A Fraud Examiner’s Guide To Relationships

Dr. Lola Gershfeld

Lola Gershfeld, CEO and Board Dynamics Specialist, Level Five Executive

Kim Chatani

Kim Chatani, Board & Advisory Partner, Khronicle Partners

Trust and transparency are two of the most important elements of a fraud examiner’s relationship with their client. We strive for it through the process of emotional connection, whether we realize it or not. The best way to gain the trust is to become more aware of it. We now know how these types of relationships are developed and nurtured, and use the New Science of emotional connection to guide us through it.

Recently, a colleague shared a story with me – he is an experienced and successful fraud examiner who is excellent at establishing and maintaining positive relationships with his clients. Kim Chatani has worked in accounting and fraud prevention for over 25 years and also serves as a board of director for several firms. Here is his story:

“I was working with a Japanese automotive parts manufacturer a number of years ago and had an experience that really highlighted how crucial positive relationships are in performing my job. I had worked with this company for several years – I had chosen my audit team with sensitivity to the Japanese culture. We got along well and we really didn’t have any issues.

Fraud AuditorOne year I arrived for the audit, and after speaking with my audit manager, I was informed that we didn’t have all the information that we had requested – specifically some of the important inventory schedules. As I sat with the audit manager, the CFO popped his head into our meeting to see how everything was going and invited me to lunch. So I went out to lunch with him and, in a more relaxed environment, I mentioned that we were missing some important schedules. He told me he wasn’t sure why and would look into it.

When he finally provided me the schedules, a day or two later, I had what they call the “auditor’s gut feeling” – something just didn’t look right with the numbers. I worked with my audit manager and found that the company was inflating their sales by manipulating their internal bill of ladings as though they were external bill of ladings, thus fictitiously increasing overall sales.

Once I realized the scheme, I contacted the CFO to ask him about the discrepancies.  I said, “take a look at this inventory report, something looks funny to me”. The color drained from the CFO’s face as he told me he had no idea why the figures looked odd and asked me to wait for two days so he could investigate what happened. He didn’t push back against me – he simply understood.

The CFO came back two days later and informed me that the COO and he had a heart-to-heart conversation with the President of the company. The President admitted giving direct orders to the inventory manager to falsify the documents. After much discussion, we realized that the President was under great stress to deliver financial results that was “expected” by the parent company. He chose to inflate the sales to meet that goal. Meeting the targeted goal was important for him to ensure advancement upon his return to the parent company.

I was shocked. I had a great deal of respect for the President who I had known for several years. He mentored me along the way and I trusted and respected him for it. It felt like the rug had been pulled from beneath me.

My immediate concern was for the audit implication and to the CFO and COO of the company. I empathized with them about the betrayal they all must have felt. With that backdrop, my audit team began calculating the financial statement impact of the fraud and its implication to the audit report.

After weighing the audit impact of the incident, we were able to provide an unqualified audit. We ensured that all fictitious transactions were properly classified, gained assurance from the parent company board of directors that these financial pressures would not be placed by the parent company and by requiring them to strengthen their internal controls.

It was important reflect with the CFO and COO to begin the healing process from this betrayal. We all were shocked by what the President’s actions that required all of us to reflect and moved forward. The honest exchange of emotions enabled all of us to move forward knowing that this could happen again anytime anywhere.

This experience really exemplified one of my favorite quotes from Ronald Regan – ‘Trust, but verify’. It’s important to build strong relationship and rapport, but you must ‘Trust, but verify.’ This starts with creating a secure yet open environment where trusting relationships can be fostered. Transparency is the core of a trusting relationship.

I later rotated off that account, and 20 years later, I still keep in touch with that CFO. The battle that we endured together really brought us closer together.”

What I love about Kim’s story is that he really harnesses the power of emotional connection to weather the storm. His relationship with the CFO and COO created the transparency he needed to figure out what was going on and redirect the company back to the right path. I want to highlight a few moments where his emotional awareness helped him get to the truth more effectively.

  • He created safety for the CFO. When Kim found out that they were missing documents, he made a conscious choice to ask the CFO about it in a comfortable environment where he didn’t feel attacked. Responding to the safety, the CFO worked quickly to get him the documents he needed.
  • He softened his language to maintain his secure bond. When he got the numbers and discovered the inconsistencies, he approached the CFO with openness. He didn’t assume that the CFO was hiding anything because he knew that the CFO was on his team and there are no “bad guys”. Instead, he said “something looks funny to me”. This is a great way to approach a sensitive situation where you don’t want to sound judgmental or critical.
  • The client trusted and wanted to help Kim based on their long-standing relationship. The CFO and later the COO worked to get Kim the information he needed because they understood that Kim was trying to help the company. When they learned that the President had given the orders, they didn’t hesitate to share the information. This is huge! Having established a secure relationship – safety, trust, and attachment, the client felt safe enough to share such a sensitive and embarrassing information.
  • Kim took time to make sure the relationship was secure after the final decision had been made. Kim and the client spoke openly about how the situation made them feel – again, this can only happen when people feel safe. We know that when people feel fear shame or fear, the natural tendency for us is to hide and divide. Kim and the client created a stronger bond through healing and sharing their vulnerabilities with each other. They shared a sense of betrayal, shock and surprise, hurt and unexpected outcome. Because the CFO felt safe with Kim, he was able to discuss the pressures and the insight into the company’s culture.

So what did this all lead to? The client was receptive and cooperative in improving and implementing the changes required by Kim and his team, and they were able to create a stronger relationship between the client and the audit company.

The true purpose of the auditor is not to run away from people who lie and cheat but be the influencer of change for the better of the organization.

Because of Kim’s ability to process the emotion and co-regulate other people’s emotions, he was able to demonstrate the process improvement and provide reassurance his concerns clearly to both his team and the client.

Kim’s development of strong, lasting relationships led to the trust and transparency that was essential in working through this audit. The company became stronger for it and Kim was able to effectively compete his job.

“Because what we all went through, we each became better Architects, building houses with stronger foundation based on open relationships and emotional connections.  Trust, but verify”


About the Authors:

Lola Gershfeld, PsyD, is a Board Dynamics Specialist, Founder and CEO of Level Five Executive Inc., a board/team dynamics consulting firm in Newport Beach, CA. that focuses on improving board/team effectiveness through the power of emotional connection. Lola is a developer of the Board/Team Dynamics Process (BDP) that impacts performance, productivity and corporate culture. She is the author of The Effective Board Dynamics Guide and TRUSTMAKERS. Lola can be reached at lola@levelfiveexecutive.com.

 

Kim Chatani, CPA, CFE, CFSA, CGMA and FCPA is an independent board director for several US organizations and a member of the board and advisory partner for Khronicle Partners, Inc., a boutique management consultancy. Khronicle provides board level services related to business and IT strategies, regulatory compliances, and fraud investigations. Kim is also an adjunct professor of corporate governance & risk management, accounting, and corporate finances at several universities. He has written on fraud casebooks, interviewed on board’s role related to cyber securities, and presented on the topic of information securities. Kim can be reached at Chatani@khronicle.com.

2017-07-28T09:48:29+00:00 July 27th, 2017|Emotional Intelligence, Leadership|

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