(By Dr. Joseph W. Koletar, CFE,
Founding Partner, Behavioral Forensics Group, LLC)

The use of metrics in anti-fraud activities is as old as the profession itself, yet fraud persists in forms great and small. It is an endeavor which will never achieve a 100 percent success rate any more than law enforcement will prevent most of the population from speeding.

But, as with law enforcement, the pursuit of improvement is a never-ending requirement. It may be that a degree of improvement can be gained by studying the techniques used by a highly-successful private-equity fund.

An article in the Wall Street Journal of July 10, 2018 (p. 1) may be instructive:

“Secret Formula, Intelligence Tests Fuel Buyout Firm.”
(Robert Smith’s method for revamping software companies relies on 110 directives)

The article recounts Mr. Smith’s secrets are, indeed, secret – they are stored on a well-protected company server and are used to evaluate and/or modify the processes of an acquired company. Such companies must have CFS (critical factors for success) and tests to evaluate existing and new employees for various mental and psychological traits. Existing employees fear such processes but new employees embrace them, since they may be identified as HPLEs (high performing entry-level.)

Mr. Smith is quoted as saying “Software companies taste like chicken…They’re selling different products but 80% of what they do is pretty much the same.” In short, Mr. Smith is looking at the “guts” of a company to see how well they perform. It must be working: The article indicates that four of his funds have returned annualized returns of between 11.7 and 29.2 percent. The article recounts that Vista (the name of his company) has done over 300 deals and informs investors it has never lost money on any of them. (Note – the article is quite long and there are those in the financial services industry who disagree with Mr. Smith’s approach.)

Now the key question – what does this have to do with fraud?

The very nature of a forensic inquiry into an organization – be it public, private, governmental, or Not-For-Profit – focuses on the “guts:” the control systems, the management style, reporting relationships, compensation plans, etc. In short, what keeps the organization moving. Fraud occurs when one or more of these elements becomes distorted. Examples:

• A focus on profit or compensation promotes over-rides of controls.

• Control systems have eroded and those who work in them are often seen as obstacles to success.

• Star performers are rarely monitored as closely as they should be.

• Psychological testing at any level, to include the “C” suite, is practically unheard of.

• Accounting standards allow aberrations to be reported as “not material” in financial reports.

• The entire industry sector operates on a “high risk” basis.

• Internal audit staffs are over-worked, under-paid, and often seen as a necessary evil. They must also service an annual “Audit Plan” which allows them little time to explore anomalies in record systems, and most have little or no training in forensic inquiries.

Many of these fraud-friendly issues can be disclosed with the proper use of metrics in fraud investigations.

If compliance monitoring (fraud deterrence) is to improve perhaps we should consider the “Robert Smith” approach.

© 2018
Joseph W. Koletar



The Behavioral Forensics GroupTM LLC is a team of professionals with vast experience in detecting fraud, understanding why it occurs, and in recommending steps to mitigate fraud incidence within the corporate workplace, particularly within higher-level (and therefore more costly to the enterprise) executives.  Three members are co-authors of The A.B.C.s of Behavioral Forensics (Wiley), a seminal work in the topic. The fields of investigation, organizational psychiatry, accounting and behavioral forensics, and law enforcement are represented within the Behavioral Forensics GroupTM LLC.  Acting in synergy to help organizations prevent, find, and/or reduce fraud, B4GTM is a premier, pioneering practice in this field.

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