Forensic Accounting:
10 Fraud Identification Tips for CPAs
Most accountants, auditors, fraud experts and financial professionals pride themselves on their analytic approach to risk assessment, data collection, client development and goal setting. We rarely think a CPA, a CFA, a CIA or CISA could be swayed by clever fabrications, exaggerations or outright lies…
Wrong!
Key Takeaways
It turns out, well trained financial professionals are highly susceptible to being duped by the next Sam Bankman-Fried. In fact, a classic study revealed a 25-50% failure rate on detecting fraud by Big 4 audit partners in a controlled lab setting. Another study of investment professionals found that their ability to distinguish between truthful and deceptive statements was no better than chance—at 49.4%. Worse yet, the study found that participants “displayed poor metacognitive realism when assessing their own performance”.—In other words, they didn’t know what they didn’t know.
So… What’s going on? Read on, to learn 5 mistakes you don’t want to make, and 5 tips that will transform how you conduct interviews, audits, and fraud identification sessions.
5 Mistakes Accountants and Auditors Make During Fraud Investigations
Here are five common “thinking errors” that any member of NASBA or AICPA, could make when in the presence of a savvy fraudster, fabricator, or liar.
- Confusing anxiety for deception. It turns out that entry level accountants misinterpret anxious behavior far more frequently than senior level professionals. A recent study found that junior staff tend to mistake anxiety-related twitches, foot taps and body movement for deceptive behavior. It’s true—anxious behavior CAN be associated with deception—but only when it’s expressed in a cluster of two to three other indicators of deceit such as avoiding direct answers to questions and over-use of qualifying language. Sometimes a foot tapper is often just…a nervous foot tapper and not a liar.
- You tell yourself it’s not worth the effort to open an investigation. Whether it’s a concern about doing additional work no one has time or budget for, or simply a concern about tension with management, research shows that over time, auditors learn through experience that there are few rewards and lots of costs to investigating suspicious behavior. It’s not uncommon to subconsciously disregard red flags of deception when the barriers to successfully uncovering it are high.
- You think “I’ve known them for years. I’d know if they were lying.” Trust can be tricky since talented fraudsters often prey on trust when misrepresenting the facts. Are you a low truster or a high truster? High trusters tend to have a very hard time asking challenging questions of those they have worked with for years. It’s psychologically uncomfortable to ask a long-term client if there might be an offshore account they “forgot” to disclose. It turns out that the longer one has had a client and the more familiar one is with them, the worse they are at spotting their lies. Accounting professionals often stop asking hard questions of dishonest clients because they tend toward over-confidence in their observational skills, and they don’t want to believe they’ve been in business with someone who might have been duping them for years.
- You think the absence of signs of deceit is proof of truth telling. And you’re busy. And you’re tired. And you didn’t prepare for an interview. In fact, you thought “ I’ll just wing it”. This is a perfect storm for being duped. Even the most polished professional can fall into the trap where they have limited time, energy and bandwidth and proceed to unconsciously clear someone of wrongdoing simply because they didn’t detect signs of deceit. Had they been trained in asking expert questions, in raising the cognitive load on their subject and in preparing carefully for a hard conversation, they surely would have surfaced material facts. More often than not, however, we make a common “thinking error” of looking the other way when deceptive signals are not apparent, especially during forensic accounting.
- You pursue people instead of facts. It’s easy to succumb to the desire to “nail that liar”. But that’s not the job of a professional investigator. In fact, the fervent passion for the truth you might feel, can lead you astray. Put your biases aside and stay 100% focused on getting facts. While your hunches might be correct, knowing that someone is lying doesn’t necessarily mean you will get to the truth unless you remain objective and signal to others that you are a fair player. Interview subjects are much more likely to open up to you if they sense a fair playing field.
5 Foolproof Tips for Every Forensic Accountant, CPA, and Auiditor
- Send two auditors to the next hard conversation instead of just one. While it might require a budget stretch, having multiple auditors conduct interviews has been proven to provide the added benefits of making fraud more obvious while also increasing the likelihood that it will be reported! One study found that subjects are more likely to leak deceptive indicators when more than one auditor is present in an in-person interview. The study also found that multiple auditors are more likely to recommend higher asset write-downs for more-deceptive clients than a single auditor.
- Working with someone new? Communicate face-to-face. Studies show that in-person communication allows your interview partner to convey clear deceptive cues that can be easily observed while online email communication is subject to multiple forms of misinterpretation. Cues such as “pausing before answering” can be detected on camera or in-person but would be impossible to detect if you simply emailed your subject and waited for them to respond. Subtle facial micro-expressions of fear and general non-verbal cues such as postural shifts would be missed via lean asynchronous exchanges such as texting and email but could be observed effectively via zoom or in person meetings. Research has found that heavy in person communication during the early phases of the client development life cycle, increases deception detection accuracy. So, if you are an auditor, CPA, certified financial planner, or forensic accountant, go the extra mile and meet in person early on.
- In an interview, be wary if your client dodges or protests your questions or provides overly simplified responses. You should always think about your interviewee’s answers relative to their usual baseline behaviors. But, if you’re finding it abnormally hard to get answers to begin with, then take note if you see these telltale verbal signs of intentional omission:
- “ Did I…?” Repeating the question, or “parrot statements” can be used by a liar to stall for time.
- “To be honest”, “to tell you the truth”, “as far as I can tell…well it seems”. Deceptive subjects often respond to hard questions with overuse of qualifying language
- “That’s a ridiculous question to ask.” Protesting the question itself is a red flag for deception
- Ask unexpected questions. The more novel your questions are, the greater insight you’ll be able to glean from a response. This is especially true if your conversation partner is well-versed in typical questions asked by financial professionals. When you ask an unexpected question, you raise the cognitive load on your subject significantly. When cognitive load is high, indicators of deceit leak more frequently. Don’t wing it. Plan your interview strategy carefully. I teach a course just on planning your questioning strategy and timing—There are seven different types of questions that get to the truth, when employed strategically.
- Post Interview Relief- Most guilty subjects will exhibit enormous post-interview relief –a change in posture, a big exhale or new breathing pattern, a nervous joke or laugh—when they think the hard questions are over. Savvy interviewers save the hardest questions for last and check to see if their subject stiffens up again once they exhibit post interview relief, thinking the interview is over.
Learn Interviewing and Deception Detection for Forensic Accountants while earning NASBA CPE credits
Want to learn more about spotting lies and deception– and also earn up to 16 NASBA CPE credits, including 4 Behavioral Ethics credits? Sign up for my pre-recorded self-paced Masterclass for Financial Professionals, Deception Detection: Interviewing and Getting to the Truth or any of my courses on expert questions, interviewing and spotting lies. All of them are NASBA compliant, hugely entertaining, and fun!