Why We Choose to Travel Inside the Mind of a Fraudster

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Andrew Fastow, the former CFO of Enron, often refers to himself now as the Chief Loophole Officer. He bent and molded accounting rules to fit Enron’s purposes. He manipulated the numbers into what would help him and the company’s executives make the most profit and to help shareholders sleep well at night. Technically legal? Yes. Ethical? No.

This rationalization that Enron wasn’t actually breaking the law is the crux of many of Fastow’s speeches and interviews when he shares his story with students, professionals and companies. This is a piece of the puzzle that anti-fraud professionals are able to use and take into their own examinations when attempting to understanding how a team of executives could cause one of the largest cases of corporate fraud in the world.

At my first ACFE Global Fraud Conference in 2010, I shared a cab with someone who told me why he had chosen not to attend the conference’s closing ceremonies. He said he had no desire to give one minute of his time to listen to a convicted fraudster speak about his crimes.

Every year the ACFE closes the conference with an address from a fraudster. In fact, Fastow spoke at our conference in 2013. We don’t do this to give fraudsters a platform or put them in the spotlight, but rather we do this quite selfishly: to give you an upper hand in your own examinations and interviews. We do this to understand their motives, their rationalizations and the opportunities that allowed their frauds to happen; all with the knowledge that the person who committed fraud is without a doubt responsible for his or her actions.

But, to dismiss that we have nothing to glean from these stories is to assume that we have nothing to take away from red flags that may have been missed, controls that were not in place or the value of understanding the human element present in every fraud committed.

In the 27th Annual ACFE Global Fraud Conference’s Pre-Conference session today, “Mindset of the Fraudster: What We’ve Learned in 25 Years of Interviewing,” John Gill, J.D., CFE, ACFE VP of Education, highlighted what he has taken away from his time meeting with white-collar criminals.

To better explain why there is value in conducting these types of interviews, he referenced the following practical applications of understanding the mindset of a fraudster:

  • Reduce the risk of projection bias (the tendency to believe that other individuals share the same or similar beliefs, values, feelings, thoughts or positions)
  • Strengthen your attitude of professional skepticism
  • By understanding what motivates people to do things, you can better influence people to take a particular direction and achieve honest goals
  • Develop work environments conducive to ethical behavior and averse to unethical behavior
  • Knowledge of human behavior provides insight into creating and maintaining effective teams

Gill also stressed how identifying rationalizations, opportunities and pressures can help examiners in the creation of fraud prevention strategies. For example, he showed a video clip of Diann Cattani, a woman who embezzled $500,000 from a small company in Idaho, who said, “I was raised an honest person…But, had there been accountability in place, it would have helped me.” Aside from the ridiculous suggestion that she needed help from the company to not steal the money, she reveals something that all companies should take note of: there should have been internal controls in place. That does not take the blame away from Cattani, but it does suggest the importance of having internal controls in place to proactively prevent fraud.

The following are examples of procedures and mechanisms that management can use to detect and prevent fraud:

  • Ethical tone at the top
  • Anti-fraud policy
  • Internal controls
  • Reporting system
  • Employee anti-fraud education
  • Employee background checks
  • Due diligence for third parties
  • Separation of duties

If it sounds odd or strange or even wrong to think that you could learn something from listening to a convicted fraudster’s story, then you are not alone. In fact, you are human. And it is only instinctual to want to stay away from potential perceived danger. But, just as behavioral analysts study serial killers to find their rationalizations, their weaknesses and their opportunities, fraud examiners can use the same methodology to understand the who, what, where, when and why of a person’s decision to risk everything for money.

The 4-hour Pre-Conference session went into much more depth about many of the suggestions mentioned above. Fortunately, the ACFE will be offering a new live course later this year covering this topic.