You Found Fraud, Now What? 5 Steps to Immediately Take After Suspecting Fraud in Your Company

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GUEST BLOGGER

Kelly Todd, CFE
Managing member & member in charge of forensic investigations
Forensic Strategic Solutions, LLC

Despite efforts to prevent fraud, the unfortunate reality is that it still happens — in fact, according to the ACFE's 2016 Report to the Nations, it is estimated that companies lose 5% of revenue each year to fraud. If you suspect fraud has occurred at your organization, take these immediate action steps:

  1. Safeguard potential evidence. Preservation of evidence is key. Secure any and all potential evidence — but by all means, avoid the temptation to examine the evidence on your own. Electronic evidence is fragile and easily altered. Did you know that simply turning a computer off or on can alter potential evidence? Secure computers, cellphones and external electronic media sources such as thumb drives. Maintaining the evidence will help your forensic accounting team identify what occurred, who committed the fraud and why.
  2. Gather a team. Enlist a forensic accountant and computer forensic specialist to help you collect, analyze and store the data. It would be wise to hire an outside financial investigator who is familiar with and experienced in fraud investigations — using an in-house accountant is not appropriate, as they are not as objective as an outside source. In fact, someone on the accounting team may be part of the problem. Retain an employment lawyer to ensure you stay on the right side of the law regarding the rights of the suspected employee. 
  3. Deal with the suspected employee. Don’t fire the suspected employee immediately — it could make gathering evidence much more difficult. Instead, restrict their access to company data. Do not let them remove their computer or any other company items and documents from their office.
  4. Notify your insurance provider. A crucial fact for employers to know is that you must notify your insurance provider within 30 to 60 days, depending on your policy. Failure to do so could cause a loss of coverage.
  5. File proof of loss. You will need to document any losses with your insurance provider in a specified time frame. Documenting a claim with an insurance provider takes time to ensure it is properly recorded. It is possible to file an extension should you need one, but be sure not to miss any deadlines or you risk forfeiting coverage.

The best way to mitigate fraud risks is to have internal controls and external resources available to prevent them from happening in the first place. Should fraud occur, the initial steps you take in addressing suspected fraud can hinder or greatly help your efforts — don’t make the mistake of collecting evidence and acting without the assistance of a team of forensic specialists and legal professionals.

Forensic Accountant Relies on Skills Learned Outside of the Classroom

MEMBER PROFILE

Ryan Collins, CFE
Manager, Fraud and Investigation Dispute Services
EY 

According to Ryan Collins, CFE, Manager of Fraud and Investigation Dispute Services at EY, the most valuable career lessons he has learned were not taught in school. “Today’s market requires a forensic accountant to possess a different skillset from the traditional accountant, which means most of what you learn in your career isn’t taught inside of a classroom,” Collins said. “Analytical thinking, problem solving, and the ability to think outside the box are some of the most important skills I’ve learned over my career, and continue to employ on a daily basis.”

How did you become passionate about fighting fraud? 
I attended Bentley University where I earned my undergraduate degree in accounting and my MBA. I always figured when I graduated I would take a job in tax or audit. At Bentley, I took a forensic accounting course where I learned about the Enrons, WorldComs and Madoffs of the world. I was immediately hooked. I’m lucky enough to have a career where I can focus on doing well and doing a lot of good.

What is one thing you wish someone would have told you before you began your professional career? 
The one thing I wish someone would have told me before I began my career was that I was going to make mistakes and that that was okay. The first thing I tell our new staff each year is that they are going to make mistakes, probably a lot of them. The important thing when you make a mistake is that you don’t get frustrated or down on yourself. Mistakes are the most powerful learning tools there are.

What value do you see in mentorship, and what advice do you have for someone looking for a mentor? 
For me, mentorship is one of the single most important aspects of career development. I think it’s essential to find a mentor as early in your career as possible. For me, that meant finding someone who was doing the job I wanted to be doing in five years, and understanding the steps they took and the process they followed to be successful. And when I get there, it is just as important to become a mentor, and help guide others along in their careers.

What is a memorable case or project that you have worked on – one that made you feel especially proud? 
A few years ago I was able to perform a pro-bono engagement working with a charity in the Boston area. Early in my career, it was inspiring to see that EY wasn’t only focusing on their financial bottom line, but also the social impact they were having on the community.

What activities or hobbies do you like to do outside of work?  
When I am not fighting fraud, I’m fighting a hook and a slice on the golf course. I love to play the game as much as possible, even when I can’t find a course. And, as a bonus, it’s a great way to develop business relationships.

Ready Ryan's full interview in the Career Center on ACFE.com.

The Art of Illusion: Look for What's Not on the Page

SPECIAL TO THE WEB

ACFE Regent Bruce G. Dubinsky, CFE, CPA, CVA; and Tiffany Gdowik, CFE

“The essence of lying is in deception, not in words.”
— John Ruskin 

Extrapolating the words of John Ruskin, a 19th-century British social thinker, I often say, “It’s not what’s on the page that matters; it’s what’s not on the page that matters.” As fraud examiners, we have been taught to gather documents, review information, interview subjects and then draw our conclusions. While that approach will detect the simplest of frauds, it won’t detect the type of complex financial frauds that are increasingly making headline news.

I’ve worked on some of the world’s largest frauds — including the Bernie Madoff Ponzi scheme, Parmalat, Lehman Brothers and International Brotherhood of Teamsters. In the Lehman Brothers case, the company used “accounting gymnastics” to manipulate the company’s financial statements during the 2005-2008 financial meltdown — the most devastating since the Great Depression. 
 

LEHMAN'S ILLUSION

In 2008, Lehman Brothers’ shaky balance sheet and falling profits left the firm in dire financial peril. It desperately needed to create the illusion that it was healthier than it actually was. Lehman used what appeared to be a normal financial instrument in the banking world — a repurchase agreement (a repo) — to book billions of dollars of transactions. A repurchase agreement is a form of short-term borrowing for banks and other dealers typically using government securities. The bank sells the government securities to an investor (many times another bank), usually on an overnight basis, and buys them back the following day. In Lehman’s case, the company did it to exploit an accounting rule that was meant to give principled guidance to determine when a repo was a true short-term financing method versus a sale of a financial instrument. The latter desired treatment as a “sale” allowed Lehman to slyly portray its financial condition as rosy when it wasn’t.

Interestingly, investigators didn’t discover the illusion created by Lehman by looking at what was on the page (i.e. the entries in the accounting system). The accounting entries, which seemed straightforward, generated little to no alarm. The debits and credits were to the proper accounts. The explanation accompanying the entries also seemed normal. In fact, a review by even the most skilled auditor or fraud examiner would, in and of itself, have revealed nothing. Rather, investigators exposed the company’s deceptive behavior by looking at what was literally not on the page. The key to uncovering the ploy was to first obtain an understanding of what Lehman’s financial perils were at that time.

Lehman had unusually high amounts of leverage (debt to finance its assets) on its balance sheet, and the public markets were responding negatively. The company spent a considerable amount of time and effort trying to calm the markets during its investor calls. So, the first “red flag” came in the form of a question: Why was Lehman spending so much time focused on de-levering its balance sheets? Its access to public capital was critical to its continued survival. With investor panic running rampant, it had to create the illusion that it wasn't a house of cards but rather a solid financial institution with a sound balance sheet.

So how did Lehman create the delusion? It simply used the chameleon approach: make something that’s really one thing look like something else. Lehman took repos that were really short-term loan transactions and made them look like they were sales of financial product inventory (e.g. U.S. treasuries and certain equities). By knowingly exploiting that U.S. accounting rule and specifically structuring the repos to fail the requisite treatment as a repo financing, Lehman was able to disguise itself as a financially healthier institution.

Read the full article on Fraud-Magazine.com.

Investigating Words: Forensic Stylometry and its Role for CFEs

GUEST BLOGGER

Christopher Ekimoff, CFE, CPA
Manager, Investigative Accounting & Financial Litigation, Duff & Phelps
Washington, D.C.

Authors throughout history have used pen names for a variety of reasons. In the 19th century, women employed masculine names to remove any bias from publishers (see Mary Ann Evans as George Eliot, and the Bronte Sisters Charlotte, Emily and Ann as Currer, Ellis and Acton Bell).

More recently, certain authors have used noms de plume for notoriety reasons:

  • Stephen King didn’t feel the public would buy more than one book from the same author in a year, so he wrote four novels as Richard Bachman until similarities in the works caught the attention of critics.
  • J.K. Rowling of Harry Potter fame secretly penned a crime novel, The Cuckoo’s Calling, as Robert Galbraith. In an interview with The Telegraph, Rowling admitted “it has been wonderful to publish without hype or expectation and pure pleasure to get feedback under a different name.”

As a forensic accountant, it is hard to communicate to others what exactly I do. With projects and cases varying widely in industry, scope and deliverables, it’s always a stretch to accurately describe the profession in a 30-second elevator speech.

That being said, I jump at the chance when the media covers a story that relates to the work of a forensic accountant. Rowling’s recent admission to the public wasn’t brought about by conscience or advice from her agent, but by a team of linguists and computer programs in forensic stylometry.

One of the members of that investigative team, Patrick Juola of Duquesne University, gives a brief description of forensic stylometry on Language Log:

The basic theory is pretty simple: language is a set of choices, and speakers and writers tend to fall into habitual, or at least common, choices. Some choices come from dialect (the reason an Englishman drives a lorry but an American a truck), some from social pressure (if I need to impress someone with my vocabulary, I can utilize a polysyllabic lexicon instead of just using big words), and some just seem to come. An example of the latter category is in the use of many function words. If you ask yourself where the salad fork is relative to the plate, you quickly realize that it's usually to the left of the plate. Or is it? It's just as likely to be "on" the left of the plate, "at" the left of the plate, or perhaps "to" the left SIDE of the plate. Same fork, same position, and at least four different choices for how to describe it, none of which correspond to any sociolinguistic or cognitive variable with which I'm familiar.

Juola goes on to say that by quantifying and comparing those choices in writing, he and Peter Millican of Oxford University were able to draw conclusions about The Cuckoo’s Calling that led them to believe Rowling was most likely the author. (Read Juola’s complete post here.)

In forensic accounting investigations, we receive information in many forms: transaction data, financial statements, policy documents and emails – as well as prepared media statements, deposition testimony and legal briefs. It is in these latter three that forensic stylometry can help support (or refute) a forensic accountant’s conclusions about the facts of a case.

  • Was this statement written by the speaker, or by the company’s public relations team?
  • Do the answers to deposition questions appear to be genuine or coached and rehearsed by the legal counsel advising the witness?
  • Does the expert’s report match up to his or her previous reports, or do sections appear to be written by others who are undisclosed?

Like most forensic undertakings, forensic stylometry is not a “smoking gun” solution to questions of veracity and authorship; it can still, however, provide insight into the development of the written information received.

Most forensic accountants already have at least one tool in forensic stylometry. Next time you finish writing a document in Microsoft Word, go to the Proofing section of the options menu, and click “Show Readability Statistics.” After a spelling and grammar review, Word will populate a table with statistics on your work. The picture below shows the statistics for this very blog post:

As you can see, I average 2.1 sentences per paragraph, over 23 words per sentence and wrote this piece at approximately a 12th-grade level.[1]

Compare some of your writings over time to see if you can identify consistencies. And the next time your intuition about a document’s author or authenticity is off, think about reviewing it through the lens of forensic stylometry. If Juola and Millican could outwit a fantasy writer turned crime novelist, what might you discover?

 


[1] More information on these statistics and their implications can be found in Financial Forensics: Body of Knowledge by Darrell Dorrell & Greg Gadawski, Wiley, 2012.