"If you go out into the mall to buy clothes, shoes or that smartphone you've got in your pocket, how much do you scrutinize the quality of that product?" asked Jonathan Davison, chief executive officer of Forensic Interview Solutions at the 2015 ACFE Asia-Pacific Fraud Conference, Nov. 4-6, 2015, in Singapore. "What I want is for you to look at your investigation as a product. Can it be scrutinized? Are there gaps in it? As an information-gatherer, where can your product go? Thinking about where it goes is the quality of it."
Davison posed these questions to attendees at the beginning of his Pre-Conference session, "Managing Internal Investigations." In a three-part session, Davison discussed the key elements of an internal investigation from the beginning objectives; to evidence collection and analysis; and then to the finalizing the investigation by writing reports, presenting the case and overcoming reluctance to prosecute.
Beginning an investigation
Davison first emphasized that the ACFE Report to the Nations on Occupational Fraud and Abuse tells fraud examiners the key data they need to know about the schemes they might be investigating. One example he gave was the perpetrator's level of authority. "Depending on how you go up the structure has an impact on the level of fraud that's being committed, the people involved in it and the amount that's being taken," said Davison.
Davison also explored the motivations behind why fraudsters commit their crimes. He cited the Hollinger and Clark Study of 12,000 employees in the workforce. The researchers concluded that the most common reason employees committed fraud had little to do with opportunity but more to do with motivation — the more dissatisfied the employees, the more likely they were to engage in criminal behavior.
Using these tools and an investigative mindset, Davison dove into the initiation of the internal investigation. He emphasized the ABCs — Assume nothing, Believe nothing, Check everything. Davidson also covered the key steps to conducting a fraud examination:
- Data analysis. Before analyzing documents or conducting interviews, examiners should perform data mining and other electronic analysis of relevant information.
- Document examination. Examiners should review documents before interviewing anyone to gain an understanding of the potential evidentiary value of the case, as well as to protect the security of documents.
- Interviews. Examiners should interview witnesses in a logical fashion.
- Report writing. The final step in most internal investigations is the preparation of a written report that summarizes the steps taken and conclusions reached.
According to Davison, time is also of the essence when considering the quality of your investigative results. "Do you have sufficient time, as investigators, to conduct your investigation? The danger of that is it affects your investigation and the quality of it."
Evidence collection and analysis
Davison explained that documents make up so much of the evidence in fraud cases that it's important to understand the appropriate way of handling them. Two of the more important aspects of handling documents are chain of custody and marking evidence.
He also discussed the importance of properly organizing evidence because fraud cases can create large amounts of paper. Documents can be segregated by witness or transaction, key document files should be updated continuously and databases can be established to handle large volumes of information.
Finalizing the investigation
Writing a comprehensive, understandable and effective report is critical. "The best things in life are simple, straightforward and easy," said Davison. He explained that the fraud examiner will need to address the classic questions of who, what, where, when, why and how.
And finally, Davison expressed the importance of self-evaluation. "How often do you evaluate your investigations?" he asked. "Do you as a team of investigators sit down after the investigation has been finalized and critique your investigation? We can always improve and look at how we do that with an investigative mindset."
President Ratley: 'Knowledge is power'
ACFE President and CEO James D. Ratley, CFE, opened the main conference by welcoming attendees and speaking about the state of the ACFE and the anti-fraud profession. Ratley encouraged attendees to embrace technology and data analytics.
"When the ACFE was founded in 1988, the life of the Certified Fraud Examiner was not as complicated as it is today," said Ratley. "The computer was still in limited use, and we were just beginning to hear a new term: ‘the Internet.' There was also a new device sitting on people's desk called the fax machine. Little did we know how technology was about to change our profession."
In order to embrace the changes of the future, he stressed the importance of continuing education and to always remember that knowledge is power.
FIFA's lessons for fraud examiners
Jarrod Baker, ACA, senior managing director at FTI Consulting, during his breakout session, discussed the recent arrests of numerous FIFA officials for racketeering, fraud and money laundering, and the subsequent resignation of FIFA president Sepp Blatter. Baker then covered lessons anti-fraud professionals could take from the FIFA scandal, including:
- A company can't use the pretense of charitable contributions as a way to funnel bribes.
- Bribery laws can be breached even if the purpose of the payment isn't achieved.
- You can be subject to international laws based on your conduct, and there is international authorities are increasingly cooperating.
Husin: 'You're still doing business with bad guys'
During lunch, Gunawan Husin, MBCI, CBCP, CAMS, principal consultant at Continuum Asia PTE Ltd, spoke to attendees about fraud as a predicate act to money laundering and terrorist financing. "I'm going to mainly be talking about money laundering today, but I don't want to downplay fraud prevention," said Husin. "Fraud is key. You need to look at the bigger picture."
Husin then showed a video that highlighted how money changes hands from institutions to criminals and back again. He then asked attendees, "Are we doing the right thing as a sector? Are we doing what we are supposed to do to safeguard our institution and community?"
He asked people to raise their hands if they'd like to do business with criminals. Not a single hand shot up. "No one wants to do business with criminals? Well what do the statistics say?" he continued. "We're still doing business with bad guys. They're still abusing your systems."
Darvall-Stevens divulges some secrets
"It's one of those once-in-a-lifetime events that seems to happen regularly," said Roger Darvall-Stevens, CFE, Partner, National Head of Forensic Services, RSM. He was referring to high-level executive misconduct during his session "C-suite's Dirty Little Fraud Secrets."
He asked the participants to divide into groups to discuss what kinds of checks and balances should exist in the C-suite. (I sat down with one group as they analyzed the executives in their respective countries.)
One attendee expressed the importance of tone at the top. Executives have the power to step outside of the normal processes but shouldn't be allowed to. That's where the checks and balances should come in. He said, "Where we hold our politicians to be accountable, we don't always do the same with our C-suite."
Another attendee explained that it's extremely tough to challenge the leaders in an Asian culture, which seemed to be the consensus across the room when Darvall-Stevens asked the groups to share their impressions. One attendee said that in Malaysia the person who raises the issue first is also the first victim. No protection exists for whistleblowers.
And the statistics back these claims up. Darvall-Stevens shared results from the 2014 ACFE Report to the Nations on Occupational Fraud and Abuse that showed that the 2014 median loss among owners and executives in the Asia-Pacific region was $1.5 million. Globally, the median loss was $500,000.
So what motivates C-suite executives to commit fraud when they're already compensated well? Darvall-Stevens again divided the attendees into groups to discuss. Answers were varied. Another group I sat down with shared an example of an executive who'd promised his family nice trips, expensive gifts, etc. However, he had a gambling problem on the side. He embezzled from his company to cover his gambling debts and still keep his promises to his family.
Darvall-Stevens shared other motivations including:
- Living beyond one's means.
- Unusually close relationship with a vendor or customer.
- Divorce or family problems.
- Excessive pressure from within the organization.
What can be done?
Darvall-Stevens finished his session by sharing tips on how to prevent C-suite fraud. Key checks and balances include:
- Developing tailored forensic or fraud detection procedures.
- Forensic reviews that include a focus on the C-suite, which can be designed by reverse-engineering the intelligence gained in understanding C-suite fraud red flags.
- Conducting forensic due diligence background checks on C-suite executives and family to ensure that any conflict of interest — perceived or actual — is managed.
- Performing forensic IT analysis as required.
"If a C-suite executive objects to forensics or fraud detection procedures, or a forensic review, I suggest that this may be a red flag in itself and should cause concern for the board," finished Darvall-Stevens. "No one, regardless of level or seniority in a business, is beyond the checks and balances that mitigate the risks of fraud and corruption."
Insight into the mind of a fraudster
"You can follow all the rules and still commit fraud and that's what I did at Enron," said Andrew Fastow, former Enron CFO and convicted fraudster,* on the last day of the conference. "I followed the rules — but undermined the principle of the rule by finding the loophole."
Fastow told a packed room of attendees that he became the master at gaming the system, explaining that his title at Enron should have been "chief loophole officer." By creating structured financing transactions that kept debts off the balance sheets, Fastow made the company appear healthier than it actually was.
Holding up his trophy for CFO of the Year in 2000 and then showing his subsequent prison ID, Fastow said, "I got this trophy and this prison ID for doing the same deals." He explained that a CFO can fundamentally change how a company looks, but that doesn't change the economic standing of the company, which is incredibly misleading.
But his message went beyond the Enron scandal. Fastow explained that companies are still doing what he did and in a bigger way. Referring to it as the "grey area" of accounting, he said that "there are over $1 trillion off-the-balance-sheet operating leases in the U.S." — and banks are some of the largest culprits. While these entities might be following the rules, are they considering the ethical implications of each deal?
"If your role today as fraud examiners is to make sure companies are following the rules, you're not detecting fraud," said Fastow. "It's not just the rules, it's the principles too. I focused just on the rules and that was my mistake."
Ultimately, Fastow's mistake caused irreparable damage at Enron. "What I did was wrong and it was illegal, and for that I'm very sorry, very remorseful. I wish I could undo it," he said. "But I'm trying to explain how someone who didn't necessarily set out to commit fraud or do harm could come to do that and on such a grand scale."
Best practices for border-busting fraud
A spirited panel discussion, "Fraud Investigations: Keeping on the Right Side of the Law," moderated by Darvall-Stevens, closed out the final day of the conference. Panelists included Tony Prior, CFE, CAMS, director, Ernst & Young LLP; Rachael Mah, CA, CPA, PMIIA, managing director, AusAsia Training Institute Pty Ltd; and Simon Goddard, CFE, managing director, Global Insight Ltd.
These international anti-fraud professionals discussed best practices to use when a fraud extends beyond a country's borders and how to keep on the right side of the law while conducting fraud investigations.
"A pragmatic approach to cross-border or international interactions is necessary as there are many pitfalls of which to be aware to make your fraud examination a success," said Darvall-Stevens. "Understanding the local culture and laws is also essential to ensure that you as fraud examiners don't inadvertently contravene laws or disrespect cultural nuances which is likely to inhibit fact-gathering investigations and anti-fraud work."
Further to this point, Prior emphasized that a senior member of the team should obtain an understanding of the environment and the context in which they are operating. "Whether we are acting for a client or conducting an investigation on behalf of our own organization, there can be temptation to jump straight into the investigation," said Prior. "A risk assessment should be performed that considers at least the geography, politics, regulations and law of the region."
The ACFE is sponsoring four additional global conferences in 2016: the Middle East Fraud Conference in Dubai (February 14-15), the European Fraud Conference in Brussels (March 20-22), the Canadian Fraud Conference in Montreal (September 11-14) and the 27th Annual ACFE Global Fraud Conference (June 12-17) in Las Vegas. We hope to see you at one of these events! (Learn more at
*The ACFE does not compensate convicted fraudsters.
Emily Primeaux is assistant editor of Fraud Magazine. Her email address is: eprimeaux@ACFE.com.