Pondering the Good Fight: ACFE Board of Regents' Interview

Members of the Board of Regents discuss the ACFE's effect on the profession, looming frauds, global topics, spreading the word, anti-fraud research, and catching the bad guys.

 

The seven have at least three things in common: they're CFEs, they're members of the ACFE Board of Regents, and they love to catch bad guys. Beyond that, their diverse backgrounds and jobs reflect the makeup of much of the ACFE. 

 

Fraud Magazine interviewed these seven during the 19th Annual ACFE Fraud Conference & Exhibition in Boston. The discussion was wide-ranging and animated as they pondered subjects that interest most fraud examiners. 

 

Participants included: Peter R. Callaway, CFE, CAMS, managing director for RISQ Consulting Services Pty Ltd.; George P. Farragher, CFE, CPA, an executive director in Ernst & Young's global Fraud Investigation & Dispute Services practice; ACFE CEO and CFO Scott Grossfeld, CFE, CPA (advisory member); Bert F. Lacativo, CFE, CPA, a partner in PricewaterhouseCoopers' Investigative Services practice; Delena D. Spann, M.S., CFE, CCA, senior criminal analyst with the U.S. Secret Service, Chicago Field Office, assigned to the Electronic and Financial Crimes Task Force; ACFE General Counsel John Warren, J.D., CFE (advisory member); and Richard F. Woodford, J.D., CFE, executive assistant to the assistant inspector general for audit at the U.S. Department of Labor. 

 

The comments of the Board of Regents' members in this article are their own opinions and points of view and aren't necessarily those of their respective employers and firms. 

 

ACFE's EFFECTS ON THE PROFESSION 

Board members agreed that before Joseph T. Wells, CFE, CPA, began the ACFE two decades ago, anti-fraud efforts were disorganized and training was elusive. But Callaway said that the ACFE has worked hard to bring "like-minded people together from different locations around the world to enable the benefits of networking and building relationships to work toward solutions to this problem we call fraud." 

 

Farragher said that when he began his career in the late 1970s, "there was not any formal training for fraud prevention outside of police school, police academies, or one of the federal agencies. So when the ACFE came along it opened the door to a lot of opportunities for the commercial sector that just weren't there," he said. "(The ACFE) has been a great resource for training in... the global network," Farragher said. 

 

Lacativo said that the ACFE has done a good job in raising awareness regarding fraud. "The ACFE has set guidelines to consider when conducting an investigation. Before that I don't think anything formal actually existed," he said. 

 

Woodford said in the early days of fraud fighting "we didn't even have a good definition of white-collar crime. ... The ACFE has a foundation now: there are bedrock standards; we can say 'these are acceptable practices and here's a whole package of training that's available for people who want to pursue this as a career.'" 

 

Spann said that thanks to the ACFE, "the fraud field is finally being recognized. It's unfortunate that a lot of people tend to think that fraud just began. ... It's had a different name and face. Because of the ACFE we can relate to it." 

 

Farragher said the ACFE has evolved into the anti-fraud "thought leadership" organization for the profession. 

 

BUILDING ON THE FOUNDATION 

Spann said that the four components of ACFE training - financial transactions, law, investigation, and criminology - can't be found in any other association. 

 

"Others have tried to emulate the four sections, but the ACFE offers something that's unique," she said. "We need to continue to maximize not only those areas but continue to implement the growing need of detecting and preventing fraud," she said. 

 

"We need to add on to the basics," said Callaway. "We need to be aware of what's coming further on down the path ... whether it's superannuation fraud, mortgage fraud, computer fraud, so that we're doing the research necessary to provide to the wider community the information to prepare them for what might be coming next." 

 

"Mr. Wells showed real brilliance," Woodford said, "in classifying all the various types of fraud. Without the 'Fraud Tree,' people really have problems identifying the type of fraud they've seen." 

 

Farragher said the ACFE has done much in 20 years but has much more to offer. "We haven't started to rock the boat yet," he said. 

 

While Farragher said fraud examiners now have tools they didn't have when the ACFE first began - such as data analytics and computer forensics - to help identify indicators of irregularities, organizations still need to invest in higher-end applications. 

 

"It would be very helpful," Lacativo said, "to crack the nut on detection and deterrence of fraud because I don't think that's actually happened yet. I don't think you'll ever get to pure prevention even though we'd like to. We need to take the next step and come up with more analytics and obtain a better understanding on why people do bad things. We also have to provide companies with tools that will allow them to better deter and detect fraud or improper activity." 

 

Grossfeld agreed with Lacativo's view. "You look at [the ACFE's] Report to the Nation and see that the vast majority of crimes occur in smaller organizations," Grossfeld said. "We hope technology tools will advance because many are cost-prohibitive to smaller companies." 

 

Callaway said that Grossfeld made a good point and added that often businesses don't want to spend money, time, and effort to prevent and deter fraud because of the prevailing faulty culture that "it hasn't happened to us and it's unlikely to happen." 

 

"Fraud has been around longer than the Bible," Farragher said. "These schemes have occurred over and over again throughout history. It's just a different medium, different venue, different group of people. There's a lot of fraud out there; it's never going to go away. We're seeing more because we're looking more." Woodford noted that Farragher was "alluding to the apple from the Tree of Knowledge as the first internal control! It certainly was an eye opener." 

 

"When we're talking about detection and deterrence," Warren said, "we tend to think of it only as an accounting problem. But there are so many other factors like raising employees' awareness. In the ACFE's Report to the Nation we still see that most frauds are reported by tips. How do you get people at the grass-roots level to understand indicators other than financial? Such as 'Why is this person driving an expensive car when he only makes $20,000 a year?'" 

 

SPREADING THE WORD 

Board members said they try to disseminate fraud examination tenets to the uninitiated without being overbearing. 

 

"The value of a credential is not in the letters themselves but in the people who earned them," Grossfeld said. He said if a CFE never uses or displays the certification, then those in the marketplace won't know why that fraud examiner is an expert and where the value comes from. 

 

"In our forensics services practices," Lacativo said, "we have an expectation that our people will increase their knowledge as they progress in their careers. Just as we expect our accountants to pass the CPA exam we also ask our forensics services professionals to obtain other credentials and the CFE is one of them. We help our people with self-study courses and passing the CFE exam is encouraged." 

 

Grossfeld mentioned that the recent ACFE "Compensation Guide for Anti-Fraud Professionals" states that CFEs earn on average 22 percent more than those without the certification. 

 

"Talking about the value of the CFE," Farragher said, "it's the diversity within the CFE ranks. When I do investigations I have investigators, accountants, computer forensic specialists. We even have engineers. On our health-care side we have pharmacists and nurses. All team members have to learn some investigative skills, but they're not all accountants and investigators," he said. 

 

Callaway said that companies often don't tap into those diverse resources for their anti-fraud teams. "If we were to use them more, we would really appreciate their different skills," he said. 

 

Woodford said that as an attorney he would like to see more lawyers study for CFE certification. But he said unfortunately lawyers don't always believe it will add value to their law practices. "They would hire an investigator rather than go through the steps of learning," Woodford said. "But personally I got a lot more out of the CFE exam process because I didn't have an accounting background." He said it makes sense to recruit not only attorneys but professionals in diverse communities, such as health care or engineering, because that's where the fraud originates. 

 

LOOMING FRAUD PROBLEMS 

Board members said they try to anticipate fraud problems peeking over the horizon. But there's nothing new under the sun, they said, just more intricate variations. And when the governments of the world or the media focus on a particular problem, it often becomes the "fraud flavor of the month." 

 

Lacativo said his firm is seeing an upsurge in clients' interest in the U.S. Foreign Corrupt Practices Act (FCPA) possibly because the FBI and the Securities and Exchange Commission began a task force several years ago to work with the Department of Justice to enforce the legislation. 

 

"Companies are concerned about acquisitions they may be making overseas or relationships with overseas agents," Lacativo said. "They're coming not only to legal counsel but firms like mine to have our people help them from a forensic accounting standpoint." 

 

He said that government agency project priorities change organizations' prevention plans. "Businesses have determined to be proactive rather than wait for the government to tell them they have a problem," he said. 

 

Farragher said his personal practice focuses on corporate investigations, bribery, and corruption, and FCPA has been 80 percent of his portfolio for the past five years. 

 

"The Sarbanes-Oxley Act was one of the things that brought FCPA to everybody's attention," he said, "because SOX put pressure on corporations to make sure the internal controls were proper. 

 

"Everything runs in cycles," Farragher said. "First it was government contracts then it was financial reporting. Then it was health care, stock options, FCPA." Events drive the market and the frauds, he said. Lacativo agreed, but said there are other forces. "Look at the whole stock-option situation," he said. "It wasn't discovered by anybody sitting at this table. It was discovered by an analyst starting to ask questions." 

 

Grossfeld wondered if eventual improprieties will be found in oil speculation. "I imagine that someone is already running analytics on oil futures trading," Farragher said. "I'd love to have the data on that just to see what's going on." 

 

Callaway said he believes that the huge amount of money stored in the Australian superannuation fund is a prime target. "[Australian] employers are required to put 9 percent of your salary into a fund and you can elect to put a percentage as well so the amount of money in the fund is massive," he said. "Individuals are entitled under exceptional circumstances to withdraw funds from their superannuation funds, which can be substantial if you've been putting money into it for 20 or 30 years. So criminals can commit identity fraud and send correspondence to the fund pretending to be Peter Callaway and withdraw the funds. Then the real Peter Callaway gets his statements in six months and there's nothing in the fund." 

 

All pension funds and 401 funds become easy targets as populations age. "People are living longer and senior citizens are already prime targets of fraudsters," Woodford said. "Another prime fraud area for the future is natural resources with increased competition. For instance, in areas of increased competition people may put in fraudulent claims for water rights and it may be hard to prove them wrong." 

 

DYNAMIC TECHNOLOGY 

Board members said fraud examiners need to know about the latest computer forensics, Web 2.0, and software developments but they don't have to become high-tech wizards to do their jobs. 

 

"In my firm we rely heavily on those with the IT backgrounds and computer forensics expertise. They are an integral part of the investigation team," said Lacativo. "They help us get the data and analyze that data - look behind it and find the hidden things. I don't have to be a computer forensics expert, but I do have to know their capabilities and when to call on them. I also need to be aware that there are different privacy laws in other countries." 

 

"I use computer forensics on almost every case whether it be for analytics or data retrieval or an e-mail review," Farragher said. 

 

"An accepted approach," Lacativo said, "is upon commencement of an investigation you identify the universe of people involved, capture their e-mails, and image their computers. You may not necessarily analyze all of the e-mails immediately. However, preservation of the information is important. The capture and imaging is relatively cheap while analysis can be expensive," Lacativo said. 

 

Farragher agreed on that procedure. "If you don't do that it could look like you didn't follow due diligence," he said. "You have to retrieve data that will stand up in a court of law." 

 

Lacativo said that every time someone sends out an e-mail it's housed on the user's computer, the company's server, the receiver's computer, the receiver's company's server, and other places. "One of the challenges an investigation team faces when looking at e-mails is to remove those duplications. Once that is done, key-word searching helps to make the e-mail analysis process more efficient," he said. 

 

Woodford said that no fraud examiner can afford to be a Luddite - someone who opposes technology. "If you go through the CFE exam process you have to leave with a certain familiarity with technology," he said. "You don't need to be an information technology expert; you just need to know where to find the experts." 

 

Farragher raised a new concern for all traveling professionals. "We have our computer forensic people preserve our data through encryption because if you're carrying a laptop to some countries it will be scanned by somebody," he said. "I'm told that it can be scanned through baggage or in your room so you have to have the appropriate level of technology backing you so you don't blow a case by someone else getting your data. We have a rule that in certain countries people have to bring in clean laptops; we only bring in data for the cases we're working on." 

 

IT TAKES A GLOBAL VILLAGE 

Board members agreed that Americans can no longer afford to be U.S.-centric; fraud knows no boundaries and all must be aware of international privacy rules, cultural differences, and accounting standards. 

 

Lacativo said that as companies worldwide and in the United States adopt and implement the International Financial Reporting Standards (IFRS) "some may take advantage of the change and that may lead to increased litigation and investigations." 

 

The International Accounting Standards Board (IASB) in London devised the IFRS. In May, the governing council of the American Institute of Certified Public Accountants (AICPA) voted to designate the IASB as an accounting body for purpose of establishing international financial accounting and reporting principles. The amendment to Appendix A of AICPA Rules 202 and 203 gives AICPA members the option to use IFRS as an alternative to U.S. Generally Accepted Accounting Principles (GAAP). The Securities and Exchange Commission decided last year to allow foreign companies to report with IFRS without using U.S. GAAP. 

 

Grossfeld said he can see the long-term benefits of a single global accounting standard, but he said the potential increase in financial statement frauds during the transition is also a possibility because of investors' and CPAs' lack of understanding of the IFRS. 

 

Farragher said that U.S. clients sometimes begin an investigation by themselves in other countries and find themselves in trouble. 

 

"They've either violated privacy laws in the EU or they took information out of the country that they weren't allowed to take," he said. "Our members need to know they can't conduct an investigation outside of the United States the same way as they do here. They have to serve two masters: U.S. laws and the local country laws." 

 

"Everything is being globalized now," said Lacativo. "The United States is not the center of the universe anymore. We're dealing with emerging nations and we have to be sensitive to local laws and customs when conducting investigations outside of the United States." 

 

HIGHER-ED PARTNERSHIP, ANTI-FRAUD RESEARCH 

Board members emphasized the role that Chairman Wells has taken in promoting fraud examination educational opportunities for higher-ed students throughout the United States and in other countries. For several years, the ACFE has given materials and syllabi to higher-ed schools (see the Anti-Fraud Education Partnership) to teach "Fraud Examination 101," supported new anti-fraud programs and degrees, and sponsored the ACFE Higher Education Advisory Committee. 

 

"In Texas, we heavily recruit students from The University of Texas and Texas A&M University," said Lacativo. "Chairman Wells taught the fraud examination class at U.T. for a very long time and we get the benefit of that. I'm all for more colleges and universities embracing these types of anti-fraud programs. Look at West Virginia University; I was fortunate to be a part of the team that helped to develop its investigations curriculum. They're sharing their information with schools across the country. If I get people out of school who can already have anti-fraud knowledge I don't have to teach them. That is good for my firm and for our clients." 

 

Spann teaches fraud courses in the School of Business at Robert Morris College in Chicago and at Utica (N.Y.) College in the online graduate program of the Economic Crime Management Program. She has been a frequent adjunct lecturer at Chicago's Northwestern University in the Investigation & Commercial Fraud Prevention Program. 

 

"As the president of the local chapter in Chicago I've reached out to the heads of these business schools because so many students are interested," she said. "I've encouraged our chapter members to also reach out to students - invite them to our events to mix and mingle." 

 

Spann said CFEs should consider approaching colleges and universities to be adjunct professors. "Most academics have the theory but many don't have the practical side," she said. 

 

Farragher concurred. "I see a number of professors who have never conducted an investigation," he said. "We as chapter members offer to go into classes and give presentations on actual cases to give real life to those courses." 

 

Woodford said the ACFE is enabling more anti-fraud educators to join by modifying the requirements for academics to become CFEs. "We not only want to encourage more academics to join; we need to have them conduct more research," Woodford said. 

 

"Mr. Wells began the Institute for Fraud Prevention (www.theifp.org/) a few years ago when the ACFE cofounded it with the AICPA," Warren said. "We're working on funding cutting-edge research on fraud and white-collar crime because, apart from the ACFE's Report to the Nation, it just doesn't exist. We just see an appalling lack of data, so we're trying to put some real money behind academics' research projects." 

 

SENTINELS AMONG US 

Several of the board members have counseled would-be whistle-blowers, or sentinels, as the ACFE calls them. Each year, the ACFE presents the Cliff Robertson Sentinel Award to recognize the selfless act of coming forward for the sole purpose of righting a wrong. 

 

"At one point in my career I was working a hotline," Woodford said. "So I received quite a bit of phone and written complaints on various levels of the federal government. One was a classic retaliation for whistle-blowing. 

 

"The guy presented the facts of the problems to his supervisor. He actually gave him a copy of the whistle-blower protection statute and said, 'Now that I've notified you and the inspector general, this provision protects me under federal law,' and then two days later he was suspended without pay. He then called me. ... [Because of written evidence] this case was actually very easy to resolve." Woodford said this was a rare open-and-shut case; most are in the gray areas. 

 

Farragher knew a sentinel who was looking for a job. Farragher sent the sentinel's résumé to a friend who was hiring. "I got this message back from the manager, which said, 'You've got to be kidding me! Who would want to hire someone they could not trust?'" 

 

"Many times," Woodford said, "the whistle-blower then becomes the problem. There's a perception by management or from peers that they're not loyal to the organization." 

 

Warren, as the ACFE's general counsel, said he's received many calls from scared members, mostly internal auditors, who have discovered questionable activities within their organizations. 

 

"They feel they have a duty to report it and don't know where to go," he said. "I try to be cautious with them and advise them first not to run straight to the police," Warren said. "There's a certain protocol you have to follow to report through your chain of command within the organization. I try to tell them their legal obligations and possible consequences as best as I understand them and leave it up to their consciences." 

 

Farragher said organizations often make the mistake of assigning internal auditors to conduct internal investigations. "They're part of management investigating management and you normally find an independence problem," he said. 

 

Woodford said that it's similar to the legal concept of informed consent. "You really can't force someone to [blow the whistle]. It's an individual choice. But you can lay out the options. Federal employees are supposed to obey a regulation that says they are obligated to report violations, but it's hard to enforce that. People need to know that there's some personal risk though it may not be formal retaliation where they lose pay or benefits or their jobs. 

 

"It takes a lot of guts to come forward to do what is right; it can come at a great personal cost because integrity does cost something," he said. 

 

AT THE END OF THE DAY ... 

The board members derive much satisfaction from their jobs. Motivation generally isn't a problem. 

 

"What keeps me motivated," Woodford said, "is an association of like-minded individuals with the same goals. Five or six years ago I felt like I was just out there doing my thing ... but now I realize fraud examination is a large international effort. I'm very excited to be a part of it." 

 

Many of the board members said they enjoy transforming chaos into harmony with disparate evidence. "You start an engagement with this mass of facts and none of it makes sense," Farragher said, "and slowly over the course of the investigation it all comes together." 

 

Callaway said that he still likes to deal with fraudsters "who think they're a little bit smarter than I am, and I'm going to prove them wrong. I enjoy finding that little extra piece of the jigsaw puzzle to solve a case." 

 

Happy clients are one goal, many said. "I feel satisfied when after the conduct of an investigation, a client says, 'Bert, we really like you but hope we never have to see you again!'" Lacativo said. "I don't feel bad about it because, more than likely, I've helped them deal with an important situation, and I know that they will call me again if the need for an investigation arises." 

 

But the board members said their greatest satisfaction comes from helping prevent and deter fraud in their communities so that citizens are protected. Most volunteer their efforts to educate not only other fraud examiners but laypersons in their cities. 

 

"We can help the wider community," Callaway said, "such as the pensioners who stand to lose their houses because of mortgage fraud or those who could have their identities stolen. If we can help prevent fraud in the community we're helping the greater good." 

 

Dick Carozza is editor-in-chief of Fraud Magazine.