Recently, I spoke about fraud at the Federal Deposit Insurance Corporation for their investigators. My day was off to a rocky start, as I accidentally burned a big hole in my pink crepe suit jacket while trying to use the steam function on the hotel iron to rid it of a few wrinkles. Normally I would be traveling for the entire week and would have multiple backup outfits, but not this time. I was trying to stay ahead of bad weather, so I made a mad dash to the Washington, D.C., area and back in 24 hours, and had only brought the one suit.
As long as I don’t fall down on stage (it has sadly happened), I don’t get flummoxed too easily and I figured I could conjure up a “you’ll never believe what happened to me on the way” story and use humor to detract from my unintentional fashion statement. But once I started my talk, I forgot all about it until my hand accidentally rubbed the now stiff (read: charred) fabric to remind me, and I made a joke about it to the crowd. I told them it is like some frauds — you didn’t notice it until I pointed it out, and now you can’t un-see it. Many came up to me after and commented that it was true; they hadn’t noticed the gaping hole with the burned outline on my jacket until I mentioned it, and then they couldn’t stop seeing it.
This happens frequently with fraud. We spend a lot of time and effort looking for concealment efforts, but what about the frauds that aren’t actually concealed? What about the frauds that hide in plain sight? As an auditor I spend a lot time looking at controls and trying to understand how they could be circumvented, and by who, but fraudsters don’t necessarily need to circumvent or conceal their fraud if the environment itself creates the concealment.
Semi-controlled chaos can provide all the concealment a fraudster needs to hide their fraud in plain sight. I speak about the “illusion of controls” and the “timeliness” of controls, and how both can create an opportunity for fraud. But both also create a naturally occurring concealment as well. Let’s look at timeliness first.
For those of you who have spent time in accounting, think about reconciliations — any type of reconciliation — anything from physical inventories to payroll registers. How many of you ever got behind on your reconciliations? How much more difficult was it to reconcile the variances after a month went by? Two months? How about six months? It becomes exponentially harder to identify and reconcile the variances as more time goes by. The purpose of a reconciliation is to identify variances and determine the underlying (root) cause of the problem to correct it and prevent it going forward. What happens when the issue can’t be identified and resolved? Normally, an adjustment is made to the account.