Q: Fraud has always kept financial executives on the lookout, but the realities of a super-swift digital age rife with hackers and cyber theft have raised the stakes like never before. Additionally, the financial turmoil caused by the pandemic will not only have increased the motivation for some frauds but possible lapses in controls as businesses adapt and their distraction whilst doing so may increase the opportunity for frauds to be perpetrated. Given the heightened sense of urgency, how can auditors adapt?
Jonathan: Auditing standards place a significant responsibility on auditors to firstly assess the risks from fraud, and then secondly design and perform appropriate audit procedures to enable the auditor to reach a reasonable conclusion on whether fraud has occurred.
The relevant auditing standard goes out of its way to emphasise that a sophisticated and carefully organised scheme might be difficult for an auditor to detect, even if their audit was designed well and implemented appropriately; this is particularly so if the fraud involved collusion and even more particularly so if the fraud was perpetrated by senior management. That line of defence will invariably be used in claims against auditors for negligence in which a fraud was a contributory factor.
However, in practice it is often a weak defence because most frauds are not that complicated and the auditor’s responsibilities in relation to detecting fraud are extensive.
In addition to a series of specific procedures, the auditor has to perform their audit following the general requirement of applying professional scepticism, planning without presuming that everything presented to the auditor is what it seems and undertaking extended procedures in the event of any unexplained items.
In my experience, most larger organisations in theory have good controls to respond to the threats from phishing attacks. I say in theory because the weakness in those controls often stems from the human interface; people often trust far too much even though they understand that they should not do so.
From an auditor’s perspective, fortunately, there are a range of interrogation tools that are readily available to detect certain types of anomalies. These are brilliant at picking up duplicate entries, some odd-looking items such as round sums, accounting entries recorded at strange hours and suppliers added and then removed from the payables system.
Most auditors are aware that many audits fail to detect fraud, even where there are clear indications that a competent auditor should have spotted. Consequently, it is fair to say that auditors are now even more on their guard on this point than they have been in the past, although mistakes will still happen.
Q: What three trends are currently impacting forensic accounting and fraud investigations?
David: Way back in the late 1980’s Dr Joseph T Wells wrote “There is no such thing as a new fraud, only new ways of perpetrating old frauds". This is as true today as it was then. Madoff copied Charles Ponzi and even today Ponzi schemes are as popular as ever. Similarly, identity fraud has hit the headlines over the last few years, but it too has always been a popular part of the fraudsters' arsenal. The 2002 Leonardo DiCaprio film Catch Me If You Can was based on the true-life story of Frank Abagnale who successfully used identity fraud to steal millions of dollars by pretending to be a pilot, a doctor and a lawyer. Identity fraud continues to evolve and become more sophisticated even as fraud prevention and detection tools struggle to keep up. A trend we have seen is what I would term two factor identity fraud, to borrow a term from fraud prevention. That is in trying to verify if a transaction is fraudulent the victim unwittingly authenticates the transaction with a second fraudulent source. Unfortunately, with potential victims pushing for an ever more frictionless banking experience there will be no shortage of opportunities for this type of fraud to evolve and grow.
Secondly, private criminal prosecutions are now making an impact in the fraud investigation world. Previously the dilemma for a corporate victim was how do I achieve restitution if the fraudster has no assets and therefore limiting the benefit of a civil claim, and I cannot get the authorities interested in a criminal prosecution due to lack of resources. Many of our clients are looking at private criminal prosecutions as a viable and cost-effective alternative.
A third trend is the growing international nature of corporate fraud. Even relatively small frauds can now involve cross boarder or transnational elements. This is increasing the cost of investigation as legal proceeds may need to be started in multiple jurisdictions. It is not uncommon for our investigations to involve at the very least civil proceedings in the UK, criminal proceedings in Switzerland and ancillary proceedings in a couple of offshore jurisdictions.
Q: Solicitors understand the tangible benefits of instructing expert accountants to deal with issues on relevant cases. What trends are you observing in the expert quantum instructions that you are seeing?
Doug: Whilst all experienced dispute resolution lawyers appreciate that a range of commercial disputes may require evidence from expert accountants, typically covering damages assessments and valuations but also sometimes covering causation and liability issues, there has been the perennial question of when is it best to first get an expert accountant involved?
Early instruction of an expert accountant may provide benefits such as obtaining an early steer on a credible range for damages pre-action or for the purpose of pleading a credible loss and an early estimate of the range of values at which the case could be settled.
However later instruction of an expert accountant may be preferred to keep costs down, particularly whilst there may be a preliminary focus on liability issues, sometimes in the hope that their costs may be avoided all together if early settlement of the case can be achieved. In recent years we have seen no identifiable pattern in the appetite or otherwise for getting expert accountants involved in a case at an earlier stage. There remain very differing schools of thought on that and we are often still instructed with very short deadlines.
However, we have seen an increasing incidence of the Courts making Orders that experts are to meet before they produce their reports, which may bring them into the case earlier. The reasons for such Orders are well intentioned, for example with the aim of the experts narrowing the issues before preparing their reports to avoid two reports with opinions based on dramatically different approaches. Whilst there may be positive results from such an Order, the product of a meeting of experts at such an early stage can be sterile and unhelpful, for the simple reason that the experts have not at that stage sufficiently considered how they will approach their expert evidence as that can sometimes only be developed during the course of the detailed work to prepare their reports, in which case the cost of the meeting may be at least partly wasteful. The expectations of what can usefully result from an early meeting of experts need to be realistic.
Q: How are the current evolutions in technology transforming your work and the area in which you work?
Doug, Jonathan and David: A key challenge for fraud investigators is dealing with the sheer volume of data involved in many investigations. Reviewing paper files or even keyword searches of digital evidence can no longer guarantee that you will find the evidence you need to prosecute your case. More sophisticated and costly tools need to be continuously added to the fraud investigator's arsenal such as predictive coding and visual intelligence analysis. Sometimes however the trusted concept of just following the money can cut through the most complicated of cases and provide desperately needed clarity.