Fraud


An interview with Paul McCormack, fraud investigator and educator…

How many fraud suspects have you interviewed in the course of your career as a certified fraud examiner?

After the first hundred, I actually stopped counting, but I’ve easily interviewed more than 500 people while investigating employee and third party fraud.

How is interviewing a fraud suspect different from the interrogations we see dramatized on TV?

The goals are very different. On TV, the actor-detective wants to force a confession. It makes for entertaining television. The goal of the interview in a private company is to encourage the employee to share information. Threatening him or her, with termination or legal action, isn’t appropriate or effective. In fact, there are legal risks to it. Tactics that may be appropriate for law enforcement can get you in trouble if you employ them as an interviewer in a corporation.

What qualities make a good fraud interviewer?

A good fraud interviewer knows how to connect with people. I don’t mean in a jovial way. He or she must be able to understand a person’s thought processes as well as their body language and use them to drive the interview. A good interviewer is able to listen intently to what the employee is saying. And not saying. They are adept at establishing rapport. A good fraud interviewer must be able to maintain composure, no matter how the employee reacts, and be creative in figuring out how to get the employee to talk.

How do you prepare before you go into the room with the employee?

You start by taking a hard look at the documents you have and trying to explain the employee actions in context. Could the transaction in question be the result of a system error or a process problem or a lack of employee training, and not fraud? Could we be misreading the document? You develop hypotheses and try to disprove them before doing any interviews.

Preparation before going into the interview room is crucial. You want to learn as much as possible about the individual whom you are about to meet. You conduct mock interviews and role-play all the scenarios you can think of. Mock interviews allow you to test your data again and develop confidence in your exhibit. I’d say for every hour spent in the interview room, three hours are spent preparing.

What do you hope to get out of the interview?

I want to stress that proving someone guilty or innocent is not the goal. The performance of investigators should never be judged on how many confessions they get or how many employees are terminated as a result of their investigations. That creates an incentive to chase the easiest cases. The goal is to find, validate, and provide facts so that others can make fully informed decisions regarding an employee’s employment status.

Throughout the interview, you have to keep asking yourself, “am I getting the information I need to write a report that someone else can view as complete?”

What’s the biggest mistake a fraud interviewer can make?

The worst mistake is assuming the target of the investigation is guilty and it’s your job to prove it. Going into an interrogation with a predefined conclusion can get you in trouble. You may believe the evidence is stronger and more compelling than it actually is. You may think that the documents speak for themselves when they don’t. You may not ask questions that need to be asked.

Each investigation has to be conducted with the same view to gathering facts, understanding the facts, and allowing others to interpret those facts. The worst thing that can happen is for an investigator to shortcut that process and believe that they are the proverbial judge, jury, and executioner.

For McCormack’s best practices for fraud detection and prevention, listen to his free webcast on The Threat Within: Combat Employee Embezzlement.

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An interview with Paul McCormack, fraud investigator and educator…

Paul McCormack, CFE, has 17 years of fraud investigation and detection experience gained in banking, real estate, manufacturing, transportation and insurance. He currently serves as Executive Vice President with Connectics Advisory Services, based in Atlanta, GA. He has also held positions with Innovar Partners, SunTrust Bank, Ernst & Young, Delta Air Lines, PricewaterhouseCoopers, and Putnam Hayes & Bartlett. Throughout his career, Paul has assisted local law enforcement agencies, FBI, DEA, and the Secret Service.

As a fraud investigator and educator, what’s the most common misconception you encounter about employee fraud?

“It won’t happen here. I trust my employees. They would never do that to me.” Ignoring fraud or thinking that it won’t happen in your company is wishful thinking. The business press is full of companies that thought exactly the same way. Many have been forced to close their doors as a direct result of employee fraud.

What is one of the worst cases of employee fraud that you’ve investigated?

I lead an investigation involving allegations of fraud regarding the actions of the CEO, CFO, General Counsel and SVP of sales at a mid-sized company. Almost all of the allegations turned out to be true. The investigation uncovered rampant fraud and abuse including expense fraud, accounts payable fraud, accounts receivable fraud, kickbacks, payroll fraud and financial statement fraud. Each of the executives had turned a blind eye to the fraud being committed by the others. The parent company was so disgusted with the results of the investigation that it closed the company and moved the operations to another state. Three executives were fired, the fourth resigned, and 50 employees lost their jobs. The company declined to notify law enforcement in order to avoid the adverse publicity.

How big is the problem of employee fraud?

The Association of Certified Fraud Examiners (ACFE) estimates that worldwide $2.9 trillion is lost to fraud each year. The median loss to a small business is $155,000. There is also incalculable damage to customer and investor trust.

What are the chances of getting the money back?

Fraud losses are rarely recovered. Fraud schemes last a median of 18 months. During that time, the fraudster is buying things, paying down debt, or sharing your money with their family and friends. They typically don’t deposit the money in the bank and watch it earn interest. Making matters worse, thinly stretched law enforcement is often unable or unwilling to help recover fraud losses. Financial crimes can be extremely complicated and time consuming to investigate. Detectives need to close cases quickly. At the federal level, the bar is even higher. A six-figure loss may be devastating for your organization, but it may barely raise the eyebrow of an FBI agent in a large city. With no connection to organized crime, drugs or terrorism, the case file may be shelved and forgotten. Civil lawsuits won’t get the money back either. Even if entirely successful, amounts recovered will be reduced by professional fees paid to attorneys, forensic accountants, etc.

What trends in fraud are you seeing?

I sometimes open my presentations with this quote from the economist John Kenneth Galbraith: “The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

With that said, cloud computing and Internet banking have helped employees successfully steal proprietary data and funds at an alarming rate. Coupled with lack of employee oversight and you have the proverbial “recipe for disaster”.

So what can businesses do to prevent employee fraud?

First of all, they need to set the tone for honesty and integrity at the top. If executives are viewed by employees as unethical, it makes it far easier for them to justify committing fraud. Further, companies where the executives are morally bankrupt rarely view fraud prevention as a priority. As such the company normally has a very weak internal control framework in place to combat fraud.

Paul McCormack teaches the CPE Link course, The Threat Within: Combat Employee Embezzlement