WHEN THE LINE IS CROSSED: FRAUD DETECTION, INVESTIGATION & RESOLUTION DETECTING DECEPTION IN AUDITS AND INVESTIGATION

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1 WHEN THE LINE IS CROSSED: FRAUD DETECTION, INVESTIGATION & RESOLUTION DETECTING DECEPTION IN AUDITS AND INVESTIGATION Detecting deception within an investigation can be challenging. In this session, you will discover how to use statement analysis to analyze oral and written statements for indications of deception and untruthfulness. Also, you will learn how to interpret body language and how to ask the right questions to get the most needed information. ED STOLLE, CFE, CPA, CFCI, CGFM Senior Analyst Federal Housing Finance Agency Washington, District of Columbia Ed Stolle recently joined the Federal Housing Finance Agency to work as a Senior Analyst for the Division of Banking Regulation s Exam Quality Assurance Unit. Previously, Ed was a Branch Chief for the Securities and Exchange Commission s Examination Program for over ten years. During that time, Ed received the SEC s Examination Award of Excellence for his work on exams and was also nominated twice for the SEC s Productivity Improvement Award for his effective leadership of the SEC s examiner training and learning development program. Prior to joining the SEC, Ed was employed in the Audit Divisions of both Ernst & Young and the Small Business Administration s Office of Inspector General, and he received SBA s Inspector General Auditor of the Year Award for his novel work in detecting fraud on audits and investigations. Ed is an accomplished speaker, giving presentations to many organizations, including banking, securities, and insurance regulators; inspector general offices; foreign financial regulators; district attorney groups; law enforcement organizations; etc. Ed graduated from the University of Maryland, College Park, Magna Cum Laude, with a B.S. in Accounting. Ed is a Certified Public Accountant (CPA) and received the Elijah Watt Cells Award for having one of the top 100 scores worldwide on the May 1990 CPA Examination, out of the 70,000 candidates who took the exam. He is also a Certified Fraud Examiner (CFE), Certified Financial Crimes Investigator (CFCI), and a Certified Government Financial Manager (CGFM). Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. 2011

2 The Federal Housing Finance Agency (FHFA), as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of FHFA. 1 Interviewing Techniques for Auditors, Examiners & Investigators: Detecting Deception Through Statement Analysis and Body Language Observations for 2 Will Most People Lie or Tell the Truth When Met With Blame or Shame? for 3 1

3 Infamous Statements: Enron The balance sheet is strong. The third quarter is looking great. Our stock is an incredible bargain at current prices. Chairman and CEO Ken Lay We are the good guys. We are on the side of angels and We are doing God s work here. CEO Jeffrey Skilling for 4 Infamous Statements: Bernie Madoff, Chairman, Madoff Investment Securities "In today's regulatory environment, it's virtually impossible to violate rules... it's impossible for a violation to go undetected, certainly not for a considerable period of time." for 5 Infamous Statements: CEO Martin Sullivan,AIG We are confident in our marks and the reasonableness of our valuation methods. We have a high degree of certainty in what we have booked to date. for 6 2

4 Infamous Statements: CEO Alan Schwartz, Bear Stearns Our liquidity and balance sheet are strong. We don t see any pressure on our liquidity, let alone a liquidity crisis. for 7 Infamous Statements: Lehman Brothers We are on the right track to put these last two quarters behind us. CEO Richard Fuld Our liquidity pool also remains strong at $42 billion. CFO Ian Lowitt for 8 Let s Get Philosophical: Is Our Culture Getting More or Less Ethical About Lying? for 9 3

5 What Would Honest Abe Think? The Josephson Institute of Ethics concludes "We've become a culture of liars, and that's the sad part of it." Josephson surveyed 43,000 high school students in 2010 and found: 64% of students cheated on a test in the past year and 38% did so two or more times, up from 60% and 35% in a 2006 survey. 36% said they used the Internet to plagiarize an assignment, up from 33% in % said they lie to save money. 25% confessed they lied on at least one survey question..? for 10 What About the Ethics of Our Future Work Force (College)? 11% reported cheating in % reported cheating in A 345% Increase From % reported cheating in A 53% Increase From 1993 for 11 How Can We Detect Deception During Interviews? Think of Interviewing as a Forensic- Type Procedure Risk-Based Interviewing, ing Looking for Red Flags/Deception Indicators Utilize Statement Analysis Observe Body Language 12 4

6 What Is Statement Analysis? Analyzing statements to make a determination about whether the interviewee is being truthful or deceptive Word choices of interviewees matter! It is taught to the FBI, law enforcement agencies, police departments, prosecutors, Fortune 500 companies, investigators, auditors, examiners, bill collectors, attorneys, therapists, etc. Examples are even found in ancient literature, as utilized by King Solomon in 1 Kings 13 What Is Statement Analysis? We do not assert a statement is deceptive on a single indicator of sensitivity or red flag ; we look for multiple indications of deception or patterns. If the subject being interviewed makes a false confession under duress, Statement Analysis should give indicators of this as well. 14 What Is Statement Analysis? What about those who are wrongfully convicted? Does Statement Analysis hold up under these circumstances? Statement t t Analysis does NOT produce evidence; it only gives indicators to probe further Hard to pinpoint why someone was wrongfully convicted possible coercion, false testimony, incompetent defense attorney, unethical prosecutor, mental incapacity, etc. 15 5

7 Statement Analysis: Susan Smith s Statement #1: This was her statement in her first press conference the day her children went missing: "My children wanted me. They needed me. And now I can't help them. (Convicted of 2 counts of murder) What Deception Indicators/Red Flag(s) Are in This Statement Above? 16 Statement Analysis: Sanjay Kumar, CEO of Computer Associates: In a 2001 interview, Kumar was asked about the company s accounting practices, which were first coming under scrutiny. He answered: I don t think there s really any confusion at all with respect to the numbers... it s a perfectly plausible answer... we are not doing anything wrong fundamentally in our business. (In 2006, Kumar was convicted of accounting manipulation, securities fraud, and lying to investigators. He was sentenced to 12 years in prison.) What Deception Indicators/Red Flag(s) Are in This Statement Above? 17 Scott Peterson s Statements #1: His First Interview (Convicted of 2 Counts of Murder in 2003) 18 6

8 Exercise #1: Analyzing Statements for Deception What Statements of Mr. Peterson Indicates He May Not Be Truthful? 19 Scott Peterson Statements #1: Transcript DIANE SAWYER: Tell me about the state of your marriage. What kind of marriage was it? SCOTT PETERSON: The first word that comes to mind is, you know, glorious. I mean, we took care of each other very well. She was amazing. Is amazing. for 20 Statement Analysis: Jeffrey Skilling: "We are innocent. By 'we' I mean Enron Corp.," he said. (Convicted of multiple federal felony charges relating to Enron's financial collapse). What Deception Indicators/Red Flag(s) Are in This Statement Above? I made the trades in question, but we did not have any insider information. What Deception Indicators/Red Flag(s) Are in This Statement Above? 21 7

9 Statement Analysis: Several no s or denials to a single question Timing before you finish your question or well after ½ a No i.e., Nn... What Deception Indicators/Red Flag(s) Are in These Statements Above? Sigh or Snicker (Scott Peterson Video #2) 22 Scott Peterson s Statements #2: Interview After He Is Named as a Person of Interest 23 Exercise #2: Analyzing Statements for Deception What Statements of Mr. Peterson Indicate He May Not Be Truthful? 24 8

10 Scott Peterson Statements #2: Transcripts Part 1 Sawyer: I think everybody at home wants the answer to the same question: "Did you murder your wife? Peterson: No. No. I did not. And I had absolutely nothing to do with her disappearance. And you use the word murder and right now every one is looking for a body. And that is the hardest thing because that is not a possible resolution for us. To use the word murder and yes, and that is a possibility. It's not one we're ready to accept and it creeps in my mind late at night and early in the morning and during the day all we can think about is the right resolution to find her. 25 Scott Peterson Statements #2: Transcript Part 2 Sawyer: But as you know, increasingly in the public, suspicion has turned on you. Peterson: Yes (unintelligible) Sawyer: Did you ever hit her? Did you ever injure her? Peterson: No, No (unintelligible). Violence towards women is unapproachable. It is the most disgusting act, to me. 26 Statement Analysis: Not that I can think of Not as far as I know Not to my knowledge I don t recall What Deception Indicators/Red Flag(s) Are in These Statements Above? You may not believe this, but I m not the type of person This is going to sound like a lie, but Credibility diversion: just ask my [spouse, friend, etc.] What Deception Indicators/Red Flag(s) Are in These Statements Above? 27 9

11 Statement Analysis: Honest to God I swear to [any deity, relative, etc.] As God is my witness Remember From Earlier, Enron CEO Jeffrey Skilling: We are the good guys. We are on the side of angels and We are doing God s work here. (In October 2006, Skilling was sentenced to 24 years in prison, & fined $45 million, for convictions related to the Enron collapse). What Deception Indicators/Red Flag(s) Are in These Statements Above? 28 Larry Craig s Statements: Interview With Police After Arrest at Airport (Plead guilty to misdemeanor disorderly conduct in August 2007) 29 Exercise #3: Analyzing Statements for Deception What Statements of Senator Craig Indicate He May Not Be Truthful? 30 10

12 Larry Craig Statements: Transcript Part 1 CRAIG: Did we bump? Ah, you said so, I don't recall that, but apparently we were close. OFFICER: Yeah, well your foot did touch mine, on my side of the stall. CRAIG: All right. OFFICER: Okay, and then with the hand. Um, how many times did you put your hand under the stall? CRAIG: I don't recall. I remember reaching down once. There was a piece of toilet paper back behind me and picking it up. OFFICER: Okay. Was your palm down or up when you were doing that? CRAIG: I don't recall. 31 Larry Craig Statements: Transcript Part 2 LATER IN THE INTERVIEW OFFICER: You don't recall CRAIG: I don't believe I did that. I don't. OFFICER: I saw. I saw. CRAIG of the stall divider: I don't do those things. LATER IN THE INTERVIEW OFFICER: Unbelievable, unbelievable. CRAIG: I'm a respectable person and I don't do these kinds of Bill Clinton s Statements: Monica Lewinsky Affair (On December 11, 1998, President Clinton Apologized for the Inappropriate Relationship with an Intern and for Misleading the Public ). 33 for 11

13 Exercise #4: Analyzing Statements for Deception What Statements of President Clinton Indicate He May Not Be Truthful? 34 Bill Clinton s Statements: Transcript CLINTON: "There is no improper relationship and I intend to cooperate with this inquiry, but that is not true. LEHRER: No improper relationship, define what you mean by that. CLINTON: Well, I think you know what it means. It means that there is not a sexual relationship, an improper sexual relationship, or any other kind of improper relationship. LEHRER: You had no sexual relationship with this young woman? CLINTON: There is not a sexual relationship. That is accurate. We are doing our best to cooperate here, but we don't know much yet, and that's all I can say now. for 35 Share Your Experiences Detecting Deception 36 12

14 Statement Analysis: Did you make any personal trades in 2009? I never make trades for myself. Never have and never will. What Deception Indicators/Red d Flag(s) Are in This Statement Above? Did you approve the trades? I always follow the firm s policy on trades. What Deception Indicators/Red Flag(s) Are in This Statement Above? 37 Richard Nixon s and Jim Bakker s Statements RICHARD NIXON: I ve made my mistakes but... I have never profited never profited from public service... "And in all of my years in public life, I have never obstructed justice... Well, I'm not a crook." (On August 5, 1974, tape recordings were found that implicated the president in the Watergate cover-up and of obstruction and on August 8, 1974, the president admitted some of [my judgments] were wrong. ) JIM BAKKER: There was never a misuse of funds here. There just never has been, never will be. (Convicted of 24 Counts of Fraud on October 5, 1989). for 38 Exercise #5: Analyzing Statements for Deception What Statements of President Nixon and Reverend Bakker Indicate They May Not Be Truthful? 39 13

15 Statement Analysis: Here's What Enron CEO Kenneth Lay Said When He Addressed His Employees Just Before Enron Imploded: "I think our core businesses are extremely strong. We have a very strong competitive advantage. Of course, we are transferring this very successful business model and approach to a lot of new, very large markets globally. Remember From Earlier, Lay s Other Statements Before Collapse: The balance sheet is strong. The third quarter is looking great. Our stock is an incredible bargain at current prices. (On July 7, 2004, Lay was indicted for his role in Enron's collapse. He 40 died before trial). for Statement Analysis: What Deception Indicators/Red Flag(s) Are in the Statements on the Previous Slide? 41 Statement Analysis: Disruptions in Speech Pattern o Stammer, Stutter, Slur Long Pauses Before Answers Buying Time by Repeating the Question Or Willfully Missing the Point Of the Question Odd Statements or Odd Choice of Words Statements that Don t Seem Logical for 42 14

16 Scott Peterson Statement s #3: Interview After Police Name Him a Suspect 43 Exercise #6: Analyzing Statements for Deception What Statements of Mr. Peterson Indicate He May Not Be Truthful? 44 Scott Peterson Statements #3: Transcript Sawyer: Are you afraid police will arrest you? Peterson: "No. I know there is no basis. I had nothing to do with her disappearance so there s no possible evidence or anything like that

17 Susan Smith s Statements #2: 2 nd Statement After Children s Disappearance (Convicted of 2 Counts of Murder July 29, 1995) for 46 Exercise #7: Analyzing Statements for Deception What Statements of Mrs. Smith Indicate She May Not Be Truthful? for 47 Susan Smith s Statements #1: Transcript Smith: I would like to say to whoever has my children, that they please, I mean please bring 'em home to us where they belong." for 48 16

18 Body Language for 49 Body Language: Key is to Benchmark: : Determine normal truthful behavior and then look for CHANGES, especially repetitive actions when possibly lying. An examiner told me he was able to deduce when a certain firm executive was lying to him, because the executive would rub and brace his ring each time when lying. for 50 Body Language: Other actions that may indicate deception (in order of significance): 1. Feigned Unconcern 2. Shifts in Posture in Response to Difficult Questions 3. Inconsistent Emotions (see Scott Peterson video #2) 4. Smirk (see Scott Peterson video #2) 4. Deep Breaths 5. Arm Crossing 6. Manipulation of Clothing/Item in Hands 7. Perspiration 8. Lack of Eye Contact for 51 17

19 Ted Haggard, Exercise #8: Interview After He Resigned for Indiscretions What Body Language of Mr. Haggard May Indicate Untruthfulness? (In November 2006, he resigned from all of his leadership positions after he admitted buying methamphetamine & other indiscretions) for 52 Susan Smith, Exercise #9: Interview The Day After Her Children s Disappearance What Body Language of Ms. Smith May Indicate Untruthfulness? for 53 How Can You Apply These Techniques On Your Exams, Audits, and Investigations? 54 18

20 Preview of My Presentation on: Dealing with Hostile or Other Difficult Interviewees on Exams, Audits, and Investigations? 55 AW1 Video of a Hostile Deposition for 56 ANY QUESTIONS? 57 19