clients:

• Provide training to employees. This training must include the identification of control owners and then the process of working directly with them to ensure that they understand what their roles are and specifically why they need to follow the steps being asked of them. Sometimes, when a control owner is given a requested role, they are told to “review” something. Review can mean anything and often what some people consider to be a review is insufficient for complete understanding. For instance, an employee may think that merely saying they checked something is sufficient. Or that having a verbal conversation is enough proof of review. Be sure to recommend to clients that they let employees know that there should be written evidence of a mandated review and to be equally sure to provide clear examples of what qualifies as evidence of that review.

• Review systems and controls to ensure that they address risks. A company may institute many systems and related procedures but, upon review, a CFE or forensic accountant may find inadequate segregation of duties. You may find that a supervisor is checking a team’s work, but no one is authorizing that supervisor’s. This becomes particularly risky if that supervisor has access to many aspects of the business. A CFE or forensic accountant, can review roles and duties to ensure that duties are sufficiently segregated.

• Training should be ongoing and updated for changes in the company as well as changes in technology and processes. At least once a year, employees should receive updated training and performance reviews. In this way, companies can also learn if there have been material changes that might lead to systems and processes having been adjusted in such a way as to create weakness and holes that could lead to future fraud or error.

It’s all well and good to have ads where famous people run, jump and play and tell you to “just do it”. I remember people rolling their eyes at me when I mentioned that I was dashing to running class – why do you have to learn how to run? Doesn’t everyone know how to do that? Yes, I could run, but with training, I ran a better marathon and lived to tell the tale (unlike the original guy). Yes, employees may know how to do the compliance and control work but as a CFE or forensic accountant, you can help a client company work with their employees to perform their work better, be aware of controls and be cognizant of risk and how to mitigate it. It’s so much better than just doing it.

Help for the Little Guy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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