Think Visually During Fraud Investigations
By James A. Loeffler, CPA, CFE
Successful fraud examiners are those who can effectively communicate complex relationships and transactions in a way that everyone can understand. They must be able to clearly describe who did what, how and why, and to what extent (the losses suffered), and be able to describe their procedures without losing the audience.
Enter the world of data visualization. Relationship maps, cash flow maps, and other visual tools can help paint a clear picture for prosecutors, judges, and juries. While the written fraud examiner’s report is integral to any case, and can be quite powerful, the mapping of relationships, transactions, communications, and other elements of a fraud brings perspective to attorneys and other team members.
CPAs are trained to analyze known data sets, such as financial or tax records. We have the support of our clients in ascertaining account balances, income expenses, and other items. CFEs and forensic accountants, however, must identify and analyze the critical few transactions among the trivial many. This can be overwhelming, even if we have some idea about the nature of the fraud. To be sure, there is no substitute for the forensic accountant’s or CFE’s core expertise. However, using a tool such as a cash flow map throughout the engagement can clarify the big picture, illustrate what is known, and highlight what is not yet known.
Consider, for example, a real estate fraud in which the developer colludes with others and uses several bank accounts to fraudulently transfer loan proceeds for his personal enrichment at the expense of contractors and trades. There are many moving parts in this scenario. We must describe the nature, timing, and extent of cash inflows and outflows – who paid what to whom, when and how payments were made, and for what purpose. Understanding the vendor creation, voucher and payment processes, not to mention general ledgers and sub-ledgers, would also be critical. Moreover, it is likely that such a fraud could have gone on for some time before being discovered, so there could be mountains of data to sift through to find the truth. The following cash flow map can help clarify the facts as the case progresses:
The map helps the investigative team see both the big picture – $2.3 million in questionable disbursements from $10 million borrowed – as well as the critical path and salient details. First, we see which bank accounts were used in each entity to transfer funds and make payments to various payees (a second bank, Bank B, was used to pay a large portion of the questionable expenses). Second, in this case, the loan agreement required that the entire $10 million be paid to trade contractors for the construction of 100 comparable units in three phases. Any sales, marketing, or general and administrative expenses were to be paid out of profits from home sales. We can therefore differentiate and describe such disbursements, be they legitimate business expenses (i.e., staff payroll) or fraudulent (i.e., Florida condo down payment). Third, we can highlight the actors and their roles in this scheme – John Smith and his wife, uncle, and brother-in-law. Fourth, the examination revealed significant payments to Acme Plumbing, which is owned by Bob Jones, Tom Smith’s brother-in-law. Displaying a summary analysis of average unit plumbing costs, as we’ve done here, allows us to question the reasonableness of such charges, particularly those in Phase III, where a disproportionate amount – $440,000 – was paid to Acme for plumbing in only 23 homes. Finally, this should prompt other questions. For example, was all of the plumbing actually completed or was the building inspector in on the scheme? What do phone, text, and e-mail records reveal about the relationships and conversations among the perpetrators? We could create a visual map of these as well.
Cash flow mapping is an iterative process that should be used throughout all phases of an investigation, and therefore can and should change frequently, as the examination reveals more facts. The above would certainly not have been created overnight, but rather continuously updated and shared with the team throughout the case. They can be created through third-party tools, but cash flow maps do not have to be fancy or pretty. Use whiteboards or pencil and paper. The key is to start simply with existing information and update it as the situation warrants.
James A. Loeffler, CPA, CFE, is president of InTune Business Advisors LLC, a Pittsburgh-based risk management firm. He can be reached at firstname.lastname@example.org.
LAST UPDATED 12/7/2010