Placing Volkswagen Into the Fraud Triangle

LIVE FROM THE ACFE GLOBAL FRAUD CONFERENCE

Mandy Moody
ACFE Media Manager

Steve Morang, CFE, CIA, CRMA, Senior Manager at Frank Rimerman & Co LLP, began his session today at the ACFE Global Fraud Conference asking attendees to raise their hands if they believed the Volkswagen executives didn’t know anything about the fraudulent emissions tests built into more than 11 million of their diesel cars. Only one person raised his hand. No matter if you think they did know about the manipulation or not, there are lessons to be learned from dissecting what could have possibly led to an ethics failure that cost $35 billion in market capital in just five days.

One way to analyze the scandal is to place it into the Fraud Triangle. Identifying the pressures, rationalizations and opportunities, as Morang did today, shines a light on the dark areas that plague many company’s ethical cultures.

Pressure
According to Morang, the former CEO’s management style was ruthless. Martin Winterkorn wanted the German car giant to be the No. 1 car maker in the world and that meant making it into the U.S. marketplace with their diesel engine cars. The tone at the top was to get it done and get it done now.

In a 2015 CNBC article, Bernd Osterloh, a supervisory board member for Volkswagen, was quoted as writing in a letter to staff, "We need in future a climate in which problems aren't hidden but can be openly communicated to superiors. We need a culture in which it's possible and permissible to argue with your superior about the best way to go."

The article goes on to reference former company executives describing “a management style under Winterkorn that fostered a climate of fear, an authoritarianism that went unchecked partly due to a company structure unique in the German motor industry.” Upon Winterkorn’s resignation in September of 2015, he said that he was “not aware of any wrongdoing.”

Rationalization
To the people responsible for the manipulation of the engines, Morang said the tampering was done for what the employees under pressure thought was the greater good. They were using the same utilitarian ethics that I described in my earlier post. There was a mentality that it was okay to bend the rules so that Volkswagen, and the investors, could come out ahead. In other words, the ends (larger profits, notoriety and reputation) justified the means (fraudulent emissions tests).

Opportunity
When an employee or group of employees (the investigation is still ongoing) discovered that the diesel cars could be wired to cheat emissions tests, the legs of the Fraud Triangle moved quickly into place. By adding the pressure to enter the U.S. market with the rationalization of putting the company above all else, in addition to the opportunity to fool emissions tests, the slippery slope soon looked like an easy path to take.

By understanding the pressures, rationalizations and opportunities that contributed to the actions taken either by a few or many, the top, middle or the bottom, anti-fraud professionals can take away practical tools to use when examining their own company’s ethical culture.

Find more coverage from the 27th Annual ACFE Global Fraud Conference at FraudConferenceNews.com.

What Makes a Fraudster Tick?

FROM THE RESOURCE GUIDE

John Gill, J.D., CFE
ACFE VP of Education

It is an unfortunate truth that fraud exists in every country and in every industry. One of the most challenging parts of this continuing fight is understanding what goes on in the mind of someone who commits fraud. What causes one person facing financial hardships to steal from his employer while another finds a more honest way to pay his bills? And what goes through the mind of individuals as they are making that choice — that first decision — to become a fraudster? How do they continue to justify their actions to themselves as they carry out their schemes?

As an anti-fraud professional, it’s important to look for the answers to those questions. You cannot effectively deter fraud unless you have a full and complete grasp of the different motivations and tipping points that might affect a fraudster. I have found that interviewing fraudsters is one of the best tools to truly enter their minds. Each story is interesting in its own right, but when combined, you begin to see the common thought patterns displayed by these perpetrators before, during and after the crime. It is also important to examine different theories offered by experts — both past and present about what causes some people to turn to fraud. 

One thing that has always stood out to me while trying to understand fraudsters is that the Fraud Triangle is alive and well. Every so often, someone argues that the triangle is no longer relevant or needs to be revised. But based on the interviews the ACFE has conducted over just the last four or five years,it is just as relevant now as it was back in Dr. Donald Cressey’s day. His basic theory still holds up: fraud is likely to occur if the subject has some kind of unshareable financial pressure, a perceived opportunity to relieve that pressure, and the ability to rationalize his or her conduct so that there is a lessening of guilt or a feeling of justification.

I am excited to announce that the ACFE has developed a new 1-day class, Understanding the Mindset of a Fraudster. We will also be offering a 4-hour version of the class as a Pre-Conference session at this year’s 27th Annual ACFE Global Fraud Conference. The seminar will examine fraudsters’ behaviors and motivations, as well as the pressures, opportunities and rationalizations for their frauds. Through discussions about human behavior, video interviews with convicted fraudsters and interactive problem-solving, you will gain a deeper understanding of mindsets and personality traits common to many fraudsters.

A good fisherman understands how a fish reacts to different types of lures and water conditions. A good fraud examiner understands how individuals react to different interview techniques and workplace controls. Understanding more about the mindset of a fraudster will better prepare you to catch those people who travel outside the lines to enrich themselves at someone else’s expense. 

Read John's full article and find more training resources in the ACFE's latest Resource Guide.

20-Year Special Agent: High level of integrity and a passion for the job remain the fraud investigator’s most important assets

MEMBER PROFILE

Ann Petterson, CFE
Senior Manager
Baker Tilly

Ann Petterson, CFE, Senior Manager at Baker Tilly, became passionate about fighting fraud at an early age. “As long as I can remember, I wanted to be a federal agent,” says Petterson. “As a child, I remember hearing about victims of an Irish Sweepstakes scam, empathizing with the victims and wanting to figure out ways to thwart the bad guys.”

What is one of the biggest lessons you have learned since becoming a CFE? 
Cressey’s Fraud Triangle. It added a new dimension to fraud fighting. The thought of profiling fraud perpetrators by being cognizant of the relevant factors that constitute the perfect environment for fraudulent conduct was an idea that was previously never within my purview. Adding Cressey’s factors to a risk assessment helps optimize the analytics.

What steps led you to your current position?  
I was employed as a Special Agent with the IRS Criminal Investigation Division for 20 years. As a financial investigator, I reviewed and evaluated financial records to determine whether a crime had been committed and, if so, to identify the perpetrators of the crime. The ability to “follow the money” is key in identifying crimes, determining motive and obtaining sufficient evidence to successfully adjudicate white-collar crime. I was also employed by the district attorney’s office and, again, I would follow the money to prove intent in murder cases, to prosecute mortgage fraud and money laundering cases, and to uncover embezzlements perpetrated by high-ranking officials of local government.

These skills have parlayed well to the private sector, where I conduct business fraud investigations, provide litigation support in white-collar crime cases, assist in integrity monitoring and apply money laundering skills to assist in regulatory compliance of financial institutions.

What is your current role and what does it entail? 
I work as a Senior Manager at Baker Tilly Virchow Krause LLP, a professional services firm, in the Business Fraud and Investigations team of the firm’s Forensic Litigation and Valuation Services group. In this capacity, I work complex tax and corporate fraud cases. Depending on the case, I am retained by either the defense attorneys or by the government to aid in prosecution. I am often called to the witness stand to testify as either an expert witness or a fact witness to help “explain the numbers to the trier of fact” (Judge or Jury). A major portion of my days are spent training young staff members on the importance of building a comprehensive set of work papers, writing detailed memoranda and properly documenting every conclusion reached.

What do you hope to personally pass on to the next generation of fraud fighters? 
Technical skills are playing an increasingly crucial role in the fraud investigation field. For the next generation of fraud fighters, the ability to conduct sophisticated data analysis and partake in computer forensics engagements will prove invaluable. However, a high level of integrity and a passion for the job remain the fraud investigator’s most important assets.

What activities or hobbies do you like to do outside of work? 
I am an avid cyclist and enjoy extended bike trips around the globe. I also like to spend time with my two grown kids.

Read Ann's full profile in the Career Center on ACFE.com.

The Fraud Triangle: Do “some men just want to watch the world burn?”

GUEST BLOGGER

Chris Ekimoff, CFE, CPA
Director, Forensic & Litigation Consulting
FTI Consulting

There are a few tenets to financial fraud that any auditor, analyst or attorney can quote chapter and verse; the most notable may be the Fraud Triangle.

Theorized by Donald Cressey in his 1973 work, Other People's Money: A Study in the Social Psychology of Embezzlement, the Fraud Triangle identifies three general elements found in the cases of embezzlement that Cressey studied: financial pressure (motivation), opportunity and rationalization.

Trusted persons become trust violators when they:

• Conceive of themselves as having a financial problem which is non-shareable.
• Are aware that this problem can be secretly resolved by violation of the position of financial trust.
• And are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.

In a recent Fraud Magazine article, “Defrauding for fun not need,” Robert Kardell, J.D., CFE, CPA/CFF, Special Agent at the FBI, discusses his take on the methodology and limitations of Cressey's seminal work. In his experience, Kardell has seen multiple cases of serial fraudsters without the cliché financial pressures of unexpected medical bills, mounting gambling debts or crippling drug addictions that take their employers for a ride anyway. These cases appear to be missing one element of the Fraud Triangle: financial pressure (motivation).

Kardell wishes to warn companies and potential victims that the well-off middle manager with a country club membership and no outstanding debts still may be making off with more than his or her share. He references a case of a fraudster at a Midwestern organization with a cushy six-figure salary, company car, and enough cash to travel the world and attend major sporting events. The investigation found the fraudster was submitting personal expenses for reimbursement, reclassifying expense accounts based on his embezzlement and seeking reimbursement for mileage on his personal car (yes, even with a company car!).

Kardell believes that some fraudsters are inherently criminal, and will pursue theft and embezzlement regardless of their personal financial standing. Batman's butler Alfred may have said it best.

It’s here I believe Kardell may want to consider an alternative to adding a side to the Fraud Triangle: the inherent need to steal might not be a financial motivation to embezzle, but it is a motivation for that individual nonetheless. Without delving too deeply into criminology theory, certain individuals may seek out the "high" of stealing from their employer; whether to get the thrill of violating the rules, the feeling of power in being able to manipulate their position, or because they find themselves unchallenged and bored in their day-to-day duties.

Kardell posits that organizations currently relying on a Fraud Triangle-based model of fraud risk management should strengthen their procedures around background investigations conducted during the hiring process. Does the individual show tendencies towards occupational fraud? How do their past employers and references describe their general behavior? What additional information can be gathered regarding the individual's expense reports or other financial duties at a previous company?

In the time since the publication of Other People's Money, financial fraud and the people who commit it have increased in complexity, length and severity. So, too, has our understanding of the reasons for those events, even when they may not appear to fit the common mold. Motivation has always been a subjective element to the Fraud Triangle — a latent need to steal is still a motivator for fraud, but should carry additional consideration going forward.

Chris Ekimoff, CFE, CPA, is a director at FTI Consulting in the Forensic & Litigation practice in Washington, D.C. He can be reached through email or on Twitter (@EkimoffCPA).

Disclosure: The views expressed in this piece are those of the author and aren't necessarily the views of FTI Consulting, its management or its subsidiaries.