In the Spring of 2012 I published a five-part series of on-line articles through Corporate Compliance Insights under the heading of “Incorporating the Fraud Triangle into Compliance Risk Assessments.” While those articles were publicly available, I understand they received a fair degree of attention and were quoted and/or cited by numerous persons doing white-papers or articles where this information was relevant. A friend in the compliance profession recently told me that this series of articles was no longer available publicly/online and asked if I might consider updating/revising that work into one complete article and putting it back out into the public domain – here it is.
Tag: fraud
DOJ Provides New Guidance to Prosecutors on “Individual Accountability for Corporate Wrongdoing”
On September 9, 2015, Deputy Attorney General Sally Quillan Yates issued a memo to all of DOJ regarding individual accountability for corporate wrongdoing. It’s been a heavy issue for years – that executives in companies where frauds or misconduct have occurred don’t seem to get prosecuted – and according to this memo, DOJ formed a “working group of senior attorneys from Department components and the United States Attorney community with significant experience in this area” to examine “how the Department approaches corporate investigations, and identified areas in which it can amend its policies and practices in order to most effectively pursue the individuals responsible for corporate wrongs.” This particular memo was stated as being a product of that working group.
I suppose that many may take this as a long-awaited admission that DOJ wasn’t focusing on individuals enough in corporate fraud matters (criminal and civil). I don’t know that I believe that to be the case, but I do find it refreshing to see greater emphasis placed on holding individuals accountable. Personally, when I was an FBI Agent, I was much more interested in putting people in jail than seeing my cases resolved with a settlement agreement of some sort. We always pursued the people behind the crimes. But like I said, the statistics and data do seem to indicate that some greater emphasis was needed in this area.
I haven’t analyzed the memo yet and may post some thoughts about it after I do so. Though I am guessing that many will be doing so very soon, probably better than I, and I look forward to reading their thoughts. Some of the repercussions that this memo will create are obvious, such as much more intense internal corporate investigations (which the external lawyers, compliance consultants and forensic accountants will welcome), while others are more subtle (e.g. how this will affect disclosures and negotiations).
Anyway, with no further commentary from me, here are the six (6) “key steps” that this memo says will provide guidance to “strengthen our pursuit of individual corporate wrongdoing“:
- In order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct;
- Criminal and civil corporate investigations should focus on individuals from the inception of the investigation;
- Criminal and civil attorneys handling corporate investigations should be in routine communication with one another;
- Absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation;
- Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declinations as to individuals in such cases; and
- Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.
Here’s a copy of the Memo: DOJ Memo – Individual Accountability for Corporate Wrongdoing – Sept 2015 – I suppose it will become referred to eventually as the “Yates Memo”.
Accepting a Fraud Engagement – “Look Before You Leap”
One of the primary considerations when contemplating accepting a fraud examination engagement is whether or not the work justifies the costs to our clients. Just like our clients, among the chief purposes of us being in business is to earn money, so we hate to turn away or minimize work. But if we truly strive to best serve our clients and be perceived as trusted advisers, there are times when we need to advise our clients not to hire us (or anyone else) or to more appropriately align the scope of our work with realistic expectations as to outcomes.
It’s not that unusual to get a call from a company that has cause to believe an employee(s) has committed a fraud and where the company is very angry at the betrayal of trust and worried about how big the loss is. That anger and fear can make them very attractive to inexperienced and/or unscrupulous consultants/fraud examiners/accounting firms, many of whom charge premium rates for this type of work. Many times have I heard such prospective clients say “It’s a matter of principle, so I don’t care about the costs! I want to get to the bottom of it and put the [expletives] in jail!”
That feeling about costs passes quickly, particularly after the invoices for your work start coming and there is no insurance to cover the costs and the likelihood of recovering any of the stolen funds is remote. Lets face it, most people who embezzle funds from an employer are not hoarding up what they stole. They spend it. And not on hard assets that may be converted to cash or otherwise benefit our clients. Simply put, it’s usually gone.
As a trusted adviser, when we believe that to be the case and absent some legal, regulatory, or contractual need for the client to conduct a full fraud examination, we are obliged to share our concerns with the client. We need to make the client aware of its risks and set their expectations on the outcome(s) realistically and practically. Where possible, we should devise other ways to help them that provide a reasonable return on their investment for our time and expertise, even if that return is more preventative of future misconduct (e.g. internal control suggestions) and/or just a moral victory (e.g. criminal prosecution) more so than a recovery of misappropriated funds.
In such instances over the many years I have been doing fraud examinations, I have both talked prospective clients out of hiring me for such an examination or into reducing the scope of my examination from that which they initially envisioned. In either case, I never leave them lacking in understanding about why conducting a formal and/or exhaustive fraud investigation was likely not going to achieve the results they desired. I also never leave them empty-handed, in the sense that, for example, I teach them how to do some investigating themselves and/or provide some ideas on internal controls that might prevent the next internal fraud. I rarely charge for that time (it’s usually minimal time and a nice “thanks” is payment enough) and have found the favors are usually returned somewhere down the road, whether by referral, reference, or selling/maintaining other accounting/tax/financial consulting services for that client.
One great example of this is an embezzlement matter that I took on a few years ago for a relatively small business. The employee at issue, whom I will hereafter refer to simply as “Joe,” had been with the business for over a decade, much of which time was spent in nearly complete control over the accounting function(s). There were no internal controls to speak of and Joe not only had the ability to steal in a wide variety of ways (i.e. payroll, accounts payable, credit card usage, false vendors, accounts receivable, cash, etc.), but also had the knowledge, experience, and ability to well conceal such activities within the books and records of the business.
After meeting with the client to gain a full understanding of the matter, their accounting system(s) & controls (or lack thereof), and learn about Joe (family, lifestyle, etc.), I quickly realized that due to the many ways that Joe could have stolen from the business and could have attempted to conceal it, conducting an exhaustive fraud examination designed to uncover the full extent of Joe’s fraud(s) would be extraordinarily expensive, while the likelihood of recovering much, if any of the stolen funds was poor. I suggested to the client that I be retained, through the client’s counsel, as a “consulting expert” rather than a “testifying expert” (which was the client’s original intent), so that I could better leverage any work to the client and otherwise keep its costs for the examination down.
In this particular matter, I quickly recognized that the facts and timing allowed for an interesting and possibly significant cost-savings option for the client – the possibility that I could interview Joe. Joe’s employment had been terminated on a Wednesday for some cause other than fraud (the fraud concerns were not mentioned to Joe when his employment was terminated) and they called me that Thursday afternoon. Following my directions, the client quickly identified and documented about $200K in alleged misappropriations. I spent about thirty hours reviewing and testing the work the company had very quickly done at my suggestion and learning as much as I could about Joe. Early the following week, I called Joe, identified myself, explained my purpose, and asked if he would be willing to let me interview him immediately. The ending result from the consensual interview of Joe was a hand-written confession.
The client had no insurance to cover Joe’s thefts and realized through our discussions that the likelihood of recovering much or any of the stolen funds was remote. More so than recovering their losses (which could not be completely quantified without significant work at great costs), the client’s desired outcome became “justice” and a criminal referral that included a hand-written confession was the ideal solution. The guidance and alternative solution that I proposed and undertook saved the client many tens of thousands of dollars in fraud examination and attorney’s fees and helped ensure that Joe became a current resident of a penal facility. In addition to a restitution order from the criminal prosecution, I believe the client eventually got a civil judgment, but to the best of my knowledge, both were more paper than currency. At least justice didn’t cost them much in this case.
I could have easily talked that client into an exhaustive forensic fraud examination. They initially felt the need for that (it was also recommended by the client’s counsel) and that was why they called me. But I knew that doing that was not in their best interests and I firmly believed that it was my duty to let them know it, even though I fully understood that if they agreed, the fees generated by my work would be many tens of thousands of dollars less. I definitely lost some short-term revenue, but I gained a long-term friend who has many needs that I or my firm can be fully trusted to help them with.
The old adage “look before you leap” finds very sound application in this practice area, and it’s our duty as trusted advisers to not just apply it to ourselves when contemplating accepting a fraud examination engagement, but to help our clients apply it as well.
Advanced Forensic Accounting – May 4th, Richmond, VA
On May 4, 2015, I am offering our “Advanced Forensic Accounting” course in Richmond, VA. The course offers 8 hours of CPE (for CPAs). Click here for a link to the official advertisement with all the relevant information.
“Advanced Forensic Accounting” is designed primarily to influence the way that one approaches and thinks when analyzing financial records in the course of a financial investigation. This is an improved and appropriately modified course that was used to train new FBI Agents at the FBI Academy, many of whom had no prior investigative, audit or financial experience. In 2013 and 2014, the Securities and Exchange Commission engaged us to teach this course to its Enforcement Examiners and Examiners in 7 of their 11 Divisions.
The course begins with an introduction to critical thinking in an investigative environment and how that is different from the way in which an auditor thinks. Time is also spent discussing how financial records can be used to build a profile of a person and how that profile is useful to an investigation. Specific and technical steps are then discussed related to how to go about collecting, organizing and analyzing financial information and how to document that analysis. The vast majority of learning is through participation in and discussion on a detailed practical exercise where the class is given three months of bank statements, including the supporting documentation for each transaction, and tasked to conduct analysis using the techniques discussed.
Come join us and see if you can figure out what Samir Samour is up to!
Messaging Risks – When IS the Right Time?
There was an awful lot of outrage about the Nationwide commercial drawing attention to home accidents affecting children during the Superbowl this year. It didn’t seem that the outrage was so much directed at the message as much as it was the timing – it was done during a time when people were trying to be entertained, not horrified.
I have four young daughters, so I get that anything that makes me think about their mortality (much less my delinquency or negligence contributing to something that harms them) causes a certain amount of discomfort. A lot of discomfort. But I was with my family watching the game when this commercial aired and I have to say, though it certainly put a temporary damper on our festive spirits, it also caused a moment of reflection. I had forgotten about securing a television set in our home that could fall if one of my kids climbed on it (such a scene was in the commercial).
So I am supposed to be angered that I suffered a brief interruption of my precious and fleeting television entertainment-induced happiness to be reminded that I needed to do something the consequences of which could cause a constant interruption of my happiness for the rest of my life?
When exactly is the time for delivering messages that draw our attention to risks? The argument that this commercial was poorly timed because it interfered with our entertainment is, in my mind, absurd. Television is predominately for entertainment. Therefore, there could be no appropriate time for a commercial like this. Perhaps there are some shows that cater to the melancholic, where “depressing” commercials might resonate better?
The idea behind heightening awareness of risks is to draw the largest amount of attention possible to those risks. In the case of this message, using a Superbowl commercial was sure to reach a heck of a lot more people than some educational/informational show that airs in the middle of the night watched by a couple hundred people.
The public uproar stimulated questions relevant to my professional compliance and consulting work – Are we living in a culture that has no appreciation for hearing about and taking actions to mitigate risks? A culture that actually takes offense when we do?
In business, we need to appreciate, understand and act on risks. Yet compliance and ethics professionals face similar challenges with Boards, Executives, Senior Management and even line employees and/or agents of an organization. Though there is an expectation that these roles know about and deal with risks, it’s not something they particularly care to hear about, particularly in the higher ranks, where it is of great importance and impact. They prefer to discuss financial results, stock performance, mergers & acquisitions, etc. – you know, the REAL and IMPORTANT stuff.
I face a similar challenge when trying to develop proactive compliance and ethics consulting work. Organizations simply don’t want to hear about faint, non-imminent, and “philosophical” dangers that could sink or significantly impair their organization. Much less do they want to spend a little money to properly deal with it.
Using the Nationwide commercial as an analogy, one might think the risk of an unsecured weapon in the home is minimal because one’s children have been well educated on the risks and, due to their obedience, would not play with the weapon. Perhaps true. But what about the kids who come over to play?
The rationalizations in business are really no different. I can’t tell you how often I heard victims of a fraud (both when I was an FBI Agent and now as a consultant) tell me something like “But Sally was such a nice and religious lady whose been with us for 15 years – she COULDN’T have stolen from us! You must have made a mistake.”
To all the compliance and ethics professionals out there working hard to do the right thing, whose risk messages too often fall on deaf ears, I raise my coffee cup to you. You ever need an ear, my number ain’t hard to find.
Advanced Forensic Accounting – Norfolk, VA
I am offering my wholly unique and practical “Advanced Forensic Accounting” course on November 5, 2014 in Norfolk, VA. The course is worth 8 hours of CPE for CPAs, which should be accepted also for CFEs, CIAs and others who accept CPA CPE.
Using just three months of bank account information, will you be able to unravel “Sammy’s” plan? Lives may depend on it….
This unique and interactive course is designed primarily to influence the way that one approaches and thinks when analyzing financial records in the course of a fraud or financial investigation. It is an improved and appropriately modified course (i.e. nothing “classified”) that I developed and used to train new FBI Agents at the FBI Academy, many of whom had no prior investigative, audit or financial investigations experience. In 2013 and 2014, the SEC engaged me to present this course to many of its Enforcement Examiners and Examiners in most of its 11 Divisions.
The course begins with an introduction to critical thinking in an investigative context, followed by a discussion about how financial records can be used to profile a person and how that profile can be critical and useful in an investigation. Specific and technical steps are then discussed about collecting, organizing and analyzing financial information and how to document that analysis.
The vast majority of learning is through participation in and discussion about a detailed practical exercise where you are challenged with a forensic accounting role within a real-life scenario. In the scenario,you work in teams and are provided with three months of bank statements,including the supporting documentation for each transaction, and tasked to conduct analysis and live internet research using the techniques you have learned. The places and people in the scenario are mostly real or otherwise back-stopped on the internet to challenge and enthrall new and experienced financial investigators alike.
The practical based nature of this course, team-work (as small teams and as a larger class) and double-reinforcement of the learning through repeated application works, effectively impacting the way that you think and making you a better financial/fraud investigator.
The course not only works – it’s the most fun eight hours of CPE or similar training you’ll ever have outside of Hogan’s Alley!
The Fraud Guy 