Digging Deeper By Walkin', Talkin', Lookin', & Listenin'

As fraud examiners and auditors, it's crucial that we not only comply with professional standards but that we go way beyond the call of duty. During an investigation or audit, break away from the desk the client assigned to you, walk around the job site, make friends, ask questions, listen intently, and then skeptically analyze your findings.

 

Auditors aren't typically remembered for their successes but for their failures. Case in point: Arthur Andersen LLP. During the firm's heyday, they conducted thousands of audits in accordance with all professional standards. But due to a rather significant audit blooper, the firm is now dead and buried. One word will be forever etched on its tombstone: Enron.

 

History will record more about this firm's infamous audit failure than all its unqualified audit reports combined. It's important to have current and detailed knowledge of everything from detecting deception to observing inconsistencies in an organization's separation of duties. Following is a walk-through of a typical day at the office for an auditor or fraud examiner equipped with the skills of a CFE that could prevent or detect another Enron. 

 

BE MOBILE AND AVAILABLE ON THE JOB SITE 

When you arrive at the job site, your client will greet you at the door gushing about how happy he is to see you. That's the first lie. You could hold the keys to his job security. In many cases, he's set up a space for you so far off the beaten path it would take a road map for anyone to find you. Regardless, it affords many comforts of your own office - telephone and fax connections, high-speed Internet access, and maybe even a private bathroom. A staff member usually will be assigned to assist you, but his main job is to give you company documents and keep you seated at your desk. 

Break away! The dirt you want probably isn't in those documents; you have to extract it from staff members' minds or observe it in normal office procedures. Before you settle in, request a tour of the facilities and talk to employees. Tell them who you are, why you're there, and where you'll be located in the building. 

 

Bring plenty of business cards complete with all your contact info. Tell employees that your door is always open because some will want to talk to you off the premises at a time and place that's convenient for them. They might test your sincerity by suggesting odd hours. But whether it's 6 a.m. or 9 p.m. - it's important to accommodate. They have information you want; you have nothing they want. 

It's sometimes appropriate to let your client's employees know where you'll be staying in town. Sometimes a fraud examiner or auditor will awake to find a brown envelope that had been slipped under the hotel room door. The envelope could be stuffed with an employee's suggested list of questions for a particular individual or copies of invoices or other documents that might point to a problem. 

 

Obviously, the employee providing the information doesn't trust management and is afraid of being seen talking to auditors or fraud examiners. He views you as his last hope so it's crucial to provide him and the other employees every possible opportunity to contact you. In any organization where fraud is occurring, normally someone other than the fraudster knows about the scheme. Your job is to find that individual in a relatively short period of time and earn his trust so he tells you what he knows. 

 

In some cases, management loses employees' trust because it might not follow up on whistle-blower leads or, even worse, punish staff members for coming forward even though it said it would protect them in its whistle-blower protection policy. 

 

For example, let's say a low-level employee, Betty, musters the nerve to tell management about her suspicions of Fred, her co-worker. Good old Fred is one of the most liked, trusted, and respected employees in the entire organization. His character is beyond reproach. Management's typical reaction is disbelief. "There's no way that Fred would steal. He's been with the company for 30 years. I'd trust him with my life," his boss says. Perhaps management will accuse Betty of plotting a vendetta against Fred, whose position many want. Management might warn Betty that Fred isn't the problem; she is. "Get back to work, keep your nose clean and head down. You're lucky we're not firing you on the spot for accusing good old Fred of such a heinous act!" says Betty's boss. 

 

Betty reluctantly keeps working with Fred, but she's afraid that if he continues to steal, others might suspect she's complicit. Should Betty stay and risk accusations of fraud by association or quit and find another job? She quits. 

 

Because management typically won't change its attitude, what type of employee will feel comfortable working in a corrupt environment? Another thief! Soon, many of the workers will be nothing but a bunch of fraudsters, simply because management refused to look into one accusation regardless of its supposed whistle-blower protection policy. 

 

ACT LIKE AN EXTROVERT 

Initiating conversations is one of the most important skills of a good auditor or fraud examiner. Don't wait for your client's employees to talk with you because they usually won't. 

 

Let's say that $50,000 is missing. For investigative purposes, of course, you'll want to talk to as many employees as possible. First, you might introduce yourself to Doug Smith, an individual who you suspect knows valuable information: "Hello, I'm Sam Jones. Management has asked me to review its operations." 

 

When initiating the conversation with Doug, first calibrate him. Don't say, "It looks like $50,000 is missing. Did you take it?" Though he might be a disinterested third party, his body will immediately go into defense mode if he thinks he's under suspicion. You don't want this to happen. 

 

Instead, ask him casual questions. Maybe Doug has a big stuffed bass hanging on his office wall. "Boy, Mr. Smith, did you catch that bass? I love to fish, but I've never caught a whopper like that! Tell me about it!" Doug is proud of catching that fish or it wouldn't be hanging on the wall. At this point, he'll be relaxed. Observe his body language, both verbal and nonverbal, when he isn't under stress. His voice won't raise a few octaves, his face won't be flushed, and no perspiration will be on his forehead. After Doug finishes telling you about catching the fish, you might transition the conversation to the investigative phase: "We should get together sometime and go fishing, Mr. Smith. But I tell you what, I've got a problem and I need your help. I'm not sure but it looks like there might be about $50,000 missing. Tell me what you think happened." 

 

If Doug has been leaning over his desk with his arms open while telling you about catching that fish, he'll likely remain in the same position when you ask him to tell you what he think happened to the money - unless he turns out to be the perpetrator. If his body language changes dramatically, you might assume that he could have knowledge related to the disappearance of the funds. Even if he lacks direct knowledge, an innocent person will tell you what they think happened. 

 

If Doug sits up straight, pushes his chair away from his desk, and his face turns white and he begins breathing rapidly, you're either talking to the perpetrator or someone who, by failing to carry out his duties and responsibilities, created an atmosphere or opportunity for someone to steal the funds. If you hadn't first calibrated Doug, you wouldn't have been able to observe the changes in his body language. 

 

BE A GOOD LISTENER 

Build a rapport with your client's employees by developing good listening skills. Beatrice has just become a grandmother for the first time. Guess what she wants to talk about? Listen, smile, and nod your head, no matter how dull the conversation. Maintain eye contact with her and don't acknowledge other people's conversations when she's speaking to you. Don't give her any reason to believe you're not paying attention. If you're not listening to her talk about her grandchild, would you listen to her if she took a chance and told you what she knows about the missing $50,000? 

 

You should simultaneously listen to the conversations around you. Doris knows all about the disappearance of the $50,000 and is hoping that you'll ask her about it, but she just can't bring herself to volunteer the information. Instead, she might stand close to you and say to one of her co-workers, "Did you hear about that $50,000 that was missing?" After you've overheard her, you can later approach Doris about the funds. Then she'll be off to the races and give you valuable information. Now she can go back to her co-workers and say, "I'm not a squealer. The investigator simply asked me what I knew and I told him. I'm not going to lie for anybody." 

 

ALWAYS THE SKEPTIC 

Be skeptical when individuals either answer your questions or provide information. Don't let your ego keep you from requesting clarification. Suppose you ask a clerk, Hortense, about an unusual adjustment to accounts receivable. She launches into a lengthy and detailed explanation, but something seems inconsistent. Ask Hortense to repeat her story and elaborate on a few details. You might ask for this clarification immediately or after a few hours. If Hortense is lying, she'll have to remember her story. Her body language will be telltale. Often, one of the easiest ways to determine if an individual is lying is by noting her inconsistencies. When a person tells the truth, there are no choices. If she's honest, there should be only one answer regardless of the length of time between questions or how you rephrase the questions. In the normal course of an investigation, you'll ask managers many questions. Chances are they'll mostly tell you what you want to hear. Now is the time to be doubtful. 

 

You might ask, "Do you ever pre-sign checks?" They'll respond with a resounding, "Absolutely not!" 

 

But while examining the checkbook, you observe six pre-signed checks. When you confront a manager, he might say, "Well, we only do that when one of the check signers goes on vacation." So much for the policy prohibiting pre-signing checks. 

 

Next, you might ask, "Do you have a vault?" They will answer, "Yes." 

 

"Who can go into the vault?" you'll continue. 

 

"Authorized personnel only." 

 

You see a big bank-type vault located in the corner of the room with a large sign over it that indeed reads, "Authorized Personnel Only." (Looks good!) But you notice that the door is open and that several individuals are freely walking in and out of the vault. There appears to be little security. To test the client's internal control, you attempt to walk into the vault. Although no one knows who you are, you're wearing a suit, which earns instant creditability. You're not challenged. Once inside, you look around and observe a stack of papers sitting on a shelf. The sheet on the top of the stack is a $10,000 bearer bond without any holes punched in it, so it's not canceled. That's $10,000 in cash that you could take to the paying agent. If you're a CFE, you'll know that this is a prime opportunity - the crowning component of the fraud triangle! Even workplaces that appear to be locked down and protected might have poor security measures when held under the microscope. 

 

Let's say you've been engaged to investigate some missing funds from the city hall in the city of Rockytop. When examining either the returned, imaged, or electronic canceled checks in the city's monthly bank statement, you note that a check made payable to the Rockytop Police Department for $1,500.25 was marked "void," but cleared the bank. The check bears the stamped signature of the mayor and the actual signature of the city finance director. You notice that on the back of the check, someone has used a stamp with the city's name and address rather than a restrictive "For Deposit Only, City of Rockytop" stamp. Also, the bank processing stamp indicates that the check had been cashed at 9:40 a.m. 

 

You ask the finance director about the check and he explains that he knew it had cleared the bank, but because it was a "wash" transaction, he marked the check "void" as a note to himself. He says that after he cashed it, he realized he really didn't need the cash, so he immediately redeposited the proceeds. He then produces a cash ticket, which indicates that $1,500.25 was deposited to the same account that the original check was drawn on. Per the time/date stamp, it was deposited only 50 seconds after the original check was cashed. You examine the bank statement, which shows that the original check had cleared and that on the same day $1,500.25 was deposited into the account. While the actions of the finance director seem suspicious, he did offer a believable explanation, and you do have documentation that the funds were redeposited into the bank account. Sounds good! Or does it? 

 

Ask yourself the following questions: Does the explanation make sense? Have you ever met anyone named Rockytop Police Department? Why would the police department need cash? All the department's regular bills would be paid out of the city's general fund because it's part of the operations of the city general government. Maybe the police chief requested cash to be used in a drug buy. That would be a legitimate reason to request cash. However, do you think the police chief would request $1,500 and 25 cents for a drug buy? If he did make such a request, shouldn't the check have been made payable to the police chief? Does anything about the transaction make sense? But you have the documentation that cash came out of the account and went right back in. Or do you? 

 

If you accept the finance director's explanation of the chain of events surrounding the check, you have just committed a deadly sin for an auditor or fraud examiner. You've assumed! You've assumed that the proceeds of the check were redeposited into the account. What you didn't know is that the finance director also opens the mail every morning, prepares all of the deposits, makes the deposits, and reconciles the bank statements. (The independent auditor hadn't included any recommendations for improvements in internal control as part of the annual audit.) The finance director had simply not deposited three checks he had received in the mail which, as nonrecurring sources of revenue, weren't recorded as receivables on the city's books. The three checks totaled (you guessed it!) $1,500.25. He simply made a check payable to nobody, cashed it and put the money in his pocket, and then deposited the three checks that totaled the same amount as the check he cashed. He took advantage of the opportunity presented to him. And that wasn't the only time. He took advantage of $465,000 worth of additional opportunities. (For a complete report of the case upon which this account was based, please see www.comptroller1.state.tn.us/RA_MA/ and scroll down to November 2001, The City of Rockwood.) [Links might not be available. —Ed.]

THE CONSUMMATE MOBILE, EXTROVERTED, LISTENING SKEPTIC 

Walking around the job site, making friends, listening to casual conversations, and always being skeptical behind your casual demeanor can lead to serious breakthroughs in any audit or fraud examination. By following these suggestions, you'll create opportunities for discovering valuable information that could provide you with keys to uncovering fraud. 

 

Dennis F. Dycus, CFE, CPA, CGFM, ACFE Fellow, is director of the Division of Municipal Audit for the Tennessee State Comptroller's Office and a member of the ACFE's Foundation Board of Directors. He is a former member of the ACFE Board of Regents, adjunct ACFE faculty member, and president emeritus of the Middle Tennessee ACFE Chapter.  

 

The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.Fraud-Magazine.com or ACFE.com. Permission of the publisher is required before an article can be copied or reproduced.