Tag Archives: Engagement Planning

Skilled for Success

Our Chapter is periodically contacted by human resource staff and others seeking CFEs for recruitment to both in-house staff and management positions. I took the opportunity afforded by one such call this last week to query the caller about what her ideal CFE candidate would look like. What attributes came to mind when she pictured the experienced CFE she was seeking? Technical ability? Investigative knowledge? Attention to detail?

All of those were certainly important, she said, but since this position would supervise others and deal directly with clients, she mentioned what she called ‘success skills’ (sometimes termed soft skills) as of over-riding importance. I asked her what she meant by success skills specifically and she said that for her and for many other human resource professionals, the culture of the organization she is recruiting for and the professional’s interpersonal behaviors and critical reasoning and judgment can frequently heavily outweigh technical skills and relevant experience. After I referred her to several folks who had furnished our Chapter with resumes for just this kind of enquiry, my caller pointed me to several sources where I could obtain information on the types of skills to which she was referring.

My somewhat cursory research revealed that some of the most common success skills employers look for and which they use to assess experienced employment candidate CFEs today include:

1. A strong work ethic — are they motivated and dedicated to getting the job done, no matter what? Will they be conscientious and do their best work?
2. A positive attitude — are they optimistic and upbeat? Will they generate good energy and good will especially with subordinates and clients?
3. Good communication skills — are they verbally articulate and good listeners? Can they make their case and express their needs in a way that builds bridges with colleagues, clients and team members?
4. Time management abilities – does the CFE candidate know how to prioritize tasks and work on a number of different projects at once? Will they use their time on the job wisely?
5. Problem-solving skills — are they resourceful and able to creatively solve problems that will inevitably arise during challenging investigations? Will they take ownership of problems or leave them for someone else?
6. Being a team player — will they work well in groups and teams? Will they be cooperative and take a leadership role when appropriate?
7. Self-confidence — do they truly believe they can do the job? Will they project a sense of calm and inspire confidence in others during investigative assignments? Will they have the courage to ask the questions that need to be asked and to freely contribute their ideas?
8. Ability to accept and learn from criticism — will they be able to handle criticism? Are they coachable and open to learning and growing as a person and as a professional no matter their present experience and authority level?
9. Flexibility/adaptability — are they able to adapt to new situations and challenges? Will they embrace change and be open to innovative ideas and investigative approaches?
10. Working well under pressure — can they handle the stress that accompanies investigative and reporting deadlines and crises? Will they be able to do their best work and come through for the employer in a pinch?

Armed with this information, I got back in touch with my caller and asked a few more questions; she was very forthcoming. It turns out that there is a wide range of questions interviewers can ask when trying to gauge the soft skills of a potential CFE hire. When it comes to interpersonal skills, my interviewee told me they may ask candidates to describe an unusual person they know and why the person may be different. Communication skills can be determined by having candidates relate their experiences with an angry or frustrated corporate counsel, client, coworker or interviewee. A popular question that is often asked to measure the ability of a candidate to work on a team is centered on the discussion of an investigative project that was not successful and how it was handled. The question of solutions to problems may also deal with negative situations and how they were overcome. Therefore, questions used to assess success skills often have an individual addressing the how and why, rather than what, where or who.

The next question I had for my respondent was regarding her opinion as to how a candidate CFE could go about acquiring and strengthening these skills since they really don’t involve the type of technical matters typically focused on in the everyday business school training curriculum. She replied that working with people who exhibit strong soft skills is an effective way of learning those skills. Many professional organizations like the ACFE run internal mentoring programs so that senior practitioners can pass on their knowledge and experience to newer professionals. Training events of local chapters of associations such as the ACFE are another good place to meet with experienced professionals who can assist with mentoring and soft skills.

It seems to me that success skill communication especially under-pin all aspects of the CFEs work. I can remember very early on in my auditing career reading that communication is not easy because something said doesn’t mean it was said correctly; something said correctly doesn’t
mean it has been heard; something heard doesn’t mean it was understood; something understood doesn’t mean it has been agreed upon; something agreed upon doesn’t mean it has been applied; something applied doesn’t mean it has been continually practiced. Communicating anything effectively as a professional is, therefore, an on-going continuous process that is almost never complete and seldom perfect.

The desire to grow professionally and develop a successful career is evident in most CFEs, as in all other professionals, and while the opportunity to be on the forefront of this challenge exists, it is not emphasized enough, hence what recruiters and human resource professionals have identified as the success skills gap. Critical success skills, such as interpersonal behavior, communication, report writing and presentation skills, that augment technical skills are important in developing a successful career. However, to the disadvantage of employees, especially young professionals, these skills are seldom even emphasized let alone actively taught in the typical workplace. Similarly, employees do not recognize the lack of or need for such skills and miss valuable opportunities to improve them.

In an increasingly information- and technology-driven society, success skills increasingly shape the structure of the workplace. This fact is found to be especially evident in the audit, investigative and information systems environments. Assurance professionals need to interact seamlessly with customers/clients, work in teams, communicate technical details and build relationships.

Managers hiring new and experienced CFEs will always ask: Is the candidate able to lead a team successfully, communicate effectively, make presentations or write an investigative report to management? These are key skills that determine promotions, raises and job success.

In summary, CFE job applicants are always weighed on their technical ability and, increasingly today, on their success skills. Employers often ask whether job candidates are the best fit for the organization or whether candidates will align well with the organization’s culture. Furthermore, as a number of headhunters have told me, employers can easily teach the technical skills. The success skills that make up a candidate’s character and demeanor are not so easily taught yet can have an enormous impact on whether a candidate eventually gets his or her dream job or the top-floor corner office. So, a mix of both cognitive and noncognitive skills, the latter such as motivation, self-esteem and perseverance, determine many life outcomes, including education, health and even involvement in crime.

To benefit from strong success skills and develop a long-term career, the foremost step for young professionals as for any other professional, is to own their career. The ability to direct and fill roles in opportunity areas highly depends on career ownership and effective personal management. Success skills are increasingly becoming the often-unrecognized element for career mastery; as recruiters tell me, the bottom line is that a full professional success depends on their mastery.

Expert Witness or Consultant

One of our newer Chapter members submitted a comment on-line two weeks ago requesting information about the pitfalls involved in the CFE choosing to act as a consultant to a client attorney rather than as an expert witness. This is an important topic for CFEs in individual practice as well as for those serving as examiners on the staffs of private or public entities. The ACFE tells us that CFEs typically act as experts in the legal process by assisting attorneys with the financial details of a suit and testifying about these practices at trial. They analyze documents and transactions, showing how the fraud was accomplished and, when possible, who the most likely perpetrators were. The CFE is a guide and adviser for the attorney in assembling the case, and a major participant in explaining the details of a fraud scenario to a judge and jury.

In general, expert witnesses are typically brought in when required by law, as in malpractice suits where a member of a given profession must explain the infraction against professional by-laws or principles; when key points are deemed sufficiently technical or complex, such as in cooking-the-books schemes involving intricate accounting manipulations, or to assist a jury in making its decision. Federal Rule of Evidence 702 says that an expert witness with appropriate knowledge and credentials may testify in any proceeding where scientific, technical, or specialized knowledge will shed light on the dispute. Even in cases that don’t go to trial, experts may still be involved in mediation, arbitration, settlement conferences, or summary judgment motions.

Experts contribute to the trial process in numerous ways. They provide background information to guide and frame a case; during the discovery process they investigate, run tests, advise on depositions, prepare other witnesses, make exhibits, and respond to the opposition’s discovery requests; they file written opinions, which are entered as evidence into the court record; and they testify in actual proceedings should the case make it to a courtroom.

Once they accept a case, many experts immediately start assembling a narrative version of the events. This detailed summary of the facts of the case serves as the raw material for rendering an official opinion. As we’ve pointed out many times, it’s important that the text be written with care and professionalism because the text may (and probably will) have to be produced during discovery. Additionally, a well-written narrative helps the client attorney in preparing and executing the case at trial.

According to our most experienced members, perhaps the thorniest challenge for CFEs, once they’re engaged to work on a case, is setting a value on the specific business losses due to a fraud. Depending on the facts, there may be several methods for evaluating net worth/net loss, each rendering a different number at the end. And regardless of the numbers, there’s always the human element. Calculating business loss is a challenging task in a complex case because the examiner has to consider the amount of business being done, try to reconstruct the market conditions, think about competitors, and then calculate the amount of direct personal benefit; all of these factors being intertwined. In such cases, the examiner must consider a variety of points, prepare an estimate of loss, and then, most often, try to work out a compromise.

Article V. of the Association of Certified Fraud Examiners Code of Professional Ethics states:

A fraud examiner, in conducting examinations, will obtain evidence or other documentation to establish a reasonable basis for any opinion rendered. No opinion shall be expressed regarding the guilt or innocence of any person or party.

The rule that prohibits opinions regarding the guilt or innocence of any person or party is a rule of prudence. Clearly, it’s prudent for a Certified Fraud Examiner to refrain from usurping the role of jury. In a courtroom, no good attorney would ask a CFE for such a conclusion, and no alert judge would allow such testimony.  The fraud examiner’s job is to present the evidence in his or her report. Such evidence might constitute a convincing case pointing to the guilt or innocence of a person. But a clear line should be drawn between a report that essentially says, “Here is the evidence” and one that steps over the line and says “S/he is the guilty (innocent) person.” Nevertheless, there is a fine line between recommending action, forwarding the evidence to a law enforcement agency or filing a complaint or lawsuit, and giving an opinion on guilt or innocence. CFEs may make such recommendations because they think the evidence is strong enough to support a case. They might even have a conclusion about whether the suspect committed a crime. The rule does not prohibit the CFE, under the proper circumstances, from accusing the person under investigation. However, the ultimate decision of whether a person is “guilty” or “innocent” is for a jury to determine. The CFE is free to report the facts and the conclusions that can be drawn from those facts, but the decision as to whether a person is guilty of a crime is a decision for the judge or jury.

Caution is the by-word for every expert witnesses at every step of the legal process. According to discovery rules governing expert testimony, everything the expert says or writes about the case after being hired is subject to discovery by opposing counsel. That means everything: narrative versions of the case, comments to the press or law enforcement, hypothetical reconstructions, even notes can be demanded and used by the opposing party. A shrewd attorney can use an expert’s preliminary notes containing drafts of an opinion and other purely deliberative information to call the witness’s testimony into question. The only exception is when the expert is hired by the attorney purely on a consulting basis. An expert witness has no privilege. The principle of privilege exists to protect certain core societal relationships (attorney-client, husband-wife), but the expert witness’s relationship with clients is not among those protected. If the expert’s opinions will be presented in court, everything related to the expert’s opinion is discoverable by the defense.

There is an exception. The CFE expert may consult on the client attorney’s work product, i.e., materials the attorney prepares as background for a case. While performing background work, the expert is said to be working as an associate of the attorney, so the exchange is protected; they are two professionals conferring. However, once the expert is hired as a witness, and begins entering opinions as part of the attorney’s case, there is no privilege for any contribution the expert makes. The distinction is something like this: when acting as “witnesses,” experts are bringing official information to the court, and so must disclose any contact with the case; when experts act as “consultants” or “associates” for attorneys or law enforcement, they are only assisting the attorney, and do not have to disclose their involvement in the case. However, if a testifying expert reviews the work of the consultant expert, then the work of the consultant expert will be discoverable. Remember this; if a CFE is hired to testify at trial, anything he or s/he used to form his or her opinion will be subject to review by the opposing party. This includes notes from other experts, documents received from the plaintiff or defendant, and any documents or notes from the attorney. CFEs should be sure to consult with the client attorney before reviewing anything. If the attorney has not given the document to you, then ask before you read. Otherwise, you may inadvertently destroy the confidentiality or privilege of the material.

In summary, the best way to protect the confidentiality of information is to keep good files. Any materials which serve as the basis for an expert’s opinion must be in the file. Notes, documents, or tests that serve as background, or that represent unfruitful lines of investigation, don’t have to be included, and probably shouldn’t be. The attorney trying the case doesn’t want an expert having to answer about investigative dead ends or exploratory side lines; a shrewd cross-examiner can turn a hastily scribbled hypothetical into reasonable doubt, just enough to avert a conviction. So, in the best-case scenario, an expert presents to the court an opinion and its basis, nothing more nothing less.

Finding the Words

I had lunch with a long-time colleague the other day and the topic of conversation having turned to our May training event next week, he commented that when conducting a fraud examination, he had always found it helpful to come up with a list of words specifically associated with the type of fraud scenario on which he was working.  He found the exercise useful when scanning through the piles of textual material he frequently had to plow through during complex examinations.

Data analysis in the traditional sense involves running rule-based queries on structured data, such as that contained in transactional databases or financial accounting systems. This type of analysis can yield valuable insight into potential frauds. But, a more complete analysis requires that fraud examiners (like my friend) also consider unstructured textual data. Data are either structured or unstructured. Structured data is the type of data found in a database, consisting of recognizable and predictable structures. Examples of structured data include sales records, payment or expense details, and financial reports. Unstructured data, by contrast, is data that would not be found in a traditional spreadsheet or database. It is typically text based.

Our client’s employees are sending and receiving more email messages each year, retaining ever more electronic source documents, and using more social media tools. Today, we can anticipate unstructured data to come from numerous sources, including:

• Social media posts
• Instant messages
• Videos
• Voice files
• User documents
• Mobile phone software applications
• News feeds
• Sales and marketing material
• Presentations

Textual analytics is a method of using software to extract usable information from unstructured text data. Through the application of linguistic technologies and statistical techniques, including weighted fraud indicators (e.g., my friend’s fraud keywords) and scoring algorithms, textual analytics software can categorize data to reveal patterns, sentiments, and relationships indicative of fraud. For example, an analysis of email communications might help a fraud examiner gauge the pressures/incentives, opportunities, and rationalizations to commit fraud that exist in a client organization.

According to my colleague, as a prelude to textual analytics (depending on the type of fraud risk present in a fraud examiner’s investigation), the examiner  will frequently profit by coming up with a list of fraud keywords that are likely to point to suspicious activity. This list will depend on the industry of the client, suspected fraud schemes, and the data set the fraud examiner has available. In other words, if s/he is running a search through journal entry detail, s/he will likely search for different fraud keywords than if s/he were running a search of emails. It might be helpful to look at the ACFE’s fraud triangle when coming up with a keyword list. The factors identified in the triangle are helpful when coming up with a fraud keyword list. Consider how someone in the entity under investigation might have the opportunity to commit fraud, be under pressure to commit fraud, or be able to rationalize the commission of fraud.

Many people commit fraud because of something that has happened in their life that motivates them to steal. Maybe they find themselves in debt, or perhaps they must meet a certain goal to qualify for a performance-based bonus. Keywords that might indicate pressure include deadline, quota, trouble, short, problem, and concern. Think of words that would indicate that someone has the opportunity or ability to commit fraud. Examples include override, write-off, recognize revenue, adjust, discount, and reserve/provision.

Since most fraudsters do not have a criminal background, justifying their actions is a key part of committing fraud. Some keywords that might indicate a fraudster is rationalizing his actions include reasonable, deserve, and temporary.

So, even though the concepts embodied in the fraud triangle are a good place to start when developing a keyword list, it’s also important to consider the nature of the client entity’s industry and the types of payments it makes or is suspected of making. Think about the fraud scenarios that are likely to have occurred. Does the entity do a significant amount of work overseas or have many contractors? If so, there might be an elevated risk of bribery. Focus on the payment text descriptions in journal entries or in work delated documentation, since no one calls it “bribe expense.” Some examples of word combinations in payment descriptions that might merit special attention include:

• Goodwill payment
• Consulting fee
• Processing fee
• Incentive payment
• Donation
• Special commission
• One-time payment
• Special payment
• Friend fee
• Volume contract incentive

Any payment descriptions bearing these, or similar terms warrant extra scrutiny to check for reasonableness. Also, examiners should always be wary of large cash disbursements that have a blank journal payment description.

Beyond key word lists, the ACFE tells us that another way to discover fraud clues hidden in text is to consider the emotional tone of employee correspondence. In emails and instant messages, for instance, a fraud examiner should identify derogatory, surprised, secretive, or worried communications. In one example, former Enron CEO Ken Lay’s emails were analyzed, revealing that as the company came closer to filing bankruptcy, his email correspondence grew increasingly derogatory, confused, and angry. This type of analysis provided powerful evidence that he knew something was wrong at the company.

While advanced textual analytics can be extremely revealing and can provide clues for potential frauds that might otherwise go unnoticed, the successful application of such analytics requires the use of sophisticated software, as well as a thorough understanding of the legal environment of employee rights and workplace searches. Consequently, fraud examiners who are considering adding textual analytics to their fraud detection arsenal should consult with technological and legal experts before undertaking such techniques.

Even with sophisticated data analysis techniques, some data are so vast or complex that they remain difficult to analyze using traditional means. Visually representing data via graphs,  link diagrams, time-series charts, and other illustrative representations can bring clarity to a fraud examination. The utility of visual representations is enhanced as data grow in volume and complexity. Visual analytics build on humans’ natural ability to absorb a greater volume of information in visual rather than numeric form and to perceive certain patterns, shapes, and shades more easily than others.

Link analysis software is used by fraud examiners to create visual representations (e.g., charts with lines showing connections) of data from multiple data sources to track the movement of money; demonstrate complex networks; and discover communications, patterns, trends, and relationships. Link analysis is very effective for identifying indirect relationships and relationships with several degrees of separation. For this reason, link analysis is particularly useful when conducting a money laundering investigation because it can track the placement, layering, and integration of money as it moves around unexpected sources. It could also be used to detect a fictitious vendor (shell company) scheme. For instance, the investigator could map visual connections between a variety of entities that share an address and bank account number to reveal a fictitious vendor created to embezzle funds from a company.  The following are some other examples of the analyses and actions fraud examiners can perform using link analysis software:

• Associate communications, such as email, instant messages, and internal phone records, with events and individuals to reveal connections.
• Uncover indirect relationships, including those that are connected through several intermediaries.
• Show connections between entities that share an address, bank account number, government identification number (e.g., Social Security number), or other characteristics.
• Demonstrate complex networks (including social networks).

Imagine a listing of vendors, customers, employees, or financial transactions of a global company. Most of the time, these records will contain a reference to a location, including country, state, city, and possibly specific street address. By visually analyzing the site or frequency of events in different geographical areas, a fraud investigator has yet another variable with which s/he can make inferences.

Finally, timeline analysis software aids fraud examiners in transforming their data into visual timelines. These visual timelines enable fraud examiners to:

• Highlight key times, dates, and facts.
• More readily determine a sequence of events.
• Analyze multiple or concurrent sequences of events.
• Track unaccounted for time.
• Identify inconsistencies or impossibilities in data.

Confidential Sources & Informants

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

First Things First

About a decade ago, I attended a training session at the Virginia State Police training center conducted by James D. Ratley, then the training director for the ACFE. The training session contained some valuable advice for CFE’s and forensic accountants on immediate do’s and don’ts if an examiner strongly suspects the presence of employee perpetrated financial fraud within a client’s organization. Mr. Ratley’s counsel is as relevant today as it was then.

Ratley advised that every significant employee matter (whether a theft is involved or not) requires thoughtful examiner deliberation before any action is taken, since hasty moves will likely prove detrimental to both the investigator and to the client company. Consequently, knowing what should not be done if fraud is suspected is often more important to an eventual successful outcome than what should be done.

First, the investigator should not initially confront the employee with his or her suspicions until the investigator has first taken several important preliminary investigative steps.  Even when those steps have been taken, it may prove necessary to use a different method of informing the employee regarding her status, imminent material harm notwithstanding. False (or even valid) accusations can lead to defamation lawsuits or at the very least to an extremely uncomfortable work environment. The hasty investigator or management could offend an innocent person by questioning her integrity; consequently, your client company may never be able to regain that person’s trust or prior level of commitment. That downside is just one example of the collateral damage that can result from a fraud. Even if the employee is ultimately found to be guilty, an investigator’s insinuation gives him or her time to alter records and conceal the theft, and perhaps even siphon off more assets. It takes only a moment for an experienced person to erase a computer’s hard drive and shred documents. Although, virtually all business records can be reconstructed, reconstruction is a costly and time-consuming process that always aggravates an already stressful situation.

Second, as a rule, never terminate or suspend the suspect employee until the preliminary investigative steps referred to above have been taken.  The desire on the part of management to take decisive action is understandable, but hasty actions may be detrimental to the subsequent investigation and to the company. Furthermore, there may be certain advantages to continuing the person’s employment status for a brief period because his or her continued status might compel the suspect to take certain actions to your client’s or to the investigation’s benefit. This doesn’t apply to government employees since, unlike private sector employees, they cannot be compelled to participate in the investigation. There can be occasions, however, where it is necessary to immediately terminate the employee. For example, employees who serve in a position whose continued employment could put others at risk physically, financially, or otherwise may need to be terminated immediately. Such circumstances are rare, but if they do occur, management (and the CFE) should document the entire process and advise corporate counsel immediately.

Third, again, as a rule, the investigator should never share her initial suspicions with other employees unless their assistance is crucial, and then only if they are requested to maintain strict confidentiality.  The CFE places an arduous burden on anyone in whom s/he has confided. Asking an employee to shoulder such responsibilities is uncharted territory for nearly anyone (including for the examiner) and can aggravate an already stressful situation. An examiner may view the confidence placed in an employee as a reflection of his and management’s trust. However, the employee may view the uninvited responsibility as taking sides with management at the expense of his relationship with other employees. Consequently, this step should be taken only if necessary and, again, after consultation with counsel and management.

Regarding the do’s, Ratley recommended that the instant that an employee fraud matter surfaces, the investigator should begin continuous documentation of all pertinent investigation-related actions taken. Such documentation includes a chronological, written narrative composed with as much specificity as time permits. Its form can take many shapes, such as handwritten notes, Microsoft Word files, spreadsheets, emails to yourself or others, and/or relevant data captured in almost any other reproducible medium. This effort will, of course, be time consuming for management but is yet another example of the collateral damage resulting from almost any employee fraud. The documentation should also reference all direct and related costs and expenses incurred by the investigator and by the client company. This documentation will support insurance claims and be vital to a subsequent restitution process.  Other collateral business damages, such as the loss of customers, suppliers, or the negative fiscal impact on other employees may also merit documentation as appropriate.

Meetings with corporate counsel are also an important do.  An employee fraud situation is complex and fraught with risk for the investigator and for the client company. The circumstances can require broad and deep expertise in employment law, criminal law, insurance law, banking law, malpractice law, and various other legal concentrations. Fortunately, most corporate attorneys will acknowledge when they need to seek additional expertise beyond their own experience since a victim company counsel specializing in corporate matters may have little or no background in matters of fraud. Acknowledgment by an attorney that s/he needs additional expertise is a testament to his or her integrity. Furthermore, the client’s attorney may contribute value by participating throughout the duration of the investigation and possible prosecution and by bringing to bear his or her cumulative knowledge of the company to the benefit of the organization.

Next, depending on the nature of the fraud and on the degree of its fiscal impact, CFEs should meet with the client’s CPA firm but exercise caution. The client CPA may be well versed in their involvement with your client through their work on income taxes, audit, review, and compilations, but not in forensic analysis or fraud examination. Larger CPA firms may have departments that they claim specialize in financial forensics; the truth is that actual experience in these matters can vary widely. Furthermore, remember that the situation occurred under your client CPA’s watch, so the firm may not be free of conflict.

Finally, do determine from management as early as possible the range of actions it might want to take with respect to the suspect employee if subsequent investigation confirms the suspicion that fraud has indeed occurred.  Deciding how to handle the matter of what to do with the employee by relying upon advice from management and from the legal team can be quite helpful in shaping what investigative steps are taken subsequently. Ratley pointed out that the level and availability of evidence often drive actions relating to the suspect. For example, the best course of action for management may be to do nothing immediately, to closely monitor and document the employee’s activities, to suspend the employee with pay, or immediately terminate the suspect’s employment. There may be valid reasons to exercise any one of these options.

Let’s say the CFE is advised by management to merely monitor and document the employee’s activities since the CFE currently lacks sufficient evidence to suspend or terminate the employee immediately. The CFE and the client’s IT operation could both be integral parts of this option by designing a plan to protect the client from further loss while the investigation continues behind the scenes. The investigation can take place after hours or under the guise of an “efficiency audit,” “business planning,” or other designation. In any case, this option will probably require the investigator to devote substantial time to observe the employee and to concurrently conduct the investigation.   The CFE will either assemble sufficient evidence to proceed or conclude there is inadequate substantiation to support the accusation.

A fraud is a devastating event for any company but Mr. Ratley’s guidance about the first steps in an investigation of employee perpetrated financial fraud can help minimize the damage.  He concluded his remarks by making two additional points; first, few executives are familiar by experience with situations that require CFE or forensic accountant expertise; consequently, their often-well-meaning actions when confronted with the actuality of a fraud can result in costly mistakes regarding time, money and people. Although many such mistakes can be repaired given sufficient money and time, they are sometimes devastating and irrecoverable.  Second, attorneys, accountants and others in the service professions frequently lack sufficient experience to recognize the vast differences between civil and criminal processes.  Consequently, these professionals often can provide the best service to their corporate clients by referring and deferring to more capable fraud examination specialists like certified fraud examiners and experienced forensic accountants.

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 Right Question, the Right Way

As every CFE knows, an integral part of the fraud examination process involves obtaining information from people. Regardless of the interview’s objective, all CFEs should embrace the role of interviewer and use the time-tested techniques recommended to us by the ACFE. But asking the right questions does not necessarily ensure key information will be uncovered; an effective interviewer also recognizes the need to separate truth from deception. Consequently, crafting effective questions, understanding the communication dynamics at play, actively participating in the interview process, and remaining alert to signs of deception will help examiners increase the effectiveness and efficiency of our interviews and of our overall engagements.

Some interviewers try to gather as much information using as few questions as possible and end up receiving convoluted or vague responses. Others seek confirmation of every detail, which can quickly turn an interview into an unproductive probing of minutia. Balancing thoroughness and efficiency is imperative to obtaining the necessary and relevant facts without overburdening the interviewee. Because the location of this line varies by interviewee, CFEs can find this balance most effectively by ensuring they ask only clear questions throughout the interview.

Some individuals might respond to a question in a way that doesn’t provide a direct answer or that veers off topic. Sometimes these responses are innocent; sometimes they are not. To make the most of an interview, examiners must remain in control of the situation, regardless of how the interviewee responds.  Being assertive does not require being impolite, however. In some instances, wording questions as a subtle command (e.g., “Tell me about…. or “Please describe….) can help establish the interview relationship. Additionally, remaining in control does not mean dissuading the interviewee from exploring pertinent topics that are outside the planned discussion points.  Interview questions can be structured in several ways, each with its own strengths, weaknesses, and ideal usage. Open questions ask the interviewee to describe or explain something. Most examination interviews should rely heavily on open questions, as these provide the best view of how things operate and the perspective of the staff member involved in a particular area. They also enable the reviewer to observe the interviewee’s demeanor and attitude, which can provide additional information about specific issues. However, if the CFE believes an individual might not stay on topic or may avoid providing certain information, open questions should be used cautiously.  In contrast, closed questions can be answered with a specific, definitive response, most often “yes” or “no.” They are not meant to provide the big picture but can be useful in gathering details such as amounts and dates. Examiners should use closed questions sparingly in an informational interview, as they do not encourage the flow of information as effectively as open questions.

Occasionally, the questioner might want to direct the interviewee toward a specific point or evoke a certain reply. Leading questions can be useful in such circumstances by exploring an assumption, a fact or piece of information, that the interviewee did not provide previously. When used appropriately, such questions can help the interviewer confirm facts that the interviewee might be hesitant to discuss. Examples of leading questions include: “So there have been no changes in the process since last year?” and “You sign off on these exception reports, correct?” If the interviewee does not deny the assumption, then the fact is confirmed. However,  before using leading questions, the interviewer should raise the topic with open questions and allow the interviewee the chance to volunteer information.

The examiner should establish and maintain an appropriate level of eye contact with the interviewee throughout the interview to personalize the interaction and build rapport. However, the appropriate level of eye contact varies by culture and even by person; consequently, the examiner should pay attention to the interviewee to determine the level of eye contact that makes him or her comfortable.

People tend to mirror each other’s body language subconsciously as a way of bonding and creating rapport. CFEs can help put interviewees at ease by subtly reflecting their body language. Further, the skilled interviewer can assess the level of rapport established by changing posture and by watching the interviewee’s response. This information can help CFEs determine whether to move into sensitive areas of questioning or to continue establishing a connection with the individual.

Confirming periodically that the examiner is listening can encourage interviewees to continue talking. For example, the interviewer can provide auditory confirmation with a simple “mmm hmmm” and nonverbal confirmation by nodding or leaning toward the interviewee during his or her response.

When the interviewee finishes a narrative response, the examiner can encourage additional information by echoing back the last point the person made. This confirms that the interviewer is actively listening and absorbing the information, and it provides a starting point for the person to continue the response.

Occasionally, the examiner might summarize the information provided to that point so that the interviewee can affirm, clarify, or correct the interviewer’s understanding.

Most often, the greatest impediment to an effective interview is the interviewer him or herself.  While it is clearly important for the interviewer to observe, to listen, and to assess the subject in a variety of ways, the role of the interviewer, and the effect he or she has on the interview process, cannot be minimized.

The interviewer typically focuses on the subject as the person who will provide the information he or she seeks. The interviewer concentrates on establishing rapport, listening effectively, analyzing the subject’s verbal and nonverbal communication, and gauging how much or how little the subject is telling her. These are valid areas of concentration for the interviewer. One significant risk is that the interviewer may pay too little attention to the negative influences s/he can bring to the interview, process. The terms interview and communication are interchangeable, and effective communication is a two-way street. What makes the interviewer an effective communicator and effective interviewer is not just the signals he or she picks up from the subject but also the signals, the information, the tone, and the body language he or she sends to the subject. It is highly presumptuous of the interviewer to think he or she has little or no effect on the subject and that the subject is not evaluating, assessing, and analyzing the interviewer.

The interviewer’s style of dress, jewelry, and grooming may tell the subject as much about the interviewer as does the interviewer’s demeanor. If the interviewer is overdressed for the occasion, does it make the subject feel inferior or intimidated? If too casual, does the interviewer send a signal of the lack of importance of the interview and, as a result, does the subject become too relaxed or not as attentive? Attire should have a desired effect. For example, when interviewing an enforcement officer or other professional who is familiar with uniforms and clothing as indicators of status, it may be appropriate to wear a coat and tie. In general, it is best to always to err on the side of conservative dress for the circumstances.

The examiner should not attempt to interview two or more persons at one time unless there is no other option. It is more difficult to control an interview with two or more subjects. One subject may be more dominant than the other. The subjects will influence each other’s memories. Some subjects will not want to embarrass themselves in front of a peer or supervisor. The environment for confidential communications will be adversely affected.

When the interviewer responds to the subject’s responses, he sends signals. At times, it might be advisable to not write notes down at the time the individual tells the interviewer something sensitive. Rather, the interviewer might consider devoting his attention to the subject and writing down the sensitive information after the conversation has moved away from the sensitive area.  The interviewer should never become argumentative, antagonistic, or belligerent. The use of the  “Good Cop, Bad Cop” routine can have unwanted results, especially long term. The CFE interviewer should use tact, speak clearly and with authority but without use of threatening language. The interviewer should consistently set a professional tone.

Finally, all individuals want to be shown respect. Maintaining the personal dignity of the subject is critical for the success of the interview and follow-up efforts. Everyone wants respect, from homeless persons to top executives. To be shown respect, especially if the subject is not accustomed to it, is disarming and contributes to that essential, professional tone.

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.

Asked and Answered

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

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

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

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

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

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

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

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

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

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

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

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

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