FAE speaker: With fraud, think outside the documentation

Published Date:
Jun 11, 2014

Jules B. Kroll, widely considered to be the father of modern corporate investigations, said that today’s businesses need to work smarter, not harder, when it comes to detecting and preventing fraud, and that simply throwing money at a crisis isn’t the most efficient use of time and resources. He made the remarks as the keynote speaker at the Foundation for Accounting Education’s 2014 Anti-Fraud Conference on May 21.

Kroll is the chairman and co-founder of the investigative consultancy firm K2 Intelligence, as well as the chairman and CEO of Kroll Bond Rating Agency, Inc. He is best known for his detective work in a series of high-profile—and, in some instances, dangerous—cases, from ferreting out hidden assets connected with dictators such as Saddam Hussein, to tracking down stolen money in the Bosnian banking system. One of his cases, which involved a kidnapping, inspired the movie Proof of Life, according to the New York Times.

In painting a picture of the world post–financial crisis, Kroll said that the reaction to the 2008 crash was a predictable one, with the “political class wagging its finger” at the financial sector and instituting a large number of new regulations overseen by numerous regulatory agencies. This, he said, was “complete overkill, a tremendous duplication of effort [that is] generally not coordinated, but is the typical societal response to problems that already exist.”

As a result, he said, the amount of money being spent on compliance is much greater than it was when he first started his business 40 years ago—for example, JP Morgan Chase, he said, now spends $2 billion a year on following the proper regulations, with 4,000 new hires brought on to coordinate its efforts. However, he said that, in general, the money is rarely put to good, targeted use, even in areas such as financial audits. “We’re spending money, but the question is: how wisely?” he said.

“My point is, let’s look in the mirror and say to ourselves, ‘is this really the right way to go about this?’” he said. “How much of it is just ticking the box and how much is getting to the bottom of things?”

Kroll said that it is important to understand an entity in terms of where the greatest fraud risks are and concentrate resources there, rather than cast a wide net and try to sift through mountains of information, only some of which will turn out to be relevant. Certain areas in a business, he said, are more prone to fraud than others, mainly those that have financial or economic power.
For instance, he said, purchasing departments are a very likely avenue for potential fraud, as they have a significant amount of financial power compared to other departments.

He went on to say that many of those who are responsible for fraud examinations, whether they’re from an outside firm or an internal office, are not sufficiently familiar with the entity they’re looking at, and needed to go beyond “the four corners of the documents” presented to them.

As one example, he said that if a good fraud examiner were to examine a purchasing department, he would go well beyond just the paperwork, talking to people within the department to get a good idea of how the operation works, as well as to vendors to see how it looks from their end, and even to competitors.

“You will hear things on a practical basis,” he said. “Some laced with self-interest, but some will give a story of what might be going on."

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