Unit II Literature Review

Corporate Fraud A Manager’s Journey

K.H. Spencer Pickett

John Wiley & Sons, Inc.

iii

C o p y r i g h t 2 0 0 7 . W i l e y .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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Library of Congress Cataloging-in-Publication Data:

Pickett, K. H. Spencer

Corporate fraud : a manager’s journey / K.H. Spencer Pickett.

p. cm.

Includes index.

ISBN 978-0-470-11479-7 (cloth)

1. Fraud. 2. Fraud–Prevention. 3. Corporations–Corrupt practices. 4. Fraud investigation. I. Title.

HV6691.P54 2007

658.4073–dc22

2007004980

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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This book is dedicated to the people of the

Isle of Wight, England

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vi

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C O N T E N T S

C H A P T E R 1

The Funeral 1

C H A P T E R 2

The Long Weekend 5

C H A P T E R 3

Snouter’s in Town 14

C H A P T E R 4

Back to the Island 32

C H A P T E R 5

Plans into Action 38

C H A P T E R 6

Criminology at Bay 45

C H A P T E R 7

The First Seminar 54

C H A P T E R 8

Keeping Your Sox On 68

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C H A P T E R 9

Trouble’s Brewing 75

C H A P T E R 1 0

Getting Real 80

C H A P T E R 1 1

The Story Unravels 84

C H A P T E R 1 2

A Shot in the Arm 88

C H A P T E R 1 3

The Story Travels 95

C H A P T E R 1 4

A New Approach 102

C H A P T E R 1 5

The Long Night 135

C H A P T E R 1 6

A Meeting of Minds 142

C H A P T E R 1 7

The Sunshine State 150

C H A P T E R 1 8

Start at the Top 163

C H A P T E R 1 9

In and Around Portugal 171

C H A P T E R 2 0

Reporting Back 178

C H A P T E R 2 1

Back in Portugal 186

C H A P T E R 2 2

Making More Plans 198

viii Contents

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C H A P T E R 2 3

The Heat is On 206

C H A P T E R 2 4

The Presentation 213

C H A P T E R 2 5

The Mystery Continues 225

C H A P T E R 2 6

The Audit Committee Hears More 234

C H A P T E R 2 7

Some Clarity at Last 261

C H A P T E R 2 8

Getting Deeper 271

C H A P T E R 2 9

Fraud Risk Awareness 282

C H A P T E R 3 0

Family Affairs 299

I N D E X 3 0 7

Contents ix

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A ll characters in this publication are fictional and any resemblance to

real persons, living or dead, is purely coincidental.

This book provides a general introduction to fraud risk management.

However, individual frauds are unique in terms of features and contexts

and therefore, legal counsel should always be sought whenever inves-

tigating fraud or designing controls to guard against fraud.

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Pickett4797_ch01_1 06/12/2007 1

c h a p t e r 1

THE FUNERAL

B ill looked down at the glazed light-brown coffin as it slowly inclined

its way down into the dark recesses of the grave. His eyes narrowed,

and he thought of the time, only last week, when he had held his father’s

hand and told him words of comfort as the sharp intakes of breath

indicated the final moments. Bill had told his father that he would cherish

the old man’s achievements—fighting his way out of hardship to buy his

own house and raise his family. He promised to fulfill his own ambition

and like his father, take a risk on new ventures when the time was right.

Bill told him that he was the most wonderful person ever, until the

breathing became so shallow that it was almost gone. And then Bill kissed

his father’s cheek and saw the faint flicker of a smile whisk across the

wrinkled face, and Bill continued to talk. He said that his grandchildren

would be told about their grandfather and all that he had done in his long

life. And then it was all over.

Bill looked up from the grave and saw some of his neighbors, his tennis

partners, a few old friends, and a group of colleagues led by his boss,

Georgina, standing around the graveside. Each person eventually

departed with a handshake or a pat on the back along with a few choice

words of sorrow and condolence. His friend Jack stood like a soldier at

the grave with his head bowed, hands behind his back, standing guard, his

body rigid and still. Georgina came over to Bill and placed a hand on his

arm as she mumbled.

‘‘Bill. Let me buy you a drink. I know you’ve not organized anything—

you know, a wake or such.’’

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Pickett4797_ch01_1 06/12/2007 2

Bill nodded and replied,

‘‘Well, yes. That’s it, really. The last of my family. . . .’’

She guided Bill towards the high road with its sparkling lights,

suggesting that drinks and laughter were on offer. Jack followed several

paces behind, and the three of them sat around a small, dimly lit table

towards the back of the bar. Bill stared at his hands as Georgina said,

‘‘Take as much time off as you like. I’ll update you when you get

back.’’

Jack got up and headed for the bar.

Georgina looked closely at Bill and continued,

‘‘Don’t worry about the new strategic transition project. Take time for

yourself and your grief. I know you’ve a trip planned.’’

Bill seemed to slowly come out of his trance and said.

‘‘Yes. I’ve got this cottage in England. It was left to me by my aunt. So I

plan to go out there and see what needs doing. But what happened at the

board meeting yesterday? Wasn’t it about the big new change project

we’re doing?’’

Georgina looked away and shook her head.

‘‘I just said don’t worry about work for a bit. Take your vacation and

relax.’’

Bill smiled and rubbed his tired eyes.

‘‘I need to get back into things as soon as I return. Really I do. How did

it go yesterday?’’

Georgina seemed unsure about what to do, as Jack returned and stood

three drinks down on the table. Bill spoke again.

‘‘Really, I’m okay. Tell me how it went.’’

Georgina sat back and assumed her chief executive look with

mouth pursed and eyes focused on Bill. She wore a tailored skirt

and jacket that hugged her small but shapely body. She crossed her

legs and said,

‘‘Okay. You get it your way, Mister Tough Guy. What’s your job title,

Bill?’’

‘‘Head of Corporate Planning.’’

‘‘But what does it mean?’’

2 C o r p o r a t e F r a u d : A M a n a g e r ’ s J o u r n e y

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Pickett4797_ch01_1 06/12/2007 3

Jack gently stood up to give the other two some freedom to discuss their

work issues, but Georgina grabbed his arm and pulled him back to his

seat.

‘‘Jack, stay here. This may hit you as well.’’

Jack finally spoke,

‘‘But I don’t work for you. I’m okay to let you two talk shop.’’

Georgina sighed.

‘‘You know you do projects for Bill. And we may well need you on this

one.’’

Jack sat down and sipped his drink. Georgina’s eyes flashed as she

started talking again.

‘‘You’re Head of Mumbo, Jumbo, Bumbo. What you do, Bill, is take

on our change projects and make them work. You’ve reviewed our

internal controls, and you’ve got us set up with enterprise risk manage-

ment, with help from Jack here. Right now, it seems that we urgently need

to sort out our antifraud measures, and yesterday the board decided to

throw this little baby at you.’’

Bill tugged at his left ear to make sure he was hearing okay before

saying.

‘‘What about that compliance officer you took on last year? Isn’t that

his job?’’

‘‘Oh yes. But he works for Davis Middleton, the Chief Finance Officer

(CFO). We need to widen the scope of things, and he’ll work for you to get

a new fraud policy up and running. You know, policy, fraud response,

staff-awareness seminars, and so on. The new chair of the audit com-

mittee reckons we need to do much more on this front. In fact, she said we

were in the dark ages. I guess the truth is we are way behind. Look Bill, I’ll

e-mail the minutes from the board meeting, and you can formulate a

terms of reference for the project when you get back to work in a few

weeks’ time. Jack, you can help, like you always do. You could start

working with Snouter, our compliance man, and prepare the ground

for when Bill’s back at work. Bill, when you get back from England you

can get me a project brief and a budget for the work—okay? Look guys, I

have to get back. Please accept my condolences for your great loss.’’

The Funeral 3

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Pickett4797_ch01_1 06/12/2007 4

And with that Georgina got up, laid a firm hand on Bill’s shoulder, and

left. Her high heels clicked loudly as she swished out of the bar. Jack

watched her move off with a smile on his face.

‘‘You know,’’ Jack said, still looking at her, ‘‘Georgie looks as fit as she

was when we were at University together. By the way, this fraud job will

be fine—I’ve got it covered. You know, I’ve got a background in fraud

work, so we should be able to set things up quite quickly. When do you get

back?’’

Bill gazed at his glass and snapped his head back; he looked up at the

ceiling and smiled, saying to Jack,

‘‘I’m supposed to fly out Monday. With all that’s been going on, I’ve

not thought about things much. Tell you what. It’s Saturday today. You

stay with me and Ruth and the babies over the weekend, and we can do

some background stuff. You can work with Snouter next week, and I’ll be

back the following weekend. That way, when I’m back we can hit the

ground running. Sounds good?’’

Jack frowned and visualized mountains of diapers and screaming

babies before he finally said.

‘‘But Ruth’s just produced twins. Is that really a good idea?’’

Bill got up.

‘‘No problem,’’ he said. ‘‘You can help out when we get tired.’’

Bill walked towards the exit, and Jack grabbed and downed his drink in

one gulp before following behind with a worried look fixed firmly on his

face.

4 C o r p o r a t e F r a u d : A M a n a g e r ’ s J o u r n e y

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Pickett4797_ch02_1 06/12/2007 5

c h a p t e r 2

THE LONG WEEKEND

B ack at Bill’s house on Long Island, Jack slapped his bag down on the

bed of the guest bedroom and looked through the window at the

views over the back yard. ‘‘Nice room,’’ Jack thought as he strained his

ears to ascertain when Bill’s baby twins would start crying. Nothing so far,

all quiet. Not that he had a particular aversion to babies; he had raised his

kids and he had enjoyed their baby days. It was just that he could not see

how he and Bill were going to get any work done in such an environment.

A sweet smell wafted upstairs, and Jack smiled as he recognized the

smell of curried chicken, a old favorite from the days he had spent living in

Jamaica with his wife when they spent a couple of years there so she could

work for the University of the West Indies. Bill’s wife, being Jamaican,

had certainly mastered the various dishes popular in that part of the

Caribbean. He thought back to the time he had first met Bill, who was

vacationing in Jamaica and who had been withdrawn and depressed.

How he had shown Bill around the island, acting as tour guide, until Bill

had met his wife’s friend and—bim, bam— fallen head over heels. Now

that Jack had moved his family back to the States, he missed the little

island. He went downstairs in the direction of the sweet aroma and found

Jack’s wife in the kitchen stirring a pot.

‘‘You ready for it?’’ Ruth said with a beaming smile. Jack looked

around and said carefully,

‘‘Where are the babies?’’

‘‘Oh. They’re upstairs with Bill. When he’s home he spends all his time

with them. You know he used to come home at lunchtime, say hello to

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Pickett4797_ch02_1 06/12/2007 6

them, and go straight back to work before I told him to stop being so

silly.’’

Jack sat down, and Ruth slid a plate of curried chicken and rice in front

of him. Jack tackled the meal like a man on fire and found little time to say

anything more than,

‘‘Good food. You know your stuff, Ruth. This tastes so good.’’

Ruth smiled again and said,

‘‘Jack. You know, I really wanted to open up a small restaurant back

home before I met Bill. Bill thinks I’ve forgotten about it, but I’m still

gonna do it. Bet on it. What d’you think?’’

Jack seemed upset to have to stop eating and start talking, but found

time to mumble,

‘‘If you keep cooking like this, babes, I’ll come to it every day.’’

‘‘I’m serious about this. As soon as Bill comes back from his trip, I’m

gonna start planning. I can bring my mom over to help. She’s the best

cook I know.’’

Jack seemed reluctant to comment on what could end up as a domestic

issue, and as he frowned, trying to think of some sort of useful but neutral

response, Bill came bounding through the door, saying,

‘‘Hey guys. Food smells good. Can you take over the babies while I get

stuck in?’’

At this, Ruth shrugged her shoulders and said,

‘‘Okay. I’ll take them upstairs and see if I can get them off to sleep.’’

She kissed Bill’s cheek and departed.

Jack smiled and remarked,

‘‘You got it all, Bill. Wife, kids, lovely home. Congrats man. I know

you lost your dad, but you have so much left.’’

Bill sat down and rubbed his eyes,

‘‘You’re right as usual. I didn’t know I could be so happy. I kinda don’t

want to go away right now, but I have to check on this house. You

remember Helen from last year’s conference over in England. She’s still

on the Isle of Wight, looking after my cottage. Well, she e-mailed me and

said it was looking good, and I sent her some money to fix it up a bit. But I

really need to get over and check it out.’’

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Pickett4797_ch02_1 06/12/2007 7

‘‘Absolutely. I was talking to my wife only last night about how we

went to the Isle of Wight last year and you found out your aunt had left

you a cottage. How is Helen?’’

‘‘Apparently, she hasn’t left the island since she went there with us last

summer. Remember how she met Peter on the island and now they’re like

star-struck lovers. She’s a bit like me. She’s found her place in life. Real

happiness.’’

Jack scooped out some more curry and sat back down.

‘‘I think we should get some work done on our new project.’’

Later that evening Bill and Jack sat in the den, and Bill poured out

two drinks from a vintage brandy bottle. After giving Jack his drink,

Bill pulled open a cabinet and took out a laptop, which he placed on a

small coffee table. He switched it on and rubbed his hands together,

saying,

‘‘Ruth says goodnight. She gets real tired with the kids. Good that she

won’t have to go out to work for the next few years. It’s great that women

are happy staying home with the kids. That’s what I like about her—she’ll

make the best mom ever.’’

Jack swirled his drink around in his glass and was about to answer

when Bill punched a key on the laptop and announced,

‘‘Fraud and such. I know that you’re up on things, Jack, but I need to

get up to speed. Let’s log onto the web and see what’s out there.’’

The screen lit up, and Jack leaned forward while Bill typed in a random

search using versions of the word ‘‘fraud.’’

Jack cupped his chin in his hands as Bill took charge. Bill flipped out a

small notebook and pencil and said,

‘‘I’ve found what looks like a good web site. It says here that fraud

covers loads of things from minor theft to significant financial misstate-

ment.’’

‘‘Yes,’’ Jack said, ‘‘I’ve been involved in a few cases, but they’re all

different.’’

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Pickett4797_ch02_1 06/12/2007 8

Bill called up a new web site and asked,

‘‘When did you last do fraud work? You know, investigations and

such?’’

‘‘It’s got to be a couple of years now. I got some employee frauds referred

to me when I was doing audit work back then. We gathered evidence and

prepared files for our attorney. But I never did fraud awareness or anything

on the fraud policy. I’m not even sure I ever saw a fraud-policy document.’’

Bill scanned through the latest web site and said,

‘‘Wow. There’s so much that falls under the fraud handle. Let’s see.

There’s a list here that relates to dishonest or fraudulent acts:

� Forgery or alteration of documents. � Misappropriation of funds—I guess that’s basically stealing stuff. � Impropriety in handling or reporting of money or other financial

transactions.

� Profiteering from insider information. � Disclosing confidential information.

There’s more here. Fraud can be:

� Bribery—that is, accepting or seeking anything of material value. � Unauthorized use of computers. � Irregular expense claims that don’t benefit the organization. For

example, putting in fictitious items in expense claims.

� Employees can also set up fictitious customers and divert company funds to themselves.’’

Jack slumped back in his chair as if thinking deeply about Bill’s list. He

stretched and got up; then he approached the window.

Bill looked up and asked,

‘‘What’s wrong?’’

Jack frowned for a second and then said slowly,

‘‘Have you got any beers in the fridge?’’

‘‘Oh yeah. Go get one, and bring me one, will you.’’

When Jack had returned, he found Bill printing out some of the web

pages. Bill said,

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Pickett4797_ch02_1 06/12/2007 9

‘‘Okay. Now tell me what’s wrong?’’

‘‘Nothing. I just wanted a beer.’’

Bill returned to the laptop.

‘‘So we have a big canvas. Says here that employee fraud can involve:

� Misappropriation of the organization’s intellectual property, pro- ducts, contracts, or customer information.

� Destruction or inappropriate use of assets.

This site shows that you can get external fraud that’s done against the

company covering things like:

� Mail fraud. � Wire fraud. � Racketeering. � Identity theft.

It seems someone could steal another person’s identify or even

the identity of the company itself. Hang on, let me scroll down a bit.

Right—you can be hit with:

� Telemarketing fraud. � Espionage. � Money laundering. � Bankruptcy fraud. � Health care fraud.

Seems that the problem here is where an outsider gets together with an

employee and you get conspiracy, where they collude and plot against the

company.’’

Bill stopped and waited for Jack to respond to this chunk of

information.

Realizing this, Jack clicked his fingers a few times and said.

‘‘Good. We can get a file of material together as background. But

somewhere along the line we need to sort out what we’re doing here.

What we’re actually after.’’

Bill reached for his beer and took a swig. He said,

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Pickett4797_ch02_1 06/12/2007 10

‘‘I’m gonna print out some background bits to take with me on

vacation. But I see what you mean. We need a plan. What to do, where

to start, and who to talk to. I know. Let me talk to Snouter and set

up a meeting between you and him. Like I said, you do your prep with

him, and we can kick it off when I get back. Let me see. I’ve got a list of

everyone’s home numbers on my system here. Okay, Snouter’s real name

is Snoutehouse—yeah it’s here.’’

Bill whipped out his cell phone and punched in some numbers while

Jack went to the kitchen for another beer.

‘‘Snouter. Bill Reynolds here. Sorry to call you at home. I’m off for a

few days, but I want to set up the new fraud project before I go. Yes, you

will need to meet with my associate Jack who will be helping us.’’

When Jack returned he saw Bill sign off his phone call.

‘‘Any luck?’’ Jack asked.

‘‘It’s all looking good. Snouter’s up for it. He’s coming round tomor-

row even though it’s Sunday. We can get some information from him, set

up a work plan, and then I can get off for a few days. Well, for a week that

is and then make progress when I get back.’’

Jack suddenly froze and mumbled,

‘‘I can’t stay here with the babies. It’ll look odd, kinda weird.’’

Bill laughed,

‘‘No shakes. Ruth’s mom is coming over tomorrow, to see the kids and

help out while I’m away. So you can stay here and work. I’m so lucky,

man. Ruth’s doing so well. She cares for the babies, and she’s always

inviting friends round for dinner. Each time she cooks a couple of new

dishes and always makes sure everyone has something special. It’s so

impressive.’’

Jack shifted in his chair and asked,

‘‘Is Ruth going to stay home for a while? I mean, be a housewife?’’

‘‘Isn’t it great. I got the job, the wife, and now the kids.’’

Jack shrugged his shoulders,

‘‘Yeah, I guess you’re right.’’

Bill slipped out of small-talk mode and got back into formal

discussion,

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Pickett4797_ch02_1 06/12/2007 11

‘‘Before we leave things, can you tell me why companies don’t bother

about antifraud measures and fraud policies?’’

Jack rubbed his hands together and searched for the right words.

‘‘Okay. I’ve worked for quite a few big organizations across the board.

Public and private sector setups. Even an international charity. And you

know, most of them don’t really care about fraud stuff. They know about

the foreign corrupt practices act where their people can cause them

problems when they get involved in bribery and irregular practices. But

many top people see fraud as a bore. It means investigating and exposing

weak controls. It means going back in time and not doing what they want,

which is to constantly go forward. Many organizations have no effective

fraud policy because fraud is so hard to deal with, and it’s so hard to get a

successful prosecution. But if some employee gets off with a bit of extra

cash and we can throw them out of the company and move on, then that’s

what many people see as about right.’’

Bill held up his hands and looked surprised to see his friend so

enthused. Jack swigged his beer and suddenly seemed tired from his

extra efforts. Bill smiled and said,

‘‘It can’t be that bad surely.’’

‘‘Perhaps not. I’m talking about a few years ago. But I do know at least

one company that builds fraud losses into its budgets. But the impact of

fraud as a problem is really getting worse. So check this—fraud is taboo,

people don’t want to talk about it, and as far as I know, most companies

see it as a civil matter and pretty much embarrassing all round. . . ,’’

Bill interrupted,

‘‘Have things changed? I mean got better since then?’’

‘‘Some. SOX—you know the Sarbanes-Oxley Act that is supposed to

sort out problems where big companies go bad—has meant companies

are much more concerned about white-collar crime, and they’re more

willing to employ all means like, say, hiring their own private investi-

gators to fight fraud. Some say that this is about avoiding culpability,

while others say we’re now waking up to the threat. You can easily find

out about this threat, you know Bill. But you need to look at the right web

sites. For example, the Association of Certified Fraud Examiners prepares

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Pickett4797_ch02_1 06/12/2007 12

a Report to the Nation each year, and the 2006 report argued that U.S.

fraud is around 5% of annual revenues, which translates to $652 billion

annually.’’

‘‘You’re kidding.’’

‘‘No way. Check the fraud examiners’ web site on acfe.com. And if you

can look at the public accountants’ web site, they have an antifraud

resource center on aicpa.org. Me, I tend to look at the Institute of Internal

Auditors stuff on fraud at the iia.org. But let me ask you Bill, do you know

about your current antifraud position? Fraud policies and such?’’

‘‘Not really. I’ve seen this Snouter guy sniffing around, but that’s

about it.’’

‘‘I think we’ve got two main problems,’’ Jack continued, ‘‘the line

between right and wrong has got blurred. Many companies don’t break

the law, but they get into what I would call sharp business practices. So a

bio-food company may play up the importance of, say, food-intolerance

testing and try to create a bigger market for expensive foods and food

substitutes that don’t really make much of a difference. The other thing is

that some fraudsters are now claiming they’re badly treated by their

company and that’s why they took money or assets to even things up. Or,

say, borrowed money that they thought they could pay back, so in their

book no one is really affected much. So take a company that’s seen as

pretty unethical and throw in staffers who feel things are not fair and

bingo, you get a potent mix.’’

‘‘Okay, I get it. But whatever you say, people must be scared of going to

jail—surely?’’

‘‘Agreed,’’ Jack replied. ‘‘But where fraud is seen as easy to get away

with, then it’ll grow. Some frauds aren’t investigated at all. Also, any

redress may be cumbersome and costly. Where people gang up and

collude it can be hell to discover what really happened—say, where

forged invoices were approved by an insider.’’

Ruth appeared at the door and said, yawning,

‘‘Sorry to interrupt boys. Bill, where’d you put the spare bottles?’’

Bill jumped up, kissed Ruth’s forehead, and went through the door in

search of baby bottles. Ruth frowned at Jack and asked,

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‘‘You two still at it?’’

Jack laughed and replied,

‘‘You know Bill. I’m ready for bed, but your old man is just a work-

aholic. He wants to know everything there is to know about fraud.’’

Ruth laughed and said,

‘‘Spot on. Remember when we caught that security guard back in

Jamaica? When I managed that hotel? He’d been stealing our drinks for

ages, and we didn’t know until we kept watch.’’

‘‘Oh yes. Me and Bill in action—real machos. . . .’’

Ruth started to walk away and called out,

‘‘I’ve left a dish in the kitchen. Jerk lobster. Try some and let me know

what you think.’’

As Ruth got to the door, Jack stood up and said softly,

‘‘I know what you’re doing, you little minx.’’

Fluttering her eyes, Ruth replied,

‘‘Who, me?’’

‘‘You’re gonna have to come straight on this restaurant thing, Ruth.

You know that.’’

As Ruth stepped through the door she whispered,

‘‘Don’t worry. Like my old ma used to tell me ‘Man smart, but woman

smarter.’ I’ve got a plan. . . .’’

Bill bumped into Ruth outside the door and, dropping two baby

bottles, grabbed her and held her tight. He looked into her eyes and said,

‘‘Sweetheart, this is great. You and the kids, and now I’ve got this

exciting new project.’’

Ruth kissed him lightly and said,

‘‘Yes darling, we are on our projects. Goodnight.’’

Bill smiled broadly and winked at Jack as he threw him a beer and

ripped open his own can.

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Pickett4797_ch03_1 06/12/2007 14

c h a p t e r 3

SNOUTER’S IN T OWN

S unday crept in quietly as the household slowly stirred and came to life.

This awakening was signaled by two soft crying sounds as two babies

demanded the attention of two tired parents. Jack heard the muted

sounds from across the landing and stretched. He had been told to help

himself to a shower and breakfast and treat the house as his own. After

washing and dressing, Jack found his way to the kitchen and heard voices

as he approached what really was the center of the house. On opening

the door he was confronted by a scene of domestic bliss—Bill holding one

baby with a bottle that was being carefully drained and Ruth holding

the other baby over her shoulder while humming a vague melody. Ruth

waved Jack forward,

‘‘Come in, Jack. Help yourself. Everything’s set out in the warmer.

Choose what you want; fresh juice is in the fridge. Want coffee?’’

Jack held up his hand as Ruth appeared to be starting to get up,

‘‘Hey, morning all. Please don’t get up Ruth. I feel like I’m in a hotel;

look at all this food. Or should I say restaurant since. . . .?’’

Ruth interrupted Jack with a cough and did get up, placing her baby in

a basket and telling Bill to bring the other baby upstairs for their bath.

Jack selected his meal and sat down. Bill returned shortly after and

poured two cups of coffee.

‘‘Right buddy,’’ he said, ‘‘when you’re ready let’s get some work done.’’

Jack munched through his ham, pancakes, and eggs and pointed to his

throat indicating that he needed time to respond. After a gulp of coffee, he

eventually spoke,

14

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Pickett4797_ch03_1 06/12/2007 15

‘‘You know what? I’m going for a walk, a jog—I mean a stroll. Look,

let’s take a little time out. Perhaps. . . .’’

Bill clicked his fingers,

‘‘Course. Sorry, I get it. I need to slow down. How’s the exercise stuff.

You still doing martial arts or what you call self defense?’’

‘‘Absolutely. It’s break time today. But most days I get in a workout

plus a walk. I’ll step out after I’ve done justice to Ruth’s breakfast. I’ll be

back in an hour, and we can start again. Good?’’

Bill checked his watch and made a brief mental calculation, and then

hesitated before saying,

‘‘I think Snouter will be here by the time you get back. So yes, that’ll

work.’’

Jack focused on his meal and used sign language to suggest agreement

with this plan.

When Jack had gone, Bill logged onto the Internet again and printed

out more pages about fraud.

Through the window Bill caught a glimpse of a figure moving amongst

a group of trees that stood towards the back of open grassland behind the

house. The shadow darted around and finally moved towards the back

door in a sliding motion with his long jacket flapping in the breeze. A

crumpled hat hid the man’s face, and Bill stared as the shape came into

focus and a sharp rap on the back door rang out.

Bill was confronted by a short, tubby man in his late forties with dark

greasy hair. His large face was wrinkled with worry lines, and one side

hung down as though he was constantly grimacing. His baggy gray suit

made him look even shorter. Snouter thrust out a large and very hairy

hand and said,

‘‘Hey Bill, I’m Snouter; seen ya around.’’

‘‘Hi. Yes, you get around most parts of the business.’’

Snouter sniffed and looked around, as it was clear that he was not an

expert in making small talk.

Bill placed a hand on Snouter’s back and guided him into the house.

Snouter looked around as he was led into the den and was just about to

slump down on the coach when Bill stopped dead and said,

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‘‘Tell you what. Let’s go through to the kitchen and grab a coffee. You

hungry?’’

Snouter smiled broadly and nodded.

As Snouter selected his meal from the various dishes simmering in the

food warmer, Bill studied him and then said,

‘‘How come you knock at the back door?’’

‘‘Oh. That’s me,’’ Snouter replied, ‘‘Whenever I get to a new house I

like to check round back and see what’s around. Get my bearings, so to

speak. . . .’’

Bill could not think of a suitable reply, and after a few seconds he

simply said,

‘‘When you’re done, bring your coffee back to the den, and we can start

work. I’ll get the laptop out.’’

Snouter nodded, and Bill left him to work on a rather large plate of

food that now sat in front of him on the breakfast table.

Bill was working through a web-based article that argued that many

fraudsters were very pleasant and likeable and used their personality to

gain trust that they would then breach.

Snouter shuffled into the room and sat down on the couch, balancing

his coffee cup on a small side table.

Bill looked up from the laptop and said,

‘‘Okay. You know we have to beef up our fraud policies. And that

you’ll be helping me with this. My associate Jack will be with us in a

while. But tell me something about yourself, Snouter.’’

Snouter slurped his coffee and then put the cup down with a rattle. In a

slow, high-pitched voice he replied,

‘‘Okay, sure. I haven’t been with the company long. I started last year

as the compliance officer.’’

‘‘What does that involve?’’

‘‘Just checking things across the business. I make sure people are doing

things right. Like procedures and authorizations and so on. I visit each

local office in turn and check that compliance is okay. Oh and I’m also the

fraud liaison officer. Any problems come to me, and I deal with them.’’

‘‘Such as?’’

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Snouter leaned forward, and his eyes flashed as he started to get

excited,

‘‘Well. I had a couple of guys from the Dallas office making bad

overtime claims. I got a tip-off and checked their movements, and bingo,

they were pretty much scamming us.’’

‘‘Do you get many frauds?’’

‘‘Nah. I get people calling me up and moaning about their job. One

crazy guy in accounts thought we were getting too much money paid into

one of our bank accounts. I told him that fraud is about losing money not

gaining it. And he shut up.’’

Jack walked into the room, and Snouter stopped talking.

Bill stood up and said,

‘‘This is my associate, Jack Durham.’’

Snouter wiped his hands on his trousers and shook hands with Jack.

Jack smiled back and made a mental note to wash his hands at the

earliest opportunity.

Bill continued,

‘‘Snouter was just telling me about himself.’’

Jack sat down and waved a hand in a rolling motion, and said

‘‘Please do go on.’’

Snouter sipped some more coffee and assumed his high-pitched

delivery,

‘‘I was a private investigator for many years back in Ohio. Mainly

divorce and shoplifters and stuff like that. Anyway, things were slow,

so I moved to New York. But I don’t have a license to practice here, so I

did some small jobs for some of the accounting firms. You know,

checking on businesses and people. General stuff. Anyway, I heard that

your company wanted someone to cover compliance work and I shot in

my resume and here I am. Oh, by the way, I’m sorry to hear about your

sad loss, Bill.’’

Bill nodded and gestured that Jack should lead on this, at which Jack

said,

‘‘What have you done so far on fraud awareness?’’

Snouter seemed confused, and Jack continued,

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‘‘I mean have you developed anything for staff to get them in tune with

antifraud measures?’’

Snouter laughed and seemed relieved at this rephrasing of the question,

‘‘Got it with me!’’ He said with glee as he took a DVD from his jacket

pocket and placed it down on the coffee table.

‘‘I’ve been hard at work. This is the online fraud resource that I

finished a few months ago. It’s watched by all new employees in the

company.’’

Bill seemed impressed,

‘‘Great,’’ he said as he picked up the DVD and slid it into the laptop’s

DVD drive.

As the DVD booted up, soft music played and the words, ‘‘Dirty Dawn

Does It All!’’ appeared.

Snouter reached for the eject button and flipped out the DVD and

inserted a new one that he had taken out of another of his jacket pockets.

‘‘Sorry, fellas. This is the right one.’’

Jack laughed, and Bill looked embarrassed as the new image sprang

into life. A fuzzy picture of Snouter appeared on the screen and as it came

into focus all three men stared at the screen. A fairly smart-looking

Snouter in suit and tie, with his hair slicked back and face freshly shaved,

delivered the following video message:

Welcome to the company. My name is Snoutehouse, and I am head of

compliance. My job is to make sure what’s supposed to happen does

really happen— in the right way. You are eager to get into your new jobs

and that’s great. But I need to deal with our position on fraud and

irregularity. As the compliance officer, I deal with fraud issues. And I

hope you use this short video to help you understand the importance of

getting fraud under control. I have a three-step approach:

Step 1. Be aware,

Step 2. Be careful,

Step 3. And be good.

Let’s look at number one—Be aware. Fraud is big business, and

employee fraud is growing. I see fraud as:

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The use of deception to obtain an advantage, avoiding an obliga- tion or causing loss to another party.

Be aware of its impact, and understand that you need to be part of the

solution and not the problem.

Let me turn to the next part of our model—Be careful; anything can

happen, and when it does, many people are shocked. I’ll illustrate this

point with a short story from my time as an investigator.

In one bank a senior manager cheated it out of 5 million dollars. This

manager manipulated the bank’s loan process by pretending that custo-

mers were applying for loans that he paid into false accounts. He

generated so much new business through the scam that he was twice

named manager of the year and got huge performance bonuses. He was a

well-liked man who lived in a modest house and had a modest lifestyle.

He was also highly trusted by all who worked with him. The scam only

came to light by accident when the bank installed a new computer system.

The fraud ran for over seven years, and he created nearly a hundred new

accounts. Once he had achieved such high performance, his new targets

meant he had to continue the fraud to survive. In the end he was

fabricating new loans to pay the interest on existing ones that he had

also fabricated.

The last part is about your behavior—Be good. You need to be good—

at all times in all ways. Here’s some Dos and Don’ts:

� Don’t break the law. � Don’t deceive or mislead. � Don’t allow conflicts of interests to affect decisions. � Don’t use company resources for private use. � Do comply with laws and procedures. � Do install good procedures. � Do seek approval where necessary. � Do record reasons for decisions. � Be honest, impartial, and evenhanded. � Seek value for money in the use of company resources. � Keep good records where appropriate.

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Okay. That’s about all I need to tell you today. To summarize:

1. Be aware,

2. Be careful,

3. And be good.

So if you know about any wrongdoings tell me, and if you are thinking

of doing anything wrong, don’t, cause I’ll find out and we have a zero

tolerance policy for fraud. Here’s my number and my e-mail address on

screen. You can reach me through these contacts, and if I’m not around,

leave a message and I will get straight back to you.

Goodbye from me and see you around. Goodbye.

Snouter clenched his fists and let out a short chuckle before saying in

triumph,

‘‘Well? What d’yah think of that?’’

Bill raised his eyebrows and said thoughtfully,

‘‘I like it. It’s short and to the point, and it covers most of the ground.

Jack?’’

Jack seemed unsure and looked towards the ceiling for inspira-

tion,

‘‘It’s not bad. Yeah, it does touch most things. Well done, Snouter.’’

Snouter rubbed his unshaven chin and a sharp scraping sound accom-

panied this motion. Bill grimaced and said,

‘‘We will need to tidy it up. Snouter, has this been issued yet?’’

‘‘No. I got it done when this fraud stuff started to come up at audit

committee meetings. The Chief Finance Officer’s seen it and signed it off,

but it’s not gone to the audit committee or anywhere else.’’

Bill looked pleased,

‘‘Okay. Needs smartening up, but it could work. What about the fraud

policy?’’

Snouter seemed surprised at this question, and his voice rose even

higher as he replied,

‘‘It’s there. It’s all in the video. Zero tolerance, behave well, and report

anything untowards. Oh, and be alert. . . .’’

Jack stepped in,

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‘‘We will need to do some sweeps. Say, run a few fraud-detection

exercises.’’

Bill agreed, adding,

‘‘Yes. Here’s the plan. I go off for my trip to England—you know the

Isle of Wight—and check on my cottage. It’s a long story, Snouter. I have

to look at a cottage given to me by my deceased aunt. Anyway, that’s

beside the point. Jack, you work with Snouter and tidy up the video. And

write out a fraud policy—something brief and punchy. You all run this

fraud detection sweep and see if you can find any problems with fraud

and abuse. Jack, check out the compliance program, and see if it can be

improved. I get back and look at what you’ve come up with, and we get it

up to the audit committee as our response to fraud risks. Sounds good?’’

Jack replied,

‘‘Okay with me. But how are you gonna know if it’s okay?’’

‘‘I’ll beef up on things while I’m away. I have this file of material I

downloaded from the Internet. If your video fits with my brief research,

then I’m sure I can pass it.’’

Snouter nodded his agreement and went to eject the DVD. Bill said

quickly,

‘‘Can I take it with me?’’

Once again, Snouter nodded vigorously and added,

‘‘Yep, of course.’’

Jack got up and stretched his arms out wide.

Bill stood and said,

‘‘Look, I appreciate you working with me on a Sunday. I have to pick

up Ruth’s mom from the airport. I’ll be a couple of hours. You know, the

only people I would ever trust to look after the babies are Ruth and her

mom. How about you stay a bit Snouter and have dinner with us when

I’m back?’’

Snouter was just about to ask what was on the menu when he stopped

himself and said,

‘‘Yes, I’m good with that. Jack and me can chew through a few things

while you’re away.’’

Jack laughed,

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‘‘So long as you come for a walk with me first. I gotta stretch my legs

again.’’

Bill started towards the door, saying,

‘‘It’s settled then. I’ll be back in an hour or two.’’

Jack jumped up and said to Snouter,

‘‘A stroll?’’

Snouter nodded without enthusiasm.

‘‘Not too far and not too fast.’’

Jack shouted up towards the top floor that they would be out for a

while and back soon. The two men walked slowly towards the woods

and Jack breathed in the slightly damp air. Snouter conserved his breath

and did not appear to be in a talkative mood. After some minutes

Jack said,

‘‘You like doing fraud work?’’

‘‘Yep. I wanted to be in the FBI when I was young and silly, but that

didn’t work out. But compliance and fraud is fine by me.’’

‘‘Doesn’t it get to you? The greed and dirty deeds.’’

‘‘Nah. People have a go, it’s human nature. I try to track down as much

as possible. Some get away, and others don’t’’

‘‘Have you had any failures yet?’’

‘‘You know what it’s like. Most times you know something’s wrong,

but there’s no trail to follow. I know a lady who skimmed off big amounts

from loads of contracts. She took bribes day and night. But I couldn’t get

her; she was just too smart. You move on, and some of the clowns are

so high up that you can’t touch them anyway. Junior people are easier

to zap. But when everyone knows the top dogs are crooks, then others

have a go.’’

Jack stopped to examine a very old oak tree. He scanned the hills and

said,

‘‘You have to believe in your work, though.’’

‘‘Oh yeah. I do what I can, but it’s not easy. I hope the video helps

a bit.’’

Jack said suddenly,

‘‘You married?’’

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‘‘Was, but she left. I mean usual story. Me working late; wife gets

bored, and she just takes off, if you see what I mean. . . .’’

Jack looked embarrassed and started back for the house.

Jack’s knock on the door was answered swiftly, and Ruth greeted the

two men with a smile and said sweetly,

‘‘Dinner’s ready. You can wash up upstairs, if you like, and join us in

the kitchen.

Snouter shrugged off the offer to wash and went straight to the kitchen

and was greeted by the sight of Bill and Ruth’s elderly mom seated at the

large dining table talking and laughing loudly together. He saw a small,

elderly West Indian lady wearing a smart blue dress that made her look

like a regular sweet old granny.

Bill waved Snouter forward and said,

‘‘Say hi to Mrs. Madoc, Ruth’s mom. . . .’’

The old lady smacked Bill smartly on his forearm and chuckled out,

‘‘Stop it Bill. Just call me mama Bess. Everyone does.’’

A smiling Snouter shook hands, and as he sat down Jack came in and

greeted mama Bess, as he already knew her from the time he had spent in

Jamaica.

Shortly after, Ruth came in and joined the party.

Ruth had organized the usual huge combination of dishes, which she

gently placed in the middle of the table with an instruction that everyone

should help themselves.

Jack poured drinks from a large bottle of wine that had been his

contribution to the proceedings, and the group were soon tucking in to

the rather appetizing food and drink.

Ruth topped up the wine glasses and asked her mother,

‘‘How was the flight, ma?’’

Mama Bess screwed up her face and said in a disdainful voice,

‘‘I’m not too fussy about the flying. You know that. It looked like the

food came straight out of the freezer. Tough like a. . . .’’

Ruth looked edgy and tried to move the conversation on as she could

see her mother was getting into a warlike mode. Her mother was the

sweetest person she knew, but she was on some kind of new medication,

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and when she got onto a vexed topic she was terrible. Unfortunately,

mama Bess had just got into her swing,

‘‘One ugly gorgon man next to me had his arm spread over the arm rest

and pushing into mine. I asked him to excuse, and he just gave me a bad

look. So I raised my voice and told him ‘move over, you not just obese—

yu a beast.’ and two-twos he quickly moved his arm. Some people you see.

He was a living hog, no manners from morning. . . .’’

Ruth gasped and quickly clapped her hands and announced,

‘‘Who wants pie? Apple pie with cinnamon and glazed cherries?’’

Bill looked up from his plate and said,

‘‘My gosh. How do you find time to conjure up this great food? You

must have spent all day cooking, sweets?’’

Ruth smiled, bowed graciously, and said,

‘‘All things are possible. With ma here I can do even more.’’

Jack opened his mouth to speak but closed it as Ruth gave him a glare

that, for a split second, turned her into the image of her feisty mother.

Mama Bess turned to Snouter and asked,

‘‘Are you a friend of Jack or Bill?’’

Snouter suspended his fork midway from his mouth and looked

displeased at being interrupted,

‘‘Oh no.’’ he stuttered, ‘‘I work with them. I mean I’m gonna work with

them soon. Say next week and for a bit. . . .’’

‘‘What’s your real name?,’’ mama Bess asked.

Snouter frowned for a while as if he had forgotten his name but then

said,

‘‘Herbert Snoutehouse. But everyone calls me Snouter.’’

Mama Bess looked shocked. She pushed out her bottom lip and said,

‘‘Utter foolishness, you. . . .’’

Jack came to the rescue,

‘‘We’re all doing work on Bill’s company’s fraud policies.’’ He said,

‘‘Antifraud training and fraud detection and such. It should be real excit-

ing, mama Bess. Snouter here’s our chief investigator and our compliance

officer.’’

Bill looked at Snouter and said,

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‘‘You must have seen some interesting things in your time.’’

Snouter shifted in his chair and wondered whether he should tell his

stock of stories. He looked around as four sets of eyes looked at him in

anticipation. And then he said,

‘‘I was called in on one case where a helper faked cancer to get nearly

$1 million from elderly clients. It’s crazy, cause she told one old bird that

she had lung cancer to get cash, and then she goes and spends it on big

vacations, cars, and expensive watches. She told her clients that she’d pay

it back when she gets an inheritance from an old aunt. All made up, you

know. She conned loads of old people out of their cash. She even enc-

ouraged one old man to drink so he got confused about things. She got

charged and convicted in the end.’’

Ruth raised her eyebrows and said,

‘‘Wow, that’s bad.’’

Jack poured himself another glass of wine and pushed the bottle

towards Snouter, determined that the huge bottle should be drained that

night. Jack said,

‘‘Employees can be real bad. I worked on one case where a hospital

boss stole $1.2 million in a big payroll scam through ghost employees.

When he was caught, the jerk forged a colleague’s signature and blamed it

on him.’’

Snouter attacked his wine and gulped it down as his eyes glazed over,

and he suddenly remembered another old story,

‘‘Tell you what, Jack. It’s not just staff, sometimes it’s the top dogs. I

checked out a cleaning firm that basically stole around $300,000 from its

staffers. The staff had an hourly contractual rate, and the company paid

them less and kept the difference. I think it added up to more than a

million, but we couldn’t prove the rest. Biggest problem I found is bid

rigging. It’s real bad.’’

Ruth asked,

‘‘What’s bid rigging?’’

Snouter quickly responded just as Jack was going to speak.

‘‘It’s where the purchaser, you know the company, invites offers for

jobs or goods. Bidding companies get together and form a cartel and

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decide on who’s gonna win the bid. They take it in turns so that some

make low bids or no bid at all. Sometimes the winner will pay off the other

bidders.’’

Mama Bess make a sucking sound and said,

‘‘Happens all the time. Nothing new—people just too bad. Just the

other day the rude boys were doing a new thing. They steal someone’s

bank card and call them up pretending to be police and tell them they

found the stolen card. And then they get the victim to tell them their

password and guess what? In double-quick time they spend, spend, spend

on the card. And the poor idiot thinks their card is out of action. Some

people shouldn’t have bank cards; if it were me, I’d tell them. . . .’’

Ruth quickly came in,

‘‘Yes. I know it’s bad. I remember reading about one large company

that was investigated for large-scale corruption. But hear the joke. This

same company specifically said in its annual report that bribery is a

criminal offense and they will not, and do not, pay bribes to anyone for

any purpose. What a joke.’’

Jack continued the storytelling with relish.

‘‘Okay what about this. A European car company’s purchasing man-

agers pocketed around $2 million a year from kickbacks from an auto

parts supplier. Apparently, the payment of bribes is seen as normal in that

part of the world. The CEO seems to have known about this for years.

The relationship between the company and its suppliers was susceptible

to corruption. And guess what? The purchasing people got cash, furni-

ture, free holidays, and cushy jobs for their girlfriends. What a scam. . . .’’

Mama Bess who, as a firm church woman, normally frowned on

drinking but who had been discreetly drinking wine all evening, thumped

the table and said,

‘‘Thief is a thief. Most times them get away with it. Just last week

one accountant man was supposed to give evidence in a big fraud case

and he was abducted from the street by men posing as plain-clothed

police. Up to now, they can’t find him. You’ll have a hard time sorting

out fraud in most companies. Actually boys, yu wasting yu time.’’

Jack looked aggrieved, but then smiled and said,

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‘‘We’ll give it a go mama Bess. Trust me.’’

Mama Bess’s eyes flashed,

‘‘You know who is the worse at this? Fraud and corruption?’’

Everyone looked blank and waited for the answer. Mama Bess carried

on,

‘‘The top man, dem. They are the worse. And yu know why you can’t

catch them?’’

Again the assembled group waited.

‘‘Because dem smart. I had a job with one of them international hotels

in town back home, and I knew something was wrong from day one.

The boss man was a big-time crook.’’

Snouter used his sleeve to wipe a bit of food from his mouth and

grimaced as he asked,

‘‘Did they have a compliance officer? At this hotel?’’

‘‘Yes.’’ mama Bess said triumphantly. She blinked three times and

then said,

‘‘A real cuffie man from outta Mocco. Use yu head Bill; for yu no

born big.’’

Bill shrugged his shoulders, and Ruth suddenly got up, let out a nervous

laugh, and said,

‘‘Okay, ma. Let’s go see the babies. They’ve been asleep for a while

now. Up we get.’’

And with that Ruth led her elderly mother safely out of the kitchen and

up the stairs.

Bill asked Jack,

‘‘What was that all about?’’

Jack smiled,

‘‘No idea. I spent a couple of years in Jamaica, but when those old folks

start talking, there’s lots of stuff I can’t understand. Anyway back to fraud

stories. I feel that it’s hard to sniff out fraud, and it can have a major effect

on our economy. Remember that car company in Japan? Their chief

executive got ten years for fraud. He was guilty of fraud in securing bank

loans, fabricating financial accounts to falsify assets, and embezzlement

of company funds. You know, he had to forfeit goods and property worth

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around $20 billion. And when the verdict was read out, he collapsed in

court.’’

Bill looked excited and said,

‘‘Yeah. I remember that one. But this is an international problem.

When the FBI arrested that British online gambling tycoon, it wiped out

more than £600 million off the stock exchange value of Internet gaming

firms. Many cases fall over because they cannot go to court. And speaking

of the FBI, just the other day, an arms dealer walked free after a multi-

million dollar terrorist trial collapsed when FBI agents refused to reveal

vital information about their ‘sting’ operation to capture a load of

weapons involving undercover FBI agents.’’

Snouter was trying to recall his fraud stories and eventually said,

‘‘It is kinda bad. I had to help one poor soul who went abroad and

rented out his house. Well, this tenant fella uses his driving license and

bills to pretend he was the owner, and he actually sold the house

and disappeared with tons of money. I helped an insurance company

once. It seems that con men convinced a well-known jeweler to lend

them their gems for an important film shoot to show off their jewels. And

when this jeweler shows up, they robbed him. You just can’t be too

careful these days.’’

Jack said,

‘‘That’s nothing. What about this. I know about a case where a junior

bookkeeper making just $32,000 spent $2 million on online poker

gambling, which he stole from his workplace. He was with his company

for six years and was trusted, but it seems that he was addicted to fruit

machines when he was a teenager. He was put in charge of company

accounts and had authority to withdraw cash for wages. He paid fistfuls

of checks into his own account. They only found out when the bills went

unpaid. And when some data recovery software was placed on his

computer, his web site visits became clear. The sad thing is that the

company went bust as a result of this fraud.’’

Snouter grabbed Jack’s arm and shouted,

‘‘Nah, nah. I can beat that. What about a gang who reads death notices

and then visit the deceased’s empty house, say as a prospective buyer?

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They then steal junk mail and the usual credit card offers and then apply

for loans and cards. Or they just use the new identity to hide their own

dodgy one.’’

Bill’s cell phone rang, and he got up and said,

‘‘I’ll take this outside.’’

Jack and Snouter continued to exchange old stories and seemed to

come up about even in terms of the extent to which these stories

demonstrated major failings in human beings all over the world.

Bill came back into the kitchen and Snouter got up to visit the bath-

room.

Jack noted Bill’s serious look and asked,

‘‘Anything wrong?’’

‘‘Not really. The opposite, I guess. That was Georgina on the phone.

She tells me that she forgot to mention the Big Picture.’’

‘‘Which is?’’

‘‘Seems that the board is considering a new executive position. Direc-

tor of Corporate Governance, or some such title. You know, a lead figure

for integrated planning, audit, compliance, ethics, risk management, and

all the fraud policy bits.’’

Jack frowned,

‘‘Which is good or bad?’’

Bill thought for a bit and said,

‘‘Georgina reckons the board members have had an eye on me. The

stuff I’ve done on risk and internal control. I mean the stuff we did

together; our projects. And she says that if I come good with this latest

fraud thing, then the job’s more or less mine. Jack, I could make it as an

executive on the main board. My dad would have been so proud. He told

me to aim for the top. Ruth would keep house and look after the little ones

if I get the big job. But she’s doing that anyway.’’

Jack jumped up and shook his friend’s hand,

‘‘It’ll work, bud. Well done.’’

‘‘I’m not so sure. I’ve got to make this project work. It’s real crucial

that. . . .’’

Snouter returned, and Bill immediately stopped talking.

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Jack glanced at his watch, and it was obvious that it was getting late.

Bill stretched, and the two men looked at Snouter as a combined signal

that the dinner party was more or less over.

Snouter, however, grabbed his glass and poured out another generous

measure of wine.

He smiled to himself, sipped his drink and said, slightly drunk and to

no one in particular,

‘‘God knows, I try hard enough.’’

Jack whispered to Bill,

‘‘Here we go. Don’t tell him we got a bottle of Jack Daniels in the den.’’

Snouter poured out some more wine, and his face became contorted as

he spluttered,

‘‘They give me this compliance stuff. I got to check on every damn

thing. And then people call me up and go on about what’s wrong at work,

and I still got to do all the checks and deal with the nagging. . . .’’

Bill came towards Snouter and said,

‘‘Slow down fella. What’s the problem?’’

Snouter seemed to find it hard to focus, rubbing his eyes with his fists.

He said slowly,

‘‘The old gal’s right. Mama Bess. Most people are up to no good, but I

can only do what I can.’’

Looking concerned, Jack asked,

‘‘Do you know about any cover-ups at work, Snouter?’’

‘‘Nah, not really. Just people moaning and calling me up. It gets to me

sometimes. And that crazy guy from Records, and the wrong income he

keeps going on about. He calls me every few months or so and talks

absolute crap.’’

Bill took charge. He said,

‘‘Look, I think we’d better call it a day. I gotta get ready for my trip

tomorrow. Let’s recap. Jack; you and Snouter tidy up the video. Get me a

frauds policy, and have a look to see whether you can find any problems—

say, any undetected frauds. I get back next week, and we wrap this up into

a package for the audit committee. And that’s that.’’

Jack replied,

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‘‘Yep. That’ll work.’’

Snouter slumped over the table and mumbled,

‘‘Blah, blah, blah—whatever.’’

Bill turned to Jack and said,

‘‘I’ll get Snouter a cab.’’

And with that Bill left the kitchen and Jack looked at the figure of

Snouter, his head resting on his arms which were spread out over the table

and a small bald patch showing on the top of his head. Jack shook

Snouter’s shoulder,

‘‘You okay?’’

Snouter sniffed and muttered something incomprehensible.

Bill returned,

‘‘Okay, Cab company’s line is tied up. I’ll drive Snouter to the cab

office and then sort out my suitcase. Jack, help yourself to whatever you

want, and I’ll see you—ermm, in a bit.’’

With that, Bill and Jack helped Snouter to Bill’s car, and Bill gunned the

engine and swung out into the dark night with Snouter strapped into the

passenger seat, gazing blankly out of the car window.

Jack watched them depart and went up to his room, which luckily had

its own attached shower, to retire for the night.

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c h a p t e r 4

BACK TO THE ISLAND

B ill sat back in his plane seat and eased off his shoes. His long legs had

just about enough room, and he fiddled in his pockets before pulling

out a typed itinerary. JFK to London, Heathrow airport, taxi to City

airport, and a light aircraft to Sandown airport on the little Isle of Wight.

Should be okay, he thought as he examined the times and connections

once more.

He closed his eyes and relaxed. His mind drifted through a wild assort-

ment of memories and ideas. He recalled the trip early last year to London

with Jack and how they had attended a huge conference on enterprise

risk management (ERM). The way they had befriended Helen and Maria

at the conference, when he had realized that these two women knew

so much about ERM. How they had persuaded the girls to join them on a

trip to the Isle of Wight so that Bill could visit his aunt, who turned out to

have died some months earlier. The four of them had a bit of an adven-

ture at the time, and Bill smiled as he visualized Helen as she found true

love with a guy who lived on the island.

He recalled the cottage at Freshwater Bay that had become his property

on the death of his aunt. It was this cottage that he had come to check on.

Helen would meet him at the airport and get him across the island to

Freshwater. He thought of Helen from Hong Kong—what a good-

looking girl. And the lovely Freshwater Bay—what a place. He remem-

bered how the sea was engaged in a constant battle with the hotels and

houses set around the bay. When the tide came in and the wind was up,

the waves roared against the sea walls and splashed everyone who got

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too close. He could picture Helen sitting by her precious bay and gaining

inspiration from her surroundings. Bill drifted off to sleep and dreamt

that he was presenting a report on fraud to the audit committee and

the committee members were laughing and shouting out ‘‘trash,’’ ‘‘non-

sense,’’ and words like that. Bill floundered as his presentation flunked.

He woke with a start and shivered. Damn it! He thought. Had he done

enough on this fraud project? He was just about to analyze his position

when the pretty brunette sitting next to him leaned over, tapped his knee,

and said in a soft English accent,

‘‘You need to order lunch.’’ and pointed to the hostess who was coming

towards them.

Bill jerked into action, said, ‘‘Sure thing,’’ and proceeded to do as he

was told.

Bill waved at Helen, who was walking quickly towards him at the tiny

airport at Sandown. She had not changed a bit. Neat, small, and attractive

with her almond-shaped eyes looking sharp and intelligent. He grabbed

her hand and gave her a brief hug.

‘‘You look so good and happy too, he said.

Helen laughed, swept her long black hair from her face, and took his

arm as they marched towards the exit.

‘‘Where’s your boyfriend, Peter?’’

‘‘Oh. He’s off the island this week on business. He wants to expand the

hotel so he’s off to London to present his plans to some possible backers.

How’s Ruth and the babies?’’

‘‘Excellent. At home, doing well.’’

Bill jumped into the passenger seat of Helen’s small car, and they were

soon chugging along the coast towards the cottage. Bill studied the

spectacular views of the island’s east coast as dramatic white cliffs with

blue swirling seas swept into view, to be replaced a few minutes later with

rural scenes of fields, sheep, and large cattle on the inland side of the

island. They passed small touristy towns with much quieter villages in

between. Helen talked about her new life, her spontaneous decision to

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remain on the island and give up the fast-lane banking world that she had

flourished in back in Hong Kong. Her instinctive choice of a partner had

proved so right. Bill smiled as he listened to Helen’s account of her new-

found happiness and how she reveled in the fact that she had not even left

this small island since she first came to it last year. The car soon swept

down the cliffside road, into Freshwater Bay, and Bill glanced at his

cottage as they passed it and stopped at the hotel nearby. Helen waved Bill

forward as he strained his neck to look at his cottage, and she said sharply,

‘‘Leave the cottage for a bit. It’s real late, so let’s get you into the hotel

and you can check it out first thing tomorrow.’’

Bill grudgingly agreed, and he soon found himself in a nice-looking

suite at the front of the hotel, with instructions to come downstairs as

soon as he was unpacked.

Bill sat opposite Helen in the well-laid-out hotel lounge bar and glanced

around at the young men and women dressed in smart black outfits,

flitting around serving guests. He waved his hands in the general direction

of the bar and said,

‘‘This is so impressive.’’

Helen laughed out loud,

‘‘If you weren’t here I might be running round just like my team. It’s

Peter’s dream come true. A smart hotel with fancy fittings and happy

guests. But actually, I really don’t do a lot most days.’’

‘‘Why’s that?’’

Helen looked embarrassed,

‘‘What I mean is, I focus on my risk management work most times. Tell

me Bill, what project are you on? I know you’re a projects man.’’

Bill leaned back as a young man placed a plate of ribs, fries, and a fresh

salad in front of him. He licked his lips in dramatic fashion and said slowly,

‘‘Well. The latest big idea is fraud. Corporate fraud prevention and so

on. You up on that?’’

‘‘A bit. You know I was into venture capital, takeovers, and mergers,

but now I’m doing risk management software with Maria. Or, at least

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helping out. I do know a bit about criminology and detection. We used to

assess smaller companies before launching our takeover bids. And among

other things, we were on the lookout for fraud. But I never got into it too

much.’’

Helen suddenly snapped her fingers and almost shouted out,

‘‘Hang on. I just remembered. Maria’s coming over in a few days, so we

can check up on progress with our risk management work. We meet up

every now and then, and since I told her I didn’t really like to leave the

island, she comes here. I think she looks forward to her trips here. She’s

pretty hot on fraud stuff. Yes, I remember now—she covers that aspect of

the software.’’

Bill tucked into his meal and recalled his first meeting with Maria. He

was naked, standing outside her hotel room, having been accidentally

locked out and mistaking Maria’s room number for Helen’s. He shivered

as he suddenly thought that it would probably have been worse, standing

naked in front of Helen.

Helen seemed to read his mind and asked,

‘‘What’s wrong. Maria is absolutely fine with you, you know that.

Both undressed or fully clothed.’’

Bill choked on his ribs and dabbed his mouth with a tissue.

‘‘Funny,’’ Bill said, ‘‘But it’s real good that Maria’s into fraud. I gotta

do a little research while I’m away from work, and she may have a few

ideas.’’

Bill finished his meal and Helen grabbed his hand and said like an

excited schooler,

‘‘Come with me. The bay should be roaring right now.’’

They left the lounge and walked down into Freshwater Bay; in the

dark, the raging sea sounded like a hundred angry lions. They walked

across to the railings that surrounded the seawall and looked down into

the dark seas as the white surf swirled around, gushing alternatively

backwards and forwards. A few tiny red and blue lights were glinting over

towards the right of the bay, and Bill pointed towards them.

‘‘What’s that? Those lights over there,’’ he asked.

Helen squinted her eyes.

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‘‘Okay,’’ she replied. ‘‘Those are a couple of local guys fishing. The

lights are attached to the rods. They stay out there for hours and usually

come back with a couple of fish. It’s a recreation thing, really.’’

In the dark Bill could not see Helen’s face, but he could feel her

contentment. Before he could stop himself he said,

‘‘You’re really happy here, aren’t you?’’

‘‘Bill, this is the first time I’ve found anything real. My parents are

coming over at Christmas to meet Peter. Things are just great. How about

you?’’

‘‘Same. Home is great, but work is demanding. Let me tell you what I

plan for the fraud project, and you tell me if it sounds right.’’

Helen listened as Bill explained the fraud project in detail and the tasks

he had set Jack and Snouter. Helen nodded as he relayed the importance

of the initiative. As Helen stared up at the myriad of stars that circled the

bay, Bill finally finished his summary. As he stopped talking, Helen

tapped his left shoulder and said,

‘‘You know, I still track stock markets and financial currency flows. It’s

just something that when it’s in your blood, you can’t let go. I buy and sell

a little here and there, and I tell you this Bill; there’s a rumor that your

company’s trying to get on the New York Stock Exchange later in the

year. That’s why they are setting up governance structures. Compliance

units, audit committees, and now this fraud policy project—they all fit in

with this objective. It’s real important they get it right.’’

Bill laughed, and the sea spray lightly showered him and Helen, as he

said,

‘‘Unbelievable. That is so unreal. You’re here on this little island, and

you know more about my New York business than me.’’

Helen wiped the sea water from her face and laughed back,

‘‘It’s a global, web-based world now. No borders—just business,

goods, and money moving around the world. Look, you must be tired.

I could stay here all night, but I guess you want to get some rest. We’ll look

at your cottage tomorrow. Okay?’’

‘‘Yep. I could use some shut-eye. But tell me, Helen, do you think my

project plan’s okay?’’

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Helen pursed her lips,

‘‘Well I know that we use to run lunchtime fraud sessions for high-risk

parts of the business. That’s really the accounts, investments, and

purchasing departments. We hosted a buffet lunch and then spent about

an hour discussing fraud and its impact. I wasn’t involved in that, but I

know it happened in my old company now and again.’’

Bill looked upwards at the stars.

‘‘Okay,’’ he said, ‘‘sounds good.’’

Helen continued,

‘‘And I know that we used to check new companies that we were

interested in for their investigation standards—how they carried out

internal inquiries and complaints handling. We wanted to see a written

document, some kind of set standard.’’

Again, Bill pondered these ideas while Helen continued,

‘‘Apart from those two things, your plan seems fine to me.’’

Bill seemed relieved and said,

‘‘I’ll e-mail Jack tonight about your ideas. Tell you what, when we’ve

done the cottage thing, perhaps I can talk to Maria when she gets here.

You think she’d be okay with that?’’

‘‘Sure thing.’’

At that, they both turned and walked slowly away from the roaring

bay, and Helen looked briefly at Bill’s profile set against the full moon that

had now appeared. She saw a look of fixed determination and remem-

bered her time at work, when the business was all-consuming and she

could not see beyond her day job. That was Bill right now. But maybe he

could be happy at the same time. At least he had a pretty wife and kids

that he could come home to each night to counterbalance the high-stress

job. Yes, it seemed that Bill had finally got his life sorted out.

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c h a p t e r 5

PLANS INTO ACTION

B ack in New York, Jack grimaced as he looked around the dingy office

that had been assigned to Snouter. He was sitting in the basement of

Bill’s headquarters at a small desk that just about accommodated two

chairs. Snouter’s office was lit by two strips of ceiling lights, which cast

their shadows across the room like a scene in a low-budget horror movie.

Jack sniffed the air as if expecting to find a rancid smell, which existed

more in his imagination than in reality. He sat back in his chair and tested

its strength as Snouter came into the room with two steaming cups of

coffee.

‘‘Hey Jack. Grab this!’’

Jack set his cup down on the desk and watched Snouter as he slid into

his chair and clasped his hands together looking straight at Jack. Jack

picked up his coffee, took an experimental sip, and said,

‘‘Let’s get a list together.’’

Snouter looked around and grabbed a single sheet of paper and a pen.

‘‘Shoot,’’ he said in his high-pitched voice.

‘‘Right. The tasks. . . .’’

Snouter interrupted,

‘‘I can get this—It’s simple. . . .’’

Jack held up a finger and said,

‘‘Hold up, Snouter. I just got an e-mail from Bill, and we have some

new things to do. Okay, we need to redo the video—your little fraud

video. I need to check your compliance program, and we need to draft a

fraud policy. Oh yeah, and see if we can find any current frauds.’’

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‘‘Agreed.’’

‘‘But the new tasks. We have to—hang on let me read out the e-mail.’’

Jack grabbed a document from his jacket and read,

‘‘Run a lunchtime fraud briefing for the procurement team in New

York, and write out our approach to investigations.’’

Snouter wrote these items down and then gulped down his coffee and

said,

‘‘What’s that about?’’

Jack scratched his head,

‘‘Just some more tasks, which shouldn’t be a problem. Okay, the video.

Plug in the DVD and let’s watch it again.’’

They watched in silence as Snouter told his viewers about his com-

pliance role and how we all need to be aware, be careful, and be good.

Snouter warned of the growing dangers of fraud and told his story about

a fraud case he had been involved in. As before, he closed with his contact

details for those who might have information on possible frauds.

The video ended, and Jack broke the sudden silence by reaching for his

coffee and then saying,

‘‘My background is pretty much investigations from the audit per-

spective. But as a staff orientation session I can’t see anything wrong

with your video. It’s not real slick, but if it were it could put people off.

It’s straight down the line and focused.’’

Snouter nodded.

Jack stared at the blank computer screen and continued,

‘‘You think we should sharpen it up?’’

Snouter rubbed his unshaven chin, and a sharp scratching noise rang

out as he said,

‘‘To be honest, it’s done. The video is finished, and the two marketing

people who helped me do it are back in their Dallas office. Davis

Middleton, the CFO, has signed off on it, and I’m not sure I could

change it even if we wanted to.’’

Jack stood up, replying,

‘‘I’m fine with it. Let’s report to Bill that we examined it further and it

fits the bill. Task one completed.’’

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At that, one of the strip lights started to flicker and Snouter reached for

a broom and started to knock it gently.

Jack reached for the doorknob and said,

‘‘I gotta get out of this office. It’s making me feel tired. Let’s get out and

discuss the other tasks. Bring your laptop.’’

Snouter gave the light one last tap, and it shut down altogether. He

switched off the laptop and thrust it into a bag and said,

‘‘Let’s go.’’

At a nearby diner, Jack and Snouter sat in a booth. The laptop whirled

into action as Jack switched it on and hovered over the keyboard.

Snouter looked nervously at his watch and, using an even higher-

pitched voice, said,

‘‘How long’s this work gonna take. I got to get back to my compliance

work. I’m supposed to be in Boston sometime this week.’’

Jack looked up from the laptop.

‘‘Snouter, we need to get something straight. Bill needs to get the fraud

project done, and you work for him now.’’

Snouter looked hurt and said,

‘‘But that’s when Bill’s back. I mean, I start with Bill when he’s back at

work. But I still gotta do the visits and checks for the Chief Finance

Officer. I give him a monthly update on all my visits and checks.’’

Jack jabbed his finger at Snouter and asked,

‘‘What do you actually check?’’

‘‘Inventories, payments, expenses, new accounts, and written com-

plaints and other things on my audit program. I have to get to each local

office once a year.’’

Snouter’s voice reached an even higher note as he continued,

‘‘And it’s hard going, pal.’’

Jack sat back,

‘‘Okay. Cool it. It’s just that we have to take time out and review

things. I’ll talk to Davis Middleton, the CFO, about that. Oh, I got to call

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the procurement manager and set up this lunchtime session—the fraud

awareness session.’’

Snouter looked down at his burger and sulked as Jack pulled out a

phone list and punched some numbers into his cell phone.

He spoke to the procurement manager and got full agreement to meet

with his team, tomorrow lunchtime, to do the session. Jack then punched

in another set of numbers and got the CFO. He explained that Snouter

was needed to support the work commissioned by the audit committee

and that without Snouter’s participation the antifraud program would

suffer.

Jack patted Snouter’s shoulder to cheer him up and said,

‘‘Your CFO seems like a nice guy. He couldn’t have been more helpful.

He says that the compliance results get reported to the audit committee,

and if they want to embark on other things then they would understand

that it would delay compliance work. Like I say, a real nice guy.’’

Snouter nodded, and although he seemed to have cooled down he

said,

‘‘Yeah. He’s okay as long as I get the compliance plan done.’’

Jack thought about all the places he could be right now and sighed.

‘‘Right, Snouter. Let’s take your video and extract the policy issues.’’

Snouter quoted as Jack typed on the laptop,

‘‘We defined fraud as the use of deception to obtain an advantage,

avoiding an obligation, or causing loss to another party. We have three

requirements:

1. Be aware,

2. Be careful,

3. And be good.

‘‘Write down the personal standards as

� Don’t break the law. � Don’t deceive or mislead. � Don’t allow conflicts of interest to affect decisions. � Don’t use company resources for private use.

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� Do comply with laws and procedures. � Do install good procedures. � Do seek approval where necessary. � Do record reasons for decisions. � Be honest, impartial, and evenhanded. � Seek value for money in the use of company resources. � Keep good records where appropriate.

Finally, put in that if anyone knows anything going on they will need to

report it straight away. Oh, and end with the fact that we here are on zero

tolerance, as far as fraud and irregularity goes.’’

Jack typed frantically and eventually said,

‘‘Let’s put the zero tolerance thing right at the start.’’

Snouter nodded, and for the first time that day he smiled and looked

relaxed.

Jack seemed pleased too, and spent a few minutes tidying up the

wording.

‘‘This is great. We’re on day one, and we have the video and the fraud

policy done. Snouter, we’re a team my friend.’’

Jack rubbed his hands together and smiled again as he called the elderly

waiter. He started to order two beers, but Snouter stopped him and asked

for the check and then said,

‘‘Don’t worry. Let’s go to the Z Bar instead. I think they have a wider

selection of beers.’’

Snouter led the way, and the two men were soon seated in a busy but cozy

mid-Manhattan bar.

Snouter got two beers and laid them down on the table. He pulled out a

fresh sheet of paper and said,

‘‘Forget the laptop. Let’s just write it down. Tomorrow’s fraud session.

What do we do?’’

Jack asked,

‘‘Have you done it before?’’

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Pickett4797_ch05_1 06/12/2007 43

Snouter drank at his beer and sneered,

‘‘Nah. But to me it’s about our policy. Let’s take them through our

fraud policy. Yes?’’

Jack had taken hold of the pen and tapped it against his lips,

‘‘Agreed. We tell them what fraud is. Hold on, let’s list it:

1. Define fraud and explain our definition

2. Zero tolerance and why this is important

3. Snouter—your role and your compliance checks. Tell them about

that

4. Fraud stories and a few more examples

Okay what next?’’

Snouter finished his beer and was looking longingly at the waitress who

had her back to him. He snapped out of his trance and said,

‘‘What next? The three rules come next: be aware, be careful, and be

good.’’

Jack wrote. He turned to Snouter and continued,

‘‘Let’s go over the ‘be good’ part and ask for feedback. You know the

‘don’t break the law,’ ‘don’t deceive,’ and all that. Say, ask them whether

it’s easy to keep to these standards. It could be a team exercise.’’

Snouter shouted out,

‘‘Miss, two more beers, sweetheart.’’

Jack was about to say something when Snouter jumped in,

‘‘We close with the hotline. We say, ‘Call me if you know anything

bad.’ I mean, ‘if you know whether anything bad is happening.’’’

Jack whipped the paper off the table as the waitress thumped down two

large glasses of beer.

Snouter grabbed his drink and attacked it eagerly.

Jack sat back and dropped his pencil down onto the table,

‘‘We’ve done it. It’s done, buddy.’’

Snouter excused himself and went off in search of the men’s room.

Jack opened the laptop and started typing quickly, looking at the

words he had scribbled down. He worked through the notes and soon had

a document that looked quite impressive. After he had finished, he looked

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around for Snouter and saw him at the bar gulping down a new large glass

of cold beer.

Jack shouted out,

‘‘Snouter—get over here.’’

Snouter finished his beer and came over with two fresh glasses of beer

and banged them down. He slumped into his chair and looked annoyed.

Slurring his words he spouted out,

‘‘Yes. We’ve done it alright. But what about me? I got to do one

hundred checks a week. It takes all my time, and when the fools call me up

and complain about their boss, I don’t have time to do anything. What

should I do—go tell off their boss? It’s a joke. I’m tied up in string, and it’s

getting worse.’’

Jack looked at Snouter and said,

‘‘Cheer up. We have a plan, and remember I’m going to look at your

compliance program after we’ve got the first seminar out of the way.

We’ll make sure it’s sensible. Now I’m going to take off and e-mail this

session plan to Bill. We’ll do the compliance program on Thursday, but

tomorrow morning let’s focus on the fraud awareness lunchtime session

and—Oh yes, we can look at investigations standards after that. Yes?

You ready?’’

Snouter relaxed in his chair and said,

‘‘I’m okay. Leave me here, and I’ll find my way home.’’

Jack got up and placed a hand on Snouter’s shoulder and walked out of

the bar. He looked back at Snouter and saw a man hunched over his seat,

staring at the backs of his hairy hands.

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c h a p t e r 6

CRIMINOLOGY AT BAY

H elen drove skillfully through the country roads outside of Fresh-

water on the way to the marina at Yarmouth, with Bill sitting

quietly beside her. Before they got to Yarmouth, she turned off on the left

into a narrow lane with various neat and tidy houses dotted along either

side. The road got increasingly narrow until it opened up into a large

parking lot surrounded by a series of buildings that appeared to be from a

bygone era. Helen parked the car and said to Bill,

‘‘This is Fort Victoria. I only discovered it a few weeks ago.’’

Bill got out of the car and looked around before asking,

‘‘What is it?’’

‘‘It’s an old fort that was built in the 1850s as a part of England’s

maritime defenses. The actual barracks were demolished some time ago,

and now it’s preserved as an historical site.’’

Bill stretched his large frame and looked around at the small museums

and what looked like an aquarium built within the fort walls. They both

walked through a large arch into a grassy cliff top area with wide views

across the sea to Lymington on the mainland.

A beach was visible towards the left, and children ran around on the

grass while several men and women stood immobile, fishing alongside

the low cliff.

Helen guided Bill towards a cafe with tables and chairs placed outside,

and as Bill sat down she went to buy tea and cakes. Bill pulled out the

e-mail from Jack and read the fraud policy and the sessions for today’s

fraud awareness seminar that Jack and Snouter were planning for the

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Pickett4797_ch06_1 06/12/2007 46

purchasing staff. It looked okay. They were making good progress, so

perhaps he could relax a bit and enjoy this short break.

Helen came back and carefully placed a tray laden with cups, a large

teapot, and various sweet cakes and cream.

Bill smiled and asked,

‘‘You practicing for motherhood?’’

Helen blushed and poured tea while Bill watched her. She finally said,

‘‘Well what do you think of the cottage?’’

Bill’s mind went back to the morning, when he had finally looked

through the cottage that now belonged to him.

‘‘Small, cozy, and cluttered, with a massive untidy garden—but real

cute,’’ he answered.

Helen stared out to sea and said,

‘‘What do you want to do then?’’

‘‘I want it gutted. I mean we can store my aunt’s nice things, strip out

the furniture, and do it up as a holiday cottage.’’

‘‘Excellent. My opinion too. You can rent it out to tourists, and you can

use it whenever you want. How about you choose the furnishing later on

from the Internet, and I’ll organize the rest. Just tell me what you want to

keep and, you know, color schemes and such. We’ll need to sort out the

giant garden, it’s so overgrown’’

Bill shrugged his shoulders, saying,

‘‘You choose—design, furniture, color scheme. Do it like the hotel,

and I’ll just put stickers on what should be stored. I really trust your

style, honestly. I’ll bring Ruth and the kids next summer, and you can

surprise us.’’

Helen accepted this commission, and they sat back in a comfortable

silence to enjoy this time out.

Helen looked at Bill, who had raised his face to the sun and had his eyes

closed. She thought that he had finally switched off from work. Excellent.

She vowed to bring her boyfriend here, and hoped that this would happen

to him too.

Bill shivered as he suddenly remembered his big fraud project. He

opened his eyes with a start and said,

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‘‘Oh Helen, you said you know a bit about, um, crime?’’

‘‘Criminology. Why people misbehave.’’

Bill closed his eyes again. He continued,

‘‘Tell me about it. It could come in useful. That is, if you don’t mind.’’

Helen sighed and tasted one of the cakes. ‘‘Here we go,’’ she thought,

‘‘back to basics.’’

‘‘Right, sir. You know about my work on acquisitions. I used to buy

going concerns that fitted with our portfolio. We looked all around the

world, and it soon became clear that the worst fraudsters didn’t rob

companies; they just bought companies to do their dirty work for them.

I had to spend more and more time examining the background of new

clients—say, from Eastern Europe—and some of the new emerging econo-

mies. Deception is about seeking to gain an unfair advantage, and now

business is so much more complex and things move so quickly, you can get

burnt if you’re not real careful. I had a checklist of danger signs.’’

‘‘Which are?’’

‘‘Well, let me see. Things like, say, an understaffed internal audit unit,

vague accounting policies, poor basic controls, real fast global expansion.

Things like that. And there really is a need for much better fraud risk

management. You can’t just go on face value. Some people start out good

but drift into fraud, say because of debt or an expensive lifestyle—you

know, school fees, mortgages, and the rest. It soon became clear that

people can go bad, and no one can be trusted absolutely. I analyzed one

company and found that the CEO was a crook. When I confronted him,

he said that he was expecting it. He had so much debt that he dipped into

corporate funds, and when he had paid off his debt, he just continued. He

bought himself fast cars and went on exotic vacations.’’

Bill was now sitting up straight and concentrating on Helen’s mes-

sages. He leaned forward and said,

‘‘Seems that some people get up to all sorts.’’

Helen sat back and thought about it.

‘‘There’s a tool developed by Dr. Donald Cressey called Cressey’s fraud

triangle. It works like this. There are three main factors that underlie

corporate fraud.’’

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Using her fingers to count, she continued,

‘‘1. Perceived opportunity—say, to solve a personal financial problem

by being trusted and then violating this trust.

2. Pressure—say, to deal with an unsolvable financial problem by

spending more than you make.

3. Rationalization—where the crime seems to the fraudster not to be

a crime at all. Often, they argue that they’ll pay it back or they

feel that they’re underpaid by their employer. This last point is

important, as it may be that people who have always been

trusted may go bad but will justify it to themselves. Scary, isn’t

it? Some people confess when they find that the crime can’t be

rationalized.’’

Bill folded his arms and replied,

‘‘I see what you mean. Right and wrong get blurred. Yes, it is scary

when you put it like that.’’

‘‘Things were pretty simple in the past,’’ Helen said, ‘‘I would look at a

business and decide whether we could finance it, partner it, take it over, or

whatever. But now the first thing I have to ask is whether it is as it seems.

I evaluated one vehicle-repair company, and I couldn’t understand why

it made such a loss when it was well set up to succeed. Anyway, in the end

we found out that the purchasing manager had adjusted the stock-control

system so that inventory reports were unclear. Then he replicated his

company’s repair service firm in his own garage and diverted inventory to

run his most profitable private business.’’

Bill tugged at his ear to make sure he was hearing properly.

‘‘You mean something pretty severe could be happening in my own

company and we wouldn’t know?’’

‘‘What I’m saying Bill is that you must take your risk management

process seriously. Remember that guy at the London conference we went

to last year who was banging on about fraud issues in risk management.

You need to make sure threats like fraud risks are bolted down. But

the real good fraudsters—sorry, I mean the real bad fraudsters—get hold

of your risk strategy and develop their own counter-strategy. The

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purchasing manager in my example knew that accurate reports would

expose his scam, so he developed his own way of managing the risk of

getting found out. It’s rough out there, Bill.’’

Bill got up and said,

‘‘Lets walk a bit.’’

They strolled along the path that bordered the sea and looked at the

dozens of boats and yachts that drifted by, blown by the sea breezes.

Bill shoved his hands down into his pockets; after a while he

asked,

‘‘How do we deal with the problem? I mean, how did you cope?’’

Helen shrugged her shoulders and responded,

‘‘I’m not in that game anymore. But when I was, I developed a checklist

to assess companies against the risk of fraud. Put your notepaper on this

bench, and I’ll draw my model for you (see Exhibit 6.1).

‘‘I assess the potential impact of fraud by looking at things like the

value of assets at risk—whether these assets are portable and easy to

convert, whether the company operates in a volatile country that has a

history of fraud and scandal. I score the company high if it has a high

inherent fraud risk. Then I look for possible control weaknesses, such as a

board dominated by a few people with disproportionate personal inter-

ests in stock values, possible management override of controls, and no

ethical direction from the top. Where there is also a weak audit and

compliance process, I score the company as having high possible control

E X H I B I T 6 . 1 Fraud: Danger Zone

In h e re

n t F

ra u d R

is k

Know Control Weaknesses

DANGER ZONE

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weaknesses. Companies that operate in high-fraud-risk ventures and also

have poor controls end up at the top right-hand corner of my model,

which I call the Danger Zone. I tend to stay far away from these sorts of

companies.’’

Bill looked carefully at the model and asked,

‘‘Can I have this—for work?’’

‘‘Oh sure. It’s pretty straightforward.’’

Bill studied the scratched model further and said,

‘‘I agree, it’s logical and easy to use. But there is one item that is a little

complex—what you call the management control override.’’

Helen was starting to feel tired and wanted to get back to Freshwater

Bay and meditate on the sea, as she did most evenings.

She looked at Bill’s eager face and continued her explanations,

‘‘Yes. The override thing is tricky. Basically, the design of controls, the

governance structures, and the published standards can look great on

paper, but the reality can be quite different. People can override controls,

and the higher up the tree, the more this can happen. Accounting

standards can be in place and corporate rules may say who does what

to ensure that these standards are observed. The external auditors review

the accounts, but if rules are broken or simply got around, the published

financials may be misleading. I guess that where personal fortunes are

more or less based on performance and where executives are on short-

term contracts and big incentives, then you have to ask how decisions are

made—because they are right or because they suit the decision maker? It’s

not just financials that are at risk. I know of one case where hospital

doctors were encouraged to write down pneumonia for cause of death

when in fact it was due to a cross-infection called MRSA. This was to stop

a rise in reported cases, which then meant missing clean-up targets. But

it’s the financial statements that are so easy to fiddle. You can fabricate

stuff or just fix adjustments or accounting period allocations to skew the

results. And there’s more—I’ve seen it all.’’

Helen spotted a dark cloud moving towards them and said,

‘‘We’d better get back. The hotel manager’s good, but I like to be

around when Peter’s out.’’

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Bill did not move and seemed transfixed by Helen’s comments. He said

slowly,

‘‘It can’t be all bad. What’s happening to straighten things out?’’

Helen sat back down,

‘‘Lots. Audit committees, Sarbanes-Oxley, international accounting

standards, and more.’’

Bill smiled,

‘‘Explain.’’

Helen got up again and said sweetly,

‘‘Not now. We’ll get together later, and I’ll give you my views. But let’s

have a break, please?’’

Bill got up and bowed deeply,

‘‘My lady, let us go,’’ he said, as the dark clouds seemed to be position-

ing themselves right above them.

Later that evening, Bill found himself in a bar with Helen, overlooking

Freshwater Bay. Because it was raining, Helen agreed not to stand outside

tonight.

Helen swirled her glass and said dreamily,

‘‘Whenever Peter goes away, I miss him so much.’’

Bill smiled, and Helen continued,

‘‘He’s asked me to marry him.’’

Bill started,

‘‘And. . . ?’’

Helen drank her wine, and when she raised her eyes they sparkled with

delight,

‘‘And when he gets back I’m going to accept.’’

Bill reached over and hugged his friend.

‘‘That’s wonderful,’’ he blurted out, pulling back when he realized

several elderly customers were now staring at them.

Helen blushed and said,

‘‘I shouldn’t have told you, since he doesn’t know my answer yet. Keep

it a secret?’’

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‘‘Oh yes, certainly,’’ Bill said quickly and thought hard about how to

change the subject. He became serious once more and said,

‘‘You were telling about the kind of corporate fraud that’s out there.’’

‘‘Of course. I promised to talk about my approach. You’re right. You

recall seeing President Bush broadcasting his concerns about fraud in the

economy a few years ago. The Enrons and WorldComs had just broken,

and it was clear that a couple of dominant managers could bring down a

huge company. Most business failures were due to bad strategic deci-

sions, followed by attempts to cover up these problems. But sometimes

it’s just about pure greed and insolence. I used to track all the major stock

markets, and the U.S. approach was about using a big stick to enforce

good governance to make sure companies could deal with an aggressive

executive—or corporate misreporting. The sanctions are real heavy now,

and corporate people can go to jail for behaving badly. Having tough

audit committees oversee corporate accounting and audit practices was

considered crucial to preventing corporate fraud. This move worked

alongside a strong code of ethics, where all employees were deemed

accountable to act within the code and keep it real. The idea was to

tackle fraudulent financial reporting, misappropriation of assets, and

basic corruption. So the audit committee starts by looking at executives’

incentives and figuring out what really motivates the top team. People are

starting to ask U.S. corporations less about their profits and more about

whether they are making a positive contribution to society over and

above just more jobs and wealth creation.’’

Bill tried to make out the shape of the bay through the windows. He

suddenly felt very tired and realized he was missing his wife and the new

babies. Worse still, he was finding it hard to concentrate on Helen’s words

of wisdom.

He blinked his eyes hard and said,

‘‘Is it working out? This big new change?’’

Helen laughed and replied,

‘‘You’re dropping off. What have I been saying?’’

Bill scratched his chin,

‘‘Uh, bad managers, corrupt business, and the solutions. Right?’’

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