Setting the Stage to Fight Fraud: Using ‘Scenario Planning’ to Prevent Crime

Television police dramas typically portray investigators piecing together clues in the aftermath of a puzzling crime. They build a theory about how the crime was perpetrated, concealed, and – if theft was involved – converted into personal gain. Every step of the crime is analyzed as the investigators ask: When did it happen? Why did it happen? Who had access? Who may have observed the act? How did the perpetrator cover his tracks or dispose of his ill-gotten gains?

The information then is assembled carefully into the case framework until a likely series of events emerges. By understanding the whole, the television investigators build a picture of the crime and the characteristics and probable actions of the perpetrator. These characteristics help identify a likely suspect or pool of suspects who then face searing interrogations until eventually someone confesses.

Not unlike the detectives and investigators of television, fraud examiners build theories, gather information, and develop leads that point to suspect business operations or employees.

But imagine if fraud examiners could bypass the entire investigation process and actually solve the crime before it happened! By using a risk assessment tool called “scenario planning,” this may be a real possibility.

The Power of Scenario Planning 

Scenario planning is a device used to strategically analyze risk. It is a disciplined method for imagining the future or a set of possible futures and then taking measures to ensure that any negative “futures” do not unfold. The essence of scenario planning is to create a narrative description of conditions, assumptions, variables, and relationships about present business operations and then examine the result if any changes were to occur in the future. The scenario planner tries to capture and interpret complex patterns of outcomes through combining quantitative data (numbers, ratios, and statistics) and subjective information (observations, impressions, and thoughts). Once the hypothetical future or set of futures are determined, markers are drawn in the near-term to identify which assumptions are coming true. Management then can take positive steps (or precautions) to deter any negative scenarios before they develop.

Scenario planners need good visualization skills, an active imagination, and a thorough understanding of the processes and relationships under study. No other tool is as powerful for challenging assumptions. Peter Schwarz, president of Global Business Network, a consulting firm specializing in strategic planning using scenarios, views the scenario approach as a way to “lift the blinders” from our eyes and discover our creative problem-solving skills. The narrative process enforces a certain logical story development that can aid in expressing hidden assumptions.

Scenarios help organizations understand their current environment, identify structural uncertainties (frauds waiting to happen), and become more adaptable by expanding their mental models. By setting the stage for fraud, management has a chance to fight it before it appears. Patterns of fraud are explored and compared to the existing risk management responses. Strengths or unlikely scenarios are discounted; weaknesses and likely scenarios are studied carefully. Once the range and types of frauds have been discovered, improved risk management techniques can be designed to shore up the weaknesses.

For an example using specific risk scenarios to fight fraud, take a look at an actual Department of Motor Vehicles case below.

Duped at the DMV 

A certain Department of Motor Vehicles had been subjected to theft and fraud for a number of years. Auto license plates (more specifically, the adhesive stickers issued annually for the plates) were a significant problem.

nscrupulous employees were suspected of stealing the plate stickers and either reselling them or giving them away to others. Likewise, there was some concern over the proliferation of fake driver’s licenses. It was probable that employees or others were stealing or duplicating the blank card stock for licenses and creating false identifications.

Exhibit 1 

Reversing the normal sequence of fraud discovery and building a case, the fraud examiner decided to use a scenario approach to analyze the fraud risk exposure at the DMV and then recommend methods to thwart these frauds. For both the adhesive stickers and the driver’s licenses, the three possible scenarios were employee theft, burglary, and unlawful duplication.

The examiner began by constructing a “process and controls” narrative for the issuance of adhesive stickers and driver’s licenses. (See Exhibits 1 and 2.) These narratives outlined the procedures and existing controls at the DMV.

Exhibit 2 

Next, the examiner identified possible weaknesses, strengths, and outcomes if present conditions were to continue. Fraud was broken down into a three-part act: the theft, the concealment, and the conversion.

Exhibit 3: Employee Theft Scenario 

Under the employee theft scenarios (see Exhibit 3), there was little or no control once the stickers and blank stock were stolen. Only random events would reveal an employee theft. Concealment and conversion were easy, so the examiner’s recommendations (which are stated later in this article) had to focus on prevention and detection. Also, because theft was a significant risk in these scenarios, they were rated as “highly likely.”

Exhibit 4: Burglary Scenario 

The burglary scenarios (see Exhibit 4) revealed the same weaknesses in concealment and conversion. Once stolen, there was little to be done except to rely on accidental discovery. However, theft by burglars was fairly well-controlled. Therefore, these scenarios were rated “unlikely” because the opportunity for burglary was so limited.

Exhibit 5: Unlawful Duplication Scenario 

The unlawful duplication scenarios (see Exhibit 5) revealed how counterfeit stickers and licenses could be created (the theft), concealed, and converted for personal use. Driver’s licenses were duplicated more easily without detection, but both suffered the weaknesses of easy concealment and ready conversion. The rating on these scenarios was “highly likely” for driver’s licenses and “unlikely” for adhesive stickers due to the unique reflective ink that is difficult to reproduce and can be detected easily at night.

Summary of the Scenarios 

Analyzing the scenarios exposed the fraud risks for the DMV, allowing the examiner to make recommendations for an anti-fraud environment. They were as follows:

• Employee theft is highly likely for license plate adhesive stickers due to excessive exposure. To deal effectively with this exposure, adhesive sticker stock should be under the custody of one clerk and disbursed to customers solely by one other clerk rather than allowing general access to the stock. Daily reconciliation by a supervisor and periodic auditing of the submitted documents also should be part of the improved risk management process.
• Both employee theft and unlawful duplication are highly likely fraud risk scenarios for driver’s licenses. Because the blank stock cannot be adequately controlled, the risk management solution should be to change the stock to hard plastic cards with embedded holograms and magnetic encoded strips. Without special hologram and encoding equipment, this new plastic stock would be difficult to reproduce.

Scenario planning predicts the likely forms in which fraud will arise, allowing management to make adjustments to processes and procedures before problems begin. By using this method, CFEs can enhance their abilities to foresee high-risk situations and perhaps stop potential fraudsters from committing future crimes.

David McNamee, CFE, CIA, CISA, CGFM, is president of Management Controls Concepts in Alamo, Calif., and a life member of the Association.