Signs of Deception

Ever wonder if your employees are deceiving you? Occupational fraud statistics for the average business, put out every other year by the Association of Certified Fraud Examiners, would show that the answer is yes, some of your employees are probably attempting to deceive the company in some way.  So how do you know which employees could be involved in a fraud scheme?  In “The 10 Tell-Tale Signs of Deception” published in the January issue of Fraud Magazine, Paul M. Clikeman, PH.D., CFE gives some techniques to help Certified Fraud Examiners in their fraud investigations, but these same signs of deception could also serve as red flags when demonstrated by your employees.

Here is a summary of the Ten Signs of Deception that business owners should keep in the back of their minds when working with employees, especially those with access to financial data or who approve or pay invoices:

  1. Lack of self-reference.  Deceptive people often use the passive voice when describing events:
    • “The key was signed out” instead of “I signed out the key.”
    • “The door was unlocked.” Instead of “I unlocked the door.”
  2. Verb Tense.  When telling the story of what happened, deceptive people sometimes describe the actual past event as happening in the present:
    • I locked the door to the office.   As I walked away, a person hits me and grabs the money and runs away.  I looked around, but did not see anyone.
  3. Answering questions with questions.  Deceptive people prefer not to lie, and will try to avoid lying by asking a question instead of answering directly:
    • “Why would I steal from my boss?”
  4. Equivocation.  Statements are filled with expressions of uncertainty, weak modifiers and vague expressions such as: think, guess, maybe. Nothing seems to be definite.
  5. Oaths.  Often use oaths to convince others that what they say is true, instead of offering up the simple truth:
    • “I swear”
    • “Cross my heart”
  6. Euphemisms.  Deceptive people often use euphemisms to make their behavior appear more favorable:
    • Use the word “missing”  for “stolen”
    • Replace the word “threatened” with “warned”
  7. Alluding to actions.  People sometimes allude to doing something, but may not actually do it. Don’t assume that the action was performed just because they allude to it. For example:
    • I started to lock the door, when I realized that I needed to also lock the safe.
  8. Lack of Detail.  Be wary of those statements that do not contain a lot of details.  Truthful statements usually contain specific details, like the color of the counter or the type of music playing.  Deceptive people don’t want to run the risk of someone using details to check out their story.
  9. Narrative balance.  A narrative has three parts: prologue, critical event and aftermath.   In a narrative, 20-25 percent will be prologue, 40-60 percent critical event and 25-35 percent aftermath.  If any of these parts is longer than expected, it may contain false information.
  10. Mean Length of Utterance.  The average number of words per sentence is called the “mean length of utterance” (MLU).  The MLU equals the total number of words in a statement divided by the number of sentences.  The average number of works per sentence is 10 to 15. Sentences much shorter or much longer are red flags.

If you are investigating an employee that you suspect is being deceptive, look for these signs.  People often reveal more then they think in the words that they choose. If you suspect a fraud scheme in your company, contact a Certified Fraud Examiner to conduct a fraud investigation.

Tricia J. Cook is a senior forensic analyst with the forensic accounting and litigation services department at Piercy Bowler Taylor & Kern CPAs. She sifts through financial transactions to resolve allegations or evaluate suspicions, interpreting that transactional data and then organizing that information into easy to understand reports for use by counsel, or for presentation in a court-of-law.  She can be reached at tcook@pbtk.com or 702-384-1120.  

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Don’t Get Caught in Their Shoes: Two Las Vegas Fraud Investigations

The fight against corporate fraud is ongoing, yet why does it always seem to come out of left field when a business finds itself defrauded and down thousands of dollars, often stolen by a trusted employee or leader?  Several local businesses and non-profits found themselves facing this very same situation in 2011. With the beginning of the New Year, we have the opportunity to look back at these cases and identify the lessons other companies can learn before they are up against the hidden enemy to profitability and success:  internal fraud.

In the first case, a former vice president of a Las Vegas homebuilder pled guilty to stealing $1.4 million over four years from the company (Las Vegas Sun, Jackie Valley, June 28, 2011).  Along with two co-conspirators, they created a fake business and submitted fraudulent invoices for construction supplies.  As vice president, he was able to both approve and pay such invoices without getting outside approval.  With the help of his co-conspirators, the fake vendor received 11 payments totaling $1.4 million from July 7, 2004 to July 25, 2008, funds he did not include on his income tax returns.

In the second case, a Las Vegas priest pled guilty to mail fraud for stealing $650,000 over an eight-year period (Las Vegas Sun, Gregan Wingert, October 7, 2011). Using his position of authority and trust within the church, he took money from the church bank account for personal reimbursements, stole funds from the gift shop and took candle donations. He was also on the church’s finance committee in addition to his administrative roles at his own parish. In that capacity he also underrepresented the church’s income in financial reports to the Las Vegas Diocese.  It was later discovered that the priest was addicted to gambling and was stealing to cover his gambling debts.

With my experience as a Certified Fraud Examiner (CFE), there are some internal controls that, if in place, could have saved these organizations hundreds of thousands of dollars.  Some lessons that other businesses can learn from these two fraud investigations include:

  • Segregation of duties.  In each of these cases, one person had control over multiple financial areas and was able to hide their thefts from others. If the same person approves an expense and then writes the check, as in the payment to a false vendor, there is ample opportunity for fraudulent payments.
  • Need for oversight and audits.  Neither case appeared to have oversight or surprise type audits. Let employees know that they could be audited at any time, and that a third party will check their work for discrepancies. Fear of getting caught is an effective fraud deterrent.
  • Perform a fraud checkup yearly. The thefts in these two cases occurred over an extended period of time, four and eight years, respectively. During the time before the fraud was discovered, the other leaders within the organization may have had no idea that any wrongdoing was occurring, until it was too late. Though it may seem pessimistic, expect the worst and stay ahead of fraud within your organization with a regular fraud checkup (contact a CFE for a checklist).
  • Create levels of accountability. High level officials and trusted employees still need supervision and to be accountable to someone. In the case of the priest, he should not have had financial control with his parish AND serve on the church’s finance committee, giving him a high level of autonomy, and therefore, the means to commit and conceal his fraud.
  • Look for warning signs. Did someone know of the priest’s gambling addiction? Personal problems or changes in behavior are red flags for fraud.  Gambling or other addictions may contribute to the rational for the theft, and provide the motive for taking money to cover debts or expenses.
  • Don’t cut administrative roles.  It may be tempting to cut a position to save money, but what could be the ultimate cost? Losing out on effective internal controls could open the door to the opportunity for committing fraud for the employees that remain.  For the cost of one additional administrative salary, a person who would offer checks and balances, the fraudulent expenses and fake vendor invoices could have been detected in the cases above.

While these two fraud investigations during 2011 are unfortunate, they should serve as a warning to other businesses and nonprofits wanting to avoid the loss of valuable funds due to internal fraud. It is difficult to stay profitable, and even more so when a trusted employee is siphoning off hard earned funds. Stay ahead of fraud with an aggressive internal control strategy and an eye on the bottom line.

Tricia J. Cook is a senior forensic analyst with the forensic accounting and litigation services department at Piercy Bowler Taylor & Kern CPAs. She sifts through financial transactions to resolve allegations or evaluate suspicions, interpreting transactional data and then organizing that information into easy to understand reports for use by counsel, or for presentation in a court-of-law. She can be reached at tcook@pbtk.com or 702-384-1120.