Finishing well by starting well

7 keys to an effective fraud-fighting career


By Steve Albrecht, Ph.D., CFE, CPA

A pillar in the fraud examination profession provides tips, which can help ensure that at the end of a long career you'll know you did your best in fighting fraud.

Fraud fighting is an exciting career. However, not all fraud-fighting professionals are equally successful. Whether you work for a company, are an independent consultant, an expert witness or perform other fraud-fighting and forensic accounting work, here are seven of the most critical things you can do to further your career and success.

LESSON 1:
You must make a business case for your services.

In the early '90s, a car dealer stole $434 million from one of America's largest automobile manufacturing companies. The company asked me to meet with its management committee — comprised of its top 12 corporate officers — to help them understand the fraud.

The CEO asked, "Why do you think this fraud occurred, and what can we do to prevent future frauds from occurring?" I said the company had a "business problem" not a "fraud problem." I asked them what their profit margin (net income as a percentage of revenues) was. They said it was about 10 percent. I asked them how much additional revenue they would have to generate to restore the stolen $434 million of profits to the company. They quickly realized that because of a profit margin of only 10 percent, they would need to generate approximately 10 times the amount of the fraud or additional revenue of $4.36 billion to restore net income to the level it would have been without the fraud.

I then asked them how much the average wholesale price was on an automobile. They said it was approximately $20,000. I asked them how many additional cars they would have to manufacture, market and sell to generate revenues of $4.36 billion. Their answer was approximately 218,000 automobiles. I told them the business problem was that they could make and sell 218,000 more automobiles, or they could prevent these kinds of fraud from occurring in the future — the result on their bottom line was the same.

The best-selling vehicle in America among all car companies at that time was the Ford F-150 pickup with sales of about 60,000 units a month, so they realized that, indeed, they had a business problem. I told them that while they'd be catching up from the fraud for the next few months, their competitors would be moving ahead and becoming more profitable.

As fraud fighters, we must show how our work can increase productivity, profitability or other metrics our clients or companies care about. Executives aren't really interested in dealing with fraud, but they're always interested in solving business problems and making more money.

LESSON 2:
You must help others understand that there are no small frauds; just large frauds that are caught early.

Several large New York-based financial institutions once retained me to help them defend themselves against a multibillion-dollar lawsuit. A rogue commodities trader lost $2.6 billion for his company by entering into complex derivatives transactions. The victim company was suing several New York financial institutions alleging that the transactions this trader executed were so favorable to them and so unfavorable to the victim company that the bankers had to know the transactions were fraudulent. They alleged that the New York banks were therefore complicit in the fraud.

The fraud went on for nine years with these cumulative losses:

This magnitude of growth in frauds is not atypical. While the amount lost was large, like all frauds, it grew geometrically from year to year. Frauds tend to increase during the time period of the dishonest acts with the largest losses in the last few months or years. This happens for two reasons. First, fraud perpetrators never save what they steal nor do they stop stealing after meeting their financial pressures. Instead they spend their stolen funds and get greedier and greedier with their purchases over time. Second, perpetrators often have to increase the fraudulent amounts to both cover up past losses and to continue the frauds.

In the rogue trader case, the perpetrator had to cover up his past losses and make it appear he was continuing to be profitable, which both required fraudulent reporting of larger and larger trades.

If you can convince those you work with that there's no such thing as a small fraud and that undetected frauds will get larger and larger, which will cause increasing harm to them and their organizations, they won't be as reluctant to spend the necessary money to prevent, detect and investigate any frauds that might be occurring.

You must convince them that once a fraudster begins his crimes, especially if an organization allows it to get large, everyone loses: your client or company, coworkers and even the perpetrator(s) lose. The only winners are litigators.

LESSON 3:
If you want to build a successful fraud-fighting business, you have to make yourself visible and build a good reputation.

No matter how good you are, people must find you before they can retain you. Here are some ways to make yourself known:

  • Interact with others and serve as an officer of professional fraud-fighting, accounting and legal organizations. (The ACFE, for example, is a phenomenal global system of likeminded practitioners).
  • Build interlocking networks with an online service such as LinkedIn.
  • Write articles and books.
  • Speak pro bono at antifraud conferences and chapter meetings of professional groups, and provide training for governmental and global organizations.

As a fraud-fighting professional, the greatest asset you have is your reputation. Do everything you can to keep it pristine. Always tell your clients that you'll work by the hour, but if you ever conclude that the work you're doing isn't appropriate, you'll have to resign.

For example, several times in my career, attorneys who have hired me were defending CPA firms in cases in which they failed to detect financial statement fraud. In three of these cases, I realized after initial study that the CPA firms indeed had performed negligent audits. I quickly resigned from these three jobs.

However, if you ever feel the need to resign, then don't work for the other side — remain totally independent of the matter. Your attitude and goal should always be: "To find the truth and then do the right thing."

LESSON 4:
Always deliver a high-value and helpful product to your client.

I once worked on a fraud-fighting engagement for one of the largest oil companies in the world. It wanted me to help it detect fraud at its largest oil refinery. When the company retained me, the executives told me that no one would "blow the whistle" on their coworkers because its workforce was heavily unionized, represented an "old boy" network and included several second- and third-generation employees.

They also told me they'd previously hired the best and biggest fraud-consulting firms to help them detect fraud at the refinery, but they hadn't been helpful. In one case, a large forensic investigative firm told them that the symptoms they found indicated that there were more than 1,000 frauds at the refinery, but it didn't give specifics on who was involved or where to look. The oil company said the forensic accounting firm information was useless.

My son (also a Ph.D. and an excellent computer programmer who was working with me) and I then did all we could to:

  1. Understand the business — the oil refinery.
  2. Identify the kinds of fraud that could be occurring.
  3. Catalog the symptoms that these possible frauds would generate.
  4. Mine its databases to look for these fraud symptoms and continuously refine the searches.
  5. Identify specific possible frauds that corporate security and internal audit could investigate.

After following this process, we identified 26 frauds that most likely were occurring. We specifically identified who was involved, on what shifts the frauds were occurring, how long it appeared they'd been going on and the nature of the frauds. The company investigated the 26 cases and found that most of them indeed represented frauds. Three or four of them were company data errors that mimicked fraud. Some of the frauds were huge, involving multimillion-dollar kickback schemes among vendors, contractors and company employees.

The fraud-fighting work you do for organizations must help them solve the real problems they have.

LESSON 5:
You must understand business concepts to become an effective fraud fighter.

Fraud occurs because of a combination of 1) perceived pressures, 2) perceived opportunities and 3) rationalizations (The Fraud Triangle). We can all relate to personal pressures that might motivate an individual to embezzle cash from an organization. However, understanding business pressures and opportunities requires knowing how companies, boards of directors and corporate officers work and their motivations. We also need to understand the rudiments of accounting, auditing and technology. (You would learn basic principles in these areas when you study for your Certified Fraud Examiner credential.)

The legal complaint in one of the largest frauds I worked on as an expert witness contained the following paragraph:

"The goal of this scheme was to ensure that [the company] always met Wall Street's growing earnings expectations for the company. [The company's] management knew that meeting or exceeding these estimates was a key factor for the stock price of all publicly traded companies and therefore set out to ensure that the company met Wall Street's targets every quarter regardless of the company's actual earnings. During a period of two years alone, management improperly inflated the company's operating income by more than $500 million before taxes, which represents more than one-third of the total operating income reported by [the company.] … The participants in the illegal scheme included virtually the entire senior management of [the company], including but not limited to its former chairman and chief executive officer, its former president, two former chief financial officers and various other senior accounting personnel. In total, there were over 20 individuals involved in the earnings overstatement schemes."

The officers of this company were trying to meet analysts' expectations of their quarterly earnings to make the company's stock price increase. Each of them had millions of dollars of stock options that would become worthless if the stock price dropped.

For comparison, see the chart below — analysts' earnings expectations, based on each firm's guidance, for three quarters of the same year for nine other comparable companies.

The consensus expectation was that the company would earn $.17 per share in the first quarter, $.22 per share in the second quarter and $.23 in the third quarter. The company's actual earnings for the three quarters were $.08, $.13 and $.12, respectively. Therefore, to meet analysts' expectations, the company committed fraud of $.09 per share or $62 million in the first quarter, $.09 or $61 million in the second quarter and $.11 per share or $71 million in the third quarter.

If you don't understand business, accounting and auditing, it would be difficult to know exactly how the company met these expectations, how it perpetrated and concealed the frauds, what kinds of steps the auditors used that didn't allow them to discover these frauds and what they could have done differently.

LESSON 6:
You must always perform high-quality work that has higher value than your competitors.

Over the years, I've been on the opposite side of "expert witnesses" who weren't well-prepared. If you ever want to be involved in expert witnessing, litigation support, high-level corporate consulting and fraud-related training, you must always be over-prepared. Taking shortcuts always comes back to haunt you.

You must:

  • Study the facts and learn more about the case than anyone else.
  • Be a creative analytical thinker.
  • Be able to take complex topics and explain them clearly to non-fraud professionals.
  • Be a good listener and a good communicator.
  • Be patient and not argumentative, regardless of how hostile others can be.
  • Fully examine any documents you're asked to explain. (Often, attorneys for the other side will show you only part of a document taken out of context, and if you don't look at the entire document, you might respond poorly.)

Don't make mistakes that will generate bad news about you and your services because you know that it will always travel faster than good news.

LESSON 7:
Be a good listener.

As a fraud-fighting professional, you're always working for someone else — perhaps an employer, a law firm or a large corporation. You must listen carefully to understand expected outcomes and what they expect you to do —  don't assume anything. Don't just hear the words but understand and connect.

I learned the importance of good listening when I was expert witnessing. During many of those cases, the opposing side's attorneys would depose me. A deposition is much more difficult than an actual trial. The other side's attorneys are trying to get you to commit perjury, box you in, limit what you can say in trial and minimize your effectiveness. Your side's attorneys can only sit and let the opposing side ask questions and object when they believe a question is unfair.

Therefore, during depositions, listen carefully to the questions. I never wanted to be sidetracked by the body language of the attorneys, their demeanors or other antics they used to confuse or frustrate me. I developed a habit during those depositions of lowering my head and not looking at them so I could focus on the questions and not be distracted. After I heard and understood the question, I would raise my head, look them in the eye, and answer simply and straightforward.

Often, we might be trying to think of how we'll respond before attorneys have finished their questions. Even worse, we'll try to answer what we think they want us to answer instead of what they're really asking us to do. Therefore, we don't really hear what they're trying to say, and we sometimes say the wrong thing.

FINISHING WELL

Success in any field, of course, doesn't hinge on just a list of pointers. But if you begin with these seven time-tested maxims, you'll waste less time, focus on integral matters and — at the end of a long career — know that you've contributed to the fraud-fighting profession.

W. Steve Albrecht, Ph.D., CFE, CIA, CPA, the ACFE's first president, is the Andersen Alumni Professor of Accountancy in the Marriott School of Management and a Wheatley Fellow at Brigham Young University.



The Association of Certified Fraud Examiners assumes sole copyright of any article published on www.Fraud-Magazine.com or www.ACFE.com. ACFE follows a policy of exclusive publication. Permission of the publisher is required before an article can be copied or reproduced. Requests for reprinting an article in any form must be emailed to FraudMagazine@ACFE.com.

 




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