My Life as a Certified Fraud Examiner

By Peggy Tracy, CFP®, CDFA, CFE

Fraud is everywhere. We hear about it when we turn on the television and are bombarded with juicy details of the latest fraudulent scandal. From politics to business we are faced with examples of fraudulent behavior.

Some fraudulent schemes are illegal and others are immoral. Perhaps we all question why Bernie Madoff would take the very last dollar from a potential investor. What he is accused of doing is downright illegal but the way he also went about his business, duping others and taking everything certainly could be said to be immoral.

 

John Markopolous was the whistle blower on Madoff over ten years ago. He is a Certified Fraud Examiner, perhaps one of the more famous amongst us.

There are over 15,000 Certified Fraud Examiners (CFE) worldwide. Most, if not all, are focused on solving corporate or business fraud cases. Typical fraud work is done in the following areas: 

Mortgage Fraud

Securities Fraud

Insurance Fraud

Misappropriation of Assets

Consumer Fraud

Internet Fraud

Tax Fraud

My practice is centered around family fraud with a specialization in divorce dissipation issues. This is a unique specialty that is composed of many disciplines; forensic accounting, financial planning, tax knowledge, criminology and law. My job is to solve a financial puzzle. Are there assets hidden or missing? Has the estate been diminished through removal or neglect of assets?

The answers to this type of fraudulent behavior come from tracing the documents through the business or household to determine all the possible sources where money is coming in to the accounts and then look at all the expenses, or money leaving the accounts.  We use a variety of methods to investigate fraud. Examples would be scanning the Net Worth from one year to the next to look for large, overall discrepancies or employing the Expenditures method when analyzing expenses. One of the most powerful methods we use is the Bank Statement method. Analyzing deposits, wire transfers and checks  (front and back) will give us clues as to the movement of funds as they move in and out of accounts.

Even though the suspicion of fraud is built on circumstantial evidence the actual proving of the fraud is almost always accomplished through direct evidence. Bank statements, credit cards, loan applications, estate planning/legal documents, brokerage accounts, life insurance policies and tax returns are favorite sources of information.

When we are investigating a business, sources of evidence would include the general ledger and accompanying financial statements, tax returns, incorporation/partnership paperwork, suppliers, vendors and employee records. Fraud examiners will often search through thousands of pages to put together all the evidence for trial.

Evidence gathering also includes electronic data/information. An attorney can now subpoena computer hard drives and hand-held devices, both at home at the place of work. Cell phones, GPS systems and toll booths will now give a daily picture of where someone has been. ATM machine withdrawal locations are also recorded.

A unique feature of fraud cases is that the perpetrator’s identity is usually known. In my area of expertise the fraudster is often a spouse or family member, but could also be an outsider brought in for hire, such as a nanny, housesitter or elder caregiver.

Donald Cressey, a professor at Indiana University in the 1940’s is credited with designing the Fraud Triangle. Basically his theory was that any trusted person could become a trust violator. All three must be present for a violation to occur.

  1. Perceived Opportunity
  2. Pressure (non-sharable need)
  3. Rationalization

The more autonomy we give others over our assets, the more opportunity they have to overstep their moral boundaries. If someone believes they will not be caught, they are much more likely to commit the indiscretion. Deterrence is the number one protector of assets being squandered or moved.

How often does one spouse just “sign” the tax return without reading it? Or perhaps sign papers that are put in front of them without reading what they are signing? Are families sitting down and having an annual meeting like a business might. Is anyone “auditing” the checkbooks and credit cards for unusual transactions or double-checking the bank account if a third party has access to it?

Or are we so delighted to be relieved of our financial responsibilities that we easily give up control over this part of our lives and trust that it will all work out? We need to take our blinders off. Greed is all around us and may even be lurking in our own households.