The Perils of Bias in Fraud Examination

Bias can affect a fraud examiner in a number of ways. It shapes our perception of the facts. It can cause an auditor to look past red flags of fraud, or compel an overeager investigator to see malfeasance where none is exists.

By Scott Patterson, CFE

January 2015

Bias can affect a fraud examiner in a number of ways. It shapes our perception of the facts. It can cause an auditor to look past red flags of fraud or compel an overeager investigator to see malfeasance where none exists. In short, it is a natural enemy of fraud examiners, who must be aware of the risk posed by their own bias and how it could hamper their objectivity and effectiveness.  

Allen F. Brown, CFE, CPA, is a former legislative auditor who discussed overcoming investigation bias in a recent interview with the ACFE. Brown said that biases are formed by our experiences and relationships that we have had, or those that have been communicated to us.

In the latter case, "they very well may not be true,” Allen said. “In other words, we’re listening to someone else, relying on someone else’s opinion to taint how we think.”

At that point, our human nature takes over … and our objectivity is compromised.

“What ‘biased’ means to me is that you have a pre-conceived notion.  You’ve already made a decision,” Brown said. “And you allow that pre-conceived notion to then color all the decisions you make.”

Science: The Evidence is Stacked Against Us

ACFE Board of Regents member Gerard Zack, CFE, CPA, CIA, Managing Director – Global Forensics for BDO Consulting, wrote at length on the subject of bias in the October 2013 edition of The Fraud Examiner. In “Your Dog is the Worst Dog. Ever,” Zack notes that several scientific studies have reinforced the idea that “no matter how much we try to be unbiased, some degree of bias is virtually always present.”

One of them, a group study, examined participants as they made comparisons among three-dimensional objects, and conformed to the observations from others. While this in itself was not unexpected, the surprising thing, Zach writes, is what happened inside their brains during the process:

All participants performed their comparisons while they were in a functional magnetic resonance Imaging (fMRI) brain scanner. Researchers wanted to determine whether when participants conformed to the incorrect conclusions drawn by other participants the part of the brain most active was the area dealing with conscious decision-making (the prefrontal cortex).

But what they found was that other regions of the brain were the dominant activity centers when conforming behaviors took place – regions associated with perception rather than decision-making. Participants actually saw what their fellow participants saw, rather than evaluating information and making the same decision.

Think of this now in terms of how an investigator responds to an allegation of fraud or a whistleblower call aimed at a particular person. The implications are significant. Knowing what someone (a whistleblower, for instance) has concluded may inherently establish a bias on the part of the investigator. Add to that all of the training in finding fraud, and a job responsibility that includes finding fraud, and one can quickly see that an investigator may commence an investigation determined to find fraud, rather than to conduct a fair and thorough investigation.  

A Professional Obligation

This is an obvious problem. For anti-fraud professionals, bias works against the driving aim to uncover the truth. Leah Lane, CFE, CFS, Global Investigations Manager for Texas Instruments, said that bias can cause investigators to rule out leads or areas to explore through a mental process of elimination.

“When you bring bias into the equation, sometimes you don’t follow a lead because the investigator or the auditor might think, ‘You know what, I know that company is a good company.  I don’t need to look at that,’” Lane said. “Or, ‘I’ve dealt with that person before, they’re a good person, they wouldn’t do anything like that. So, we don’t need to involve them.’  And you might miss very important facts that relate to an investigation.”

Lane said the threat can be even greater when dealing with small companies. There are often longstanding relationships and people have built trust with each other over many years, thus increasing their bias.

“Sometimes when you build relationships with people inside your company, you’re not as objective as you may need to be,” Lane said. “Because you’ve known that person for 10 years, and you’ve worked with them. And you don’t want to believe that they might be doing something wrong.”

For fraud examiners, however, it is imperative to rise above acting upon our biases. It is also dictated by the rules of the profession. The ACFE’s Code of Professional Standards addresses objectivity directly in its third standard. As written in the Code:

Certified Fraud Examiners shall maintain objectivity in discharging their professional responsibilities within the scope of the engagement.

Guidance: Objectivity refers to the ability to conduct fraud examinations without being influenced by one’s own personal feelings or the personal feelings and motives of others. An objective CFE employs impartial standards in providing professional services or recommendations and is not influenced by bias, prejudice, or other information that cannot be substantiated or that has no foundation. Bias refers to partiality that prevents a member from objectively considering an issue or situation, whereas prejudice refers to a preconceived opinion or feeling that prevents objective consideration of an issue or situation.

A CFE would likely be found to have violated this Standard, for example, if he were to determine at the outset of an examination that suspect A had misappropriated funds, and then proceeded to only gather or seek out evidence showing that suspect A was responsible for the missing money, while ignoring evidence which tended to show suspect A was not responsible … A CFE who fails to maintain objectivity is in violation of the Standards regardless of whether the client/employer consents to the CFE’s conduct. Therefore, A CFE should remove himself from an engagement when his objectivity has become so diminished that it could significantly impact the outcome or findings of the examination.

 

How to Mitigate the Effects of Bias

While science indicates that bias is a predisposition to all humans, all is not lost for fraud examiners. We can learn to recognize our own biases, and Brown offers the following advice for dealing proactively with the issue of bias:

Maintain professional relationships with your colleagues. “You can’t play golf or party on Saturday with those you may have to investigate on Monday,” Brown advises.

Stick to factual information, not opinions, when gathering evidence and building a case to avoid creating bias among others – and yourself.

Frequently step back and take a “big picture” look at the case. Review everything and make sure you are following the facts.

“If you know you have a bias, don’t take the project. Stay away from it.”

Require others working on an investigation to certify they don’t have a bias or a conflict of interest. “It causes your staff to at least think about it.”

Being biased is a part of being human. Recognizing our own proclivity toward biased thinking and knowing when our objectivity might be affected is one of the many challenges of being a fraud examiner. Most importantly, by always seeking objectivity and following the facts, we maintain our credibility in the eyes of those counting on us to get to the truth. "The best advice I can give is: remain professional,” Lane said.  “Follow your fraud theory, to prove it or disprove it, for your case. And follow the facts. Don’t let emotions, or past history, or friendships, or involvements affect you in that investigation.”