Unmasking Deception: The Interplay of Human Behaviour and Forensic Accounting

“Human behaviour flows from three main sources: Desire, Emotion, and Knowledge” – Plato.

Welcome back to #ForensicForesight, where we delve into diverse topics related to forensic accounting and fraud examination. To date, we've explored a range of subjects, from fraud risk and prevention to evidence collection and analysis.

Click here for a recap of our previous article!

In this article, we shift our focus to a unique perspective within forensic accounting: the behavioural aspect or the human element. Specifically, we will discuss how behavioural analysis integrates with fraud prevention and the pivotal role that forensic accounting plays in this domain.

So, what does behaviour have to do with fraud? Actually, a lot!

According to the #ACFE, a seasoned #fraud examiner equipped with an understanding of behavioural principles knows that every fraud has its unique behavioural underpinning. A distinct set of motivations drives a high-stakes player who manipulates millions of others' money compared to a clerk secretly siphoning off modest amounts to support their family's savings. Many criminology courses anchor their teachings on the essential belief that crimes, at their core, are specific behaviours shaped largely by repeated patterns and reactions.

When fraud examiners step into a case, their methodology mirrors this concept. If there's missing money, they map out the money's journey and probe into questions like, "Who had both the chance and the motive to access these funds?" Such inquiries are grounded in a behavioural understanding of the crime. Thus, when a forensic accountant or a fraud examiner’s role extends to not just identifying but also preventing fraud, a deep dive into behavioural analysis becomes imperative.

 Firstly, it's essential to grasp the concept of the fraud triangle to truly fathom the role of the 'human element'.

The Fraud Triangle

The fraud triangle, a hypothesis formulated by Dr. Donald R. Cressey, an expert in the sociology of crime, often considered the founder of the modern study of organised crime, consists of three critical components:

1. Pressure,
2. Opportunity, and
3. Rationalisation.

Each leg of this triangle represents a vital element that, when combined, often culminates in fraudulent activities.

Pressure, often stemming from personal or financial challenges, drives an individual towards considering unethical means. Opportunity is the avenue that allows fraud to take place, often arising from weak internal controls or unchecked authority. And finally, rationalisation is the mental assertions one performs to justify their actions, convincing themselves that their fraudulent activities are acceptable or only temporary.

For example,

Consider Mike, a long-standing financial manager at a company. Faced with sudden high medical bills for his daughter's treatment, the pressure mounted. Within the company, lax oversight on certain funds presented Mike with an opportunity. He began diverting small amounts, rationalising to himself, "I'll return it once her treatment is over; it's just a temporary loan for a good cause. I have been working my heart out for this organisation, and I deserve this." Over time, these "borrowings" became frequent and larger, driven by the three elements of the fraud triangle: pressure, opportunity, and rationalisation.

Understanding this triangle is pivotal. It sheds light on the psychological and situational factors that can push even the most upright individuals towards committing fraud. Only by addressing each of these facets can organisations truly mitigate the risks associated with fraudulent behaviours and develop effective preventive strategies.

Behavioural Red Flags

While our primary interactions with fraud may first spotlight its financial aspects, it's worth noting that fraud frequently leaves behind distinct behavioural imprints. These behaviours, often termed 'red flags,' signal potential illicit activities and can serve as indications for investigators.

Dr Steve Albrecht, a pioneer researcher in occupational fraud and abuse, did a comprehensive study into these behavioural indicators. Through meticulous examination of varied data sources, he assembled an exhaustive list of fifty potential red flags indicative of occupational fraud and abuse. These red flags are segmented into two broad categories: Traits of the fraudster and circumstances within the enterprise.

 The essence of Dr. Albrecht’s research was to ascertain the significance of these red flags in the context of fraud commission, detection, and prevention. The indicators span a wide spectrum – from personal financial struggles, like high debts, to work-related concerns, such as the fear of job loss or insufficient background checks during the hiring process. Out of the exhaustive list, the top ten indicators, as identified for their frequent occurrence in fraud scenarios, are as follows.

1. Extravagant Lifestyle: When an individual’s spending habits don’t align with their known income.
2. Obsession for Personal Gain: An unrestrained drive to benefit oneself, often at the expense of others or the organisation.
3. High Personal Debt: Being burdened with significant debts or monetary challenges.
4. Intimate Ties with Clients: Unusually close or secretive relationships with clients or customers.
5. Compensation Dissatisfaction: Feeling that one’s compensation doesn’t match their responsibilities or efforts.
6. Opportunistic Mindset: An inclination to be manipulative, always seeking an advantageous deal or workaround.
7. Desire to Bypass Rules: A consistent attempt to find gaps in systems, sidestep established procedures, or exploit ambiguities.
8. Compulsive Gambling: Regularly indulging in high-risk gambling ventures.
9. Exaggerated External Influences: Experiencing intense pressure from family, friends, or other external entities.
10. Feeling Undervalued at Work: A sense of not receiving due acknowledgement or appreciation for professional contributions.

Behavioural Analysis Techniques in Forensic Accounting

With a foundational understanding of the red flags that might indicate fraudulent activity, it's equally imperative to grasp how forensic accountants and fraud examiners employ behavioural analysis techniques to detect, prevent, and resolve these issues.

1. Structured Interviews:

Forensic accountants and fraud examiners often rely on structured interviews to discern truths from falsehoods. Their approach is not merely about the answers but also focuses on the non-verbal cues, inconsistencies, and reactions that individuals exhibit during the conversation. The interview techniques employed during a fraud examination by a forensic accountant or a fraud examiner often have dedicated chapters on their own in many academic publications.

For instance, a forensic accountant or a fraud examiner can use this technique to interrogate an employee suspected of embezzlement. By using open-ended questions and observing how the employee constructs their narrative, the inconsistencies in the story are detected.

2. Analysis of a ‘standard’ behaviour:

By observing a person in a relaxed or non-threatening situation, forensic accountants and fraud examiners establish a "baseline" of their normal behaviour. Any significant deviation from this baseline during crucial conversations can hint at potential deceit or hidden information.

For instance, before questioning a suspect, say a vendor, about suspicious invoices, the interviewing professional engages in casual conversation, noting their typical conversational style and body language. This serves as a reference during the main interrogation.

3. Scenario Test:

Presenting individuals with hypothetical yet plausible scenarios can help in gauging their reactions. Their responses to these scenarios can offer insights into their values, ethics, and potential inclinations.

For instance, a forensic accountant or a fraud examiner, during an investigation, can present a hypothetical situation to an employer/employee about finding an accounting discrepancy. The person’s response, whether defensive or curious, can offer hints about their involvement or knowledge.

4. Kinesics, Body Language and Tone:

Beyond words, body language, posture, and tone of voice can reveal discomfort, evasion, or defensiveness. Detecting these nuances can be pivotal in understanding the individual's mindset.

For instance, while discussing financial discrepancies with a department head, the forensic professional notices the individual's feet pointing towards the exit and a change in vocal pitch, indicating possible signs of discomfort or evasion or during a meeting about financial irregularities, the forensic accountant catch a brief flash of surprise on a staff member's face when certain transactions are mentioned, indicating potential awareness or involvement.

Insights ≠ Evidence

While these behavioural techniques give us valuable insights, they're just one piece of the puzzle. They help guide an investigation but aren't always the final proof of wrongdoing.

So forensic accountants and fraud examiners need to be careful in how they use and interpret these insights. Moreover, in current times, data analytics also plays a big role in understanding behavioural patterns. Imagine spotting transactions happening at odd times or noticing certain controls being bypassed time and again. With the help of modern software, forensic accountants and fraud examiners can spot unusual trends in large sets of data. These are warning signs that something might be off. And for those eager to know more about this intriguing intersection of data and behaviour, stay tuned for our upcoming articles in the #ForensicForesight series.

Today we understood that reading behavioural signs is an art as much as it is a science. Not every forensic accountant or fraud examiner will pick up on these cues right away. Intensive training, continuous learning, and real-world experience are indispensable. Just as a keen eye for financial discrepancies is vital, so too is a well-honed sense of the subtleties of human behaviour. However, it's paramount that forensic accountants balance their behavioural insights with concrete, verifiable data, ensuring their conclusions are both insightful and legally robust.

Here is a link to our previous articles in the #ForensicForesight series!

1. Starting a Forensic Accounting Practice - How to Succeed in the Field
2. Exploring the Emerging Practice: Fraud Risk Assessment in Forensics
3. Extending the Reach: CAs, CMAs, and CSs brought under the ambit of PMLA reporting entities.
4. Building a Robust Fraud Risk Assessment Framework: Best Practices and Tips
5. Uncovering Deception: The Emerging Role of Detective Forensic Accounting
6. Building the blueprint: planning a forensic engagement
7. Forensic Accounting Engagements: Exploring Standards for Comprehensive Planning
8. Piecing the Puzzle: The Art of Evidence Collection in Forensic Accounting
9. From Pieces to Patterns: The Intricacies of Evidence Analysis in Forensic Accounting - I
10. From Pieces to Patterns: The Intricacies of Evidence Analysis in Forensic Accounting - II

About the Author

Dr. (CA) Durgesh Pandey

Durgesh is a highly accomplished forensic accounting and fraud investigation professional. He holds the distinction of being the first PhD in Forensic Accounting from the National Forensic Sciences University (NFSU), Gandhinagar, an Institute of National Importance under the Ministry of Home Affairs, Government of India.

He has trained thousands of professionals and law enforcement officials on financial crime investigation.  He is passionate towards research/teaching and associated with NFSU as professor of practice. He regularly speaks and publishes internationally.