The Human Face of Fraud

Dan Kerr had a towering ego. That was one of the reasons he was the top salesperson with Forrest Machinery Ltd., a medium-sized company that sold heavy equipment in Northern Ontario. But that same egocentricity was also the source of his downfall subsequent to an investigation of suspected wrong-doing at the company that had employed Kerr for almost two decades.

Taking a checklist approach rarely, if ever, solves fraud investigations. Rather, they typically require the investigators to devise a tailored strategy based on the specifics of the case and a keen understanding of human nature and behaviour. The latter is particularly important when interviewing a suspected fraudster, given that it's unlikely the individual will eagerly volunteer the details of any wrongdoing. By studying what is known (or can be intuited) about the suspected fraudster's personality, however, an approach can be developed to get the person to provide compromising information about his or her fraudulent scheme without the person realizing how much he or she is revealing.

Kerr believed Forrest's success was primarily because of his ability to sell. When he stormed into the office of CEO Jack Musselman one day, he had conveniently forgotten that Musselman had trained him and introduced him to Forrest's key contacts. Kerr complained he was underpaid and demanded an equity interest in Forrest, given his perceived contribution to the company's success. Taken aback, Musselman wisely deferred an answer, suggesting he needed time to assess Kerr's specific achievements.

Following some inquiries by Musselman, some troubling rumours surfaced–one suggested Kerr had benefited from the sale of customers' used equipment, which was replaced by equipment that he sold them. These sales should have been to the benefit of his employer.

Concerned, Musselman retained a firm of forensic accountants and corporate investigators to investigate the matter. He demanded their work be completed without raising Kerr's suspicions and without risk of damage to the company's reputation. These restrictions left limited investigative options. Time was also a concern. Kerr wanted a response within two weeks. He had been confident enough to threaten to join a competitor, taking customers with him, as he was not subject to a noncompete clause in his employment contract.

Immediately after meeting with the CEO, the investigators began their work at the company after hours. Over the course of two long nights, they prepared a comprehensive brief on Kerr's activities, including copies of business files obtained by computer forensic analysis of his PC; details of his background and employment with the company, including pay increases, commissions and bonuses; a detailed reconstruction of all sales meetings with customers in the past five years, based on business diaries kept at the office; and analyses of all new sales completed by him, by customer, which was then corroborated with the data from the diaries.

At the same time, a personal profile of Kerr and his family was obtained based on an intensive analysis of public record sources and a lengthy interview of Musselman. Critically, the investigators found that Kerr and his wife were spendthrifts, living beyond their means. Kerr had become increasingly difficult to deal with—he was arrogant and appeared to be overly self-confident—as he became more successful in his role at the company. Kerr's wife was demanding and known to ridicule her husband in public, which may have driven him to overachieve. This information proved to be as crucial as the facts uncovered in the business records.

While crunching the numbers plays an obvious role in any fraud investigation, there is much more to a successful outcome. It is vital to understand, from the perspective of the fraudster, the context within which the fraud was committed.  The motive for committing a fraud may not be simply financial. 

For instance, what were the factors at play in the fraudster's life at the time the fraud started? What events or problems—divorce, gambling habits or other addictions—may have created the financial need that had to be fed from the proceeds of the crime? Also, what kind of personality does the fraudster have? A deeper understanding of these factors may help explain the motives, in particular the timing and magnitude of the problem.

Given that most business schools and accounting courses don't deal with such issues, some accountants may not consider these vital elements when trying to unravel a suspected fraud, which is regrettable, as a critical dimension of the case may be overlooked.

While the following are generalities, and must therefore be used only as a guide, some types of behaviours have been found to be quite prevalent in individuals who commit fraud in the workplace.

The Bully: makes unusual and significant demands of those who work for him or her, cultivates fear rather than respect, rarely provides praise, will not accept criticism or direction, widely known to be difficult by his or her superiors and consequently avoids being subject to the same rules and procedures as others.

The Egotist: on the surface driven to succeed at all costs, self-absorbed, self-confident and narcissistic, secretly craves the approval and admiration of others and is motivated by an overriding fear of failure.

The Control Freak: as the name suggests, very controlling, refuses to complete his or her work in any other way, gets upset when procedures are not followed to the letter, overly protective or secretive of certain aspects of his or her work and perceives certain tasks as being solely his or her domain of responsibility.

The Mouse: mostly silent, not well-known to fellow employees, does not socialize with coworkers, fellow workers know very little about this person, his or her family, keeps a very low profile and avoids conflict, but often seems to be almost a model employee in many respects.

Although these behaviours are not absolute indicators of fraud, many fraudsters adopt them to further their schemes. They have been found in people who override controls, maintain control over procedures critical to the commitment or concealment of a fraud, or who keep a low profile to preserve their employment and the lucrative opportunity for the fraud itself.  It should be mentioned, however, that an Australian study (The Psychology of Fraud, Australian Institute of Criminology, by Grace Duffield and Peter Grabosky) noted that many of these fraud-oriented behaviours (eg., the drive for success) are considered legitimate and are highly regarded and rewarded in the corporate world.

Once the investigators completed their work, Musselman told Kerr that he'd retained consultants to conduct due diligence to satisfy him before considering any deal for an equity interest in the company. With his future financial security in mind, the salesman agreed to meet with them.

The investigators—a forensic accountant and a former senior law enforcement officer—had assessed Kerr as an egotist and shaped their interview strategy accordingly. In their meeting with him, they planned to elicit critical pieces of evidence, without raising his suspicions.

In the first hour, they gently persuaded him to help them understand how significant his contribution to the business was. Their interest appealed to Kerr's ego; he readily divulged his key accounts and customers and, keen to demonstrate his expertise, he explained in detail how the business worked—specifically, he confirmed all his secondhand deals were derived from sales of his employer's new equipment. The secondhand equipment was sold to Forrest contacts or customers.

Having built a rapport with him, the investigators empathized with his perceived under-remuneration relative to his contribution to the business. Kerr railed at the level of salary, commissions and bonuses he had received. He complained that he and his wife carried too much debt, that they could hardly make a living. In the heat of the moment, he let it slip that he did a side cash deal to supplement his income, but it still wasn't enough. 

When asked about one secondhand deal the investigators suspected had been diverted to his benefit, Kerr confirmed he had pocketed the proceeds. "What's the big deal?" he asked, convinced he was confiding to like-minded people. "I deserved it. Musselman never missed the funds."

The investigators gently probed him about his family, in particular his wife, who they discovered was the registered director and officer of a company named Forrest Machinery Inc. (Musselman's firm was Forrest Machinery Ltd.). Kerr confirmed he used the company to complete the secondhand deals on the side and that the name was basically identical to his employer's to avoid raising the suspicions of his clients—who thought their payments were going to Musselman's firm. Then, to the interviewers' surprise, Kerr volunteered that his wife's company also ran a software business, the customers of which were almost identical to his employer's. It transpired that he had diverted this business opportunity to his wife's firm after he was approached by a company at a trade show where he was representing his employer. Having "borrowed" his employer's customer database, his wife's company enjoyed considerable success selling the software to his employer's key customers.

Impressed by the investigators' knowledge of his customers (culled during their nights onsite), by the end of the interview Kerr was reviewing his client list compiled by Musselman and identifying several other customers with whom he had made secret secondhand deals, none of which had been suspected by Musselman. At the end of a four-hour interview, Kerr had unknowingly confessed to having repeatedly defrauded his employer. He thanked the investigators for their time and interest and left, unaware that dismissal, a lawsuit and the prospect of criminal charges awaited him the next day.

The Forrest case, which has been slightly altered for confidentiality, is a classic example of the benefits of creative preparation and strategizing prior to an interview with a possible fraudster. People need a reason to talk, and fraud investigators should always consider what might motivate a person to open up and tell the truth. Often it's the need to unburden their soul. But that doesn't always work. In this case, the investigators felt that Kerr was an egotist who believed he deserved his ill-gotten benefits. So they first stroked his ego, then empathized with his plight. As a result Kerr was blind to the true purpose of the discussion and he vented all the injustices he felt had been done to him. In doing so, he sealed his fate.

Every fraud investigation is unique and requires a distinctive approach. As well as analysing all the obvious evidence, take time and effort to consider the personality type of the suspected fraudster. Find a way to get the person talking and you may be surprised by how much you find out.

 

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