Author Archives: Brad Preber

Brad Preber

About Brad Preber

Brad Preber is the managing partner of the Phoenix office of Grant Thornton. For more information, visit www.grantthornton.com.

"MACH" A Match for Whistleblowers

“MACH” A Match For Whistleblowers

In 2002, the Sarbanes-Oxley Act (SOX) breathed new life into whistleblower programs for U.S.-listed public companies. This legislation had a particular impact on audit committees, handing them the responsibility of, “establishing procedures for

  • The receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and
  • The confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.”

SOX, however, did not provide any guidance to audit committees on what procedures should be considered or how to evaluate their effectiveness once established. As a result, for many companies, complaint handling is still a haphazard process that tends to operate in crisis mode. It can be both costly and time consuming, yielding few, if any, measurable results. We have found that — even now, 10 years after the enactment of SOX — companies are still struggling to find an effective approach to handling whistleblower complaints.

It is important to understand the role whistleblower complaint handling plays in deterring corporate fraud. Controls on the front end that prevent or deter fraud are critical — after all, the cheapest fraud is one that never happens. An effective whistleblower program, however, is the last line of defense.

According to the Association of Certified Fraud Examiners’ (ACFE’s) 2012 Report to the Nations, a study of 1.388 cases of occupational fraud, the most fraud is not detected as a result of internal controls. This is in part because perpetrators of fraud work in areas that are not tightly controlled or in areas that they themselves control. By far, the most effective form of fraud detection is a tip, often received via a fraud hotline.

The ACFE study also reports that the presence of a whistleblower hotline results in a much higher likelihood that occupational fraud will be discovered by a tip. For the most part, what has been lacking both from the literature and from practice is a methodical approach that organizations can use to register complaints and channel them to the appropriate groups for action. Only by establishing a comprehensive process will organizations be able to ensure that, when the whistle does blow, someone has the wherewithal to stop the train, get out and investigate.

One process, which Grant Thornton developed, is called the Model Accounting Complaint-Handling Process, or MACH Process. The MACH Process is designed to provide both meaningful structure and enough flexibility so that it can be adapted to any organization. It should not be viewed as a soup-to-nuts formula for setting up a whistleblower program. Instead, the MACH Process focuses on the component of any whistleblower program that requires the most attention from management and the board, handling complaints once they are received. Setting up the overall program is important, including making decisions regarding whether to insource or outsource the program administration, who to engage, how to handle different countries’ related legal requirements, and so on. The focus here is on what happens once the whistle blows and that train starts rolling down the track.

The MACH Process consists of six basic steps:

1.   Receive the complaint.
2.   Analyze the complaint.
3.   Investigate the complaint.
4.   Resolve the complaint.
5.   Report the resolution of the complaint.
6.   Retain the necessary documentation.

This complaint-handling process can be tailored to meet the needs of virtually any organization. The MACH Process is designed to ensure not only that venues exist for the gathering of whistleblower complaints, but also that all complaints are documented, investigated and addressed in the appropriate manner and that the process involves all necessary stakeholders.

Ultimately, by establishing an effective whistleblower complaint-handling process, organizations will be able to identify and deal with cases of fraud that have the greatest potential to harm reputation and bottom line.

For more information about the MACH Process, please visit gt.com.

Business Fraud

Watch Out For Business Fraud — In Any Economy

It is impossible to reflect on the recent recession without thinking of multi-million and billion dollar business fraud allegations — Bernie Madoff, Allen Stanford and Danny Pang dominated the headlines, to name a few.

We shake our heads and ask how it happened — poor investor due diligence, a lack of government oversight, unchecked lending, or just greed.

Business Fraud

Forensic accountants have long known that business fraud is heavily dependent on an individual’s position in an organization and the level of tempting circumstances. The general rule for this “occupational fraud” is the higher the rank in the organization, the greater the risk for a significant fraud to be committed.

The circumstances that create fraud temptation fall into three categories that create the legs of the Fraud Triangle. This is a well-known fraud model based on the work of criminologist Donald R. Cressey to understand why people commit occupational fraud.

The Fraud Triangle reflects that three elements must be present for fraud to be committed:

1. Incentive or pressure;
2. Opportunity; and
3. Rationalization.

Incentive or pressure is the presence of non-sharable personal problems, which often include a belief that money will make the problem go away. The element of opportunity requires a perception that one has the position, knowledge, skill and access needed to commit fraud unnoticed and undetected by others. Rationalization is a person’s ability to plan, commit and hide fraud in the workplace with a belief that the bad act is reasonable and justified.

Recession Fraud Trouble

Today we are faced with weak consumer confidence, increasing business failures, record levels of unemployment, depressed real estate markets, restricted access to loans and capital, impaired retirement accounts and a likely future of increasing taxes and governmental debt. In the world of the forensic accountant, this is an enormous amount of pressure increasing the risk of fraud. That pressure, when combined with shrinking business oversight due to lay-offs and cost cutting and desperation felt by the average worker to get all they can before they are fired, add opportunity and rationalization in ways never experienced before.

Forensic Accounting Against Fraud

More and more businesses are discovering that forensic accounting is an effective tool in the management and defense of fraud. Hot services right now include:

Fraud Assessment, Monitoring & Compliance

Sometimes referred to as fraud “audits” (although they are not per se), these services include fraud risk assessment, implementation of fraud detection and prevention programs and fraud monitoring activities.

Forensic Due Diligence

These services are designed to discover information and confirm facts using data analytics, investigative techniques, background checks and other methods.

Fraud Investigation

This type of forensic service respond to allegations of fraud, white-collar crime, waste and abuse.

Fraudulent Conveyance and Preference Search

Typically performed in connection with bankruptcy proceedings, this forensic service includes the search for and analysis of potentially fraudulent transfers and preferential payments.

Asset Tracing and Recovery

Forensics services in this area identify hidden assets and include efforts to locate and recover them.

Anti-Money Laundering and Foreign Corrupt Practices Act

Compliance with Federal and state laws is an important activity, and these services assist to identify compliance risks and to assess and test existing systems, practices and procedures.

Litigation Consulting

These are forensic accounting services performed in connection with litigation. Forensic accountants often serve as expert witnesses related to fraud and damages.

For more information about business fraud, please visit gt.com.

 

Black binoculars against a white background

Financial Deception Can Flourish In Good Times And Bad

It is impossible to reflect on the recent recession without thinking of the unearthing of multimillion- and billion-dollar fraud schemes. We shake our heads and ask how it happened. Was it poor investor due diligence, a lack of government oversight, unchecked lending or just greed? But when it comes to fraud, watch out, because emerging from this recession may just be, in the words of baseball legend Yogi Berra, “Déjà vu, all over again.”

Business fraud

Forensic accountants have long known that business fraud is heavily dependent on an individual’s position in an organization and the level of tempting circumstances. Occupational fraud is commonly defined by the Association of Certified Fraud Examiners as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” We all recognize these bad acts as corruption, asset theft and financial statement fraud. The general rule for occupational fraud is the higher the rank in the organization, the greater the risk for a significant fraud to be committed.

The circumstances that create fraud temptation fall into three categories that create what is called the Fraud Triangle. This is a well-known fraud model based on the work of criminologist Donald R. Cressey, and is aimed at understanding why people commit occupational fraud. The Fraud Triangle reflects the three elements that must be present for fraud to be committed:

  • Incentive or pressure
  • Opportunity
  • Rationalization

Incentive or pressure is the presence of non-sharable personal problems, which often include a belief that money will make a problem go away. For example, an unpaid mortgage or the threat of the loss of employment can cause stress and, therefore, increase the pressure for an employee to steal an employer’s cash or fudge an expense account.

The element of opportunity requires a perception that one has the position, knowledge, skill and access needed to commit fraud unnoticed and undetected by others.

Rationalization is a person’s ability to plan, commit and hide fraud in the workplace with a belief that the bad act is reasonable and justified.

Business fraud bubble

In the first decade of this century, as the stock market continued to experience significant growth, the real estate market boomed. As employee compensation mimicked these gains, the propensity for occupational fraud skyrocketed. It was a time in which hard money loan returns were uncharacteristically high, double-digit real estate investment gains were an expectation, consumer confidence was strong, and new investment strategies abounded. Simultaneously, the rapidly growing economy and limited regulatory oversight over complex investment vehicles sparked increasing fraudulent behaviors ranging from mortgage fraud to Ponzi schemes.

In terms of the Fraud Triangle, all the elements for a fraud disaster bubble were present. Incentives for massive wealth creation were unprecedented. Investors blinded by greed created an easy opportunity for criminals. And the rationalization cry of “everyone’s doing it” was heard at every office water cooler. All the signs were there that the big burst was about to happen.

Recession fraud trouble

While much of the fraudulent behavior went undetected for years, the recent economic downturn led to increased scrutiny and fraud detection. Be warned, however, that recovery from the recession has created a whole set of new business fraud risks.

Today, we are faced with weak consumer confidence, increasing business failures, record levels of unemployment, depressed real estate markets, restricted access to loans and capital, impaired retirement accounts, and a likely future of increasing taxes and governmental debt. In the world of the forensic accountant, this is an enormous amount of pressure that is increasing the risk of fraud. That pressure, when combined with shrinking business oversight due to layoffs and cost cutting, and desperation felt by the average worker to get all he can before he is fired, add opportunity and rationalization to complete the Fraud Triangle in ways never experienced before.

Forensic accounting against fraud

More and more businesses are discovering that forensic accounting is an effective tool in the management and defense of fraud. The American Institute of Certified Public Accountants defines forensic accounting services as “the application of specialized knowledge and investigative skills possessed by CPAs to collect, analyze and evaluate evidential matter and to interpret and communicate findings in the courtroom, boardroom or other administrative venue.”

Hot services right now include:

  • Fraud assessment, monitoring and compliance: Sometimes referred to as fraud “audits” (although they are not per se), these services include fraud-risk assessment, implementation of fraud detection and prevention programs and fraud monitoring activities.
  • Forensic due diligence: These services are designed to discover information and confirm facts using data analytics, investigative techniques, background checks and other methods.
  • Fraud investigation: This type of forensic service responds to allegations of fraud, white-collar crime, waste and abuse.
  • Fraudulent conveyance and preference search: Typically performed in connection with bankruptcy proceedings, this forensic service includes the search for and analysis of potentially fraudulent transfers and preferential payments.
  • Asset tracing and recovery: Forensics services in this area identify hidden assets and include efforts to locate and recover them.
  • Anti-money laundering and foreign corrupt practices act: Compliance with federal and state laws is an important activity, and these services assist to identify compliance risks and to assess and test existing systems, practices and procedures.
  • Litigation consulting: These are forensic accounting services performed in connection with litigation. Forensic accountants often serve as expert witnesses related to fraud and damages.

As much as we would like to put the fraud of the last decade behind us, exiting the current recession is looking to be a risky proposition. The pressure, opportunity and justification to commit fraud may be at unprecedented levels. A healthy awareness about this risk, together with knowledge of forensic accounting services to control the risk, will be important.

Fraud Triangle
Incentive or Pressure

  • Pressure to protect remaining equity, prevent additional profit losses, and shield assets.
  • Concerns about potential layoffs (financial well-being).
  • Insolvency concerns may drive fraudulent behaviors.Opportunity
  • Layoffs may lead to segregation of duty weaknesses or failure.
  • Budget cuts and cost containment results in less time and resources for fraud monitoring and prevention.Rationalization
  • “We need to do it to stay competitive” or “Everyone does it.”
  • Rationalize fraudulent behaviors because of perceived sacrifices during the downturn.