Far Eastern Economic Review

October 7, 1999

SUPER SLEUTHS:
Forensic accountants are turning to sophisticated software
to follow the trail of fraudulent transactions

Messy liquidations, complex restructurings, byzantine fraud cases--these days, Asia's accountants have their work cut out for them. But following the money is no longer simply a matter of brainpower: Technology is playing an increasingly important role in the search for missing or suspicious loot. From the Bank Bali scandal in Indonesia to other, less-publicized cases of funds gone astray, accountants are using new software to store, sift and organize vast amounts of data with greater speed and accuracy.

These programs are particularly useful for forensic accountants who spend their days tracking down hard-to-find or deliberately damaged data in cases likely to end up in court. "Where is the smoking gun in 55,000 pieces of paper?" asks Graham Soutar, a partner at Deloitte Touche Tohmatsu in Hong Kong. Or, for that matter, in 55 disk drives that have been tampered with? The software is designed to find the answer.

Accountants won't disclose the names of their clients or details of the frauds they have uncovered. But they will talk about the ways their software can recover, duplicate, catalogue and even simplify complex data so it can be clearly presented to a judge or jury if a case goes to trial. Most importantly, certain programs allow accountants to "interrogate" information using so-called data-mining tools that search huge amounts of electronic data for signs of fraudulent activity, whether it be bogus loans, stolen shipments or shady fund transfers.

The newest generation of software designed specifically to aid in this type of investigation bears little resemblance to that available in the early 1990s. Software that has hit the market in the past two years can manage significantly larger quantities of data from diverse sources, compiles findings in clear diagrams and requires no special programming expertise to use. Accountants say these traits, along with the increasing prevalence of electronic data, have made such programs indispensable in the fight against fraud.

One recent Deloitte case involved an Australia-based company with subsidiaries throughout the region that was sued by its shareholders for alleged financial mismanagement. The company claimed key records relating to its investment portfolio had disappeared, making it impossible to prove the allegations. However, by working with electronic data downloaded from various banks and stockbrokers, Deloitte was able to recreate the missing records and the allegations were proved in an Australian court.

Deloitte also used data-mining tools to uncover a procurement fraud at a company in Asia, where an investigation revealed that someone at the company was consistently overpaying one of its suppliers. Deloitte reached that conclusion after sifting through 1.5 gigabytes of data--equal to several encyclopedias--and its findings led to litigation against the individual involved.

As companies rely more heavily on digital data, fraud-detection software is becoming an essential part of safeguarding a company's operations, say experts. "It's not a question of you may, but you will" find abuse of your electronic data, says Risto Haataja, a senior consultant at Arthur Andersen in Sydney. Abuse, he adds, will only grow as e-commerce becomes more widespread.

In many cases, the software can also be used to uncover fraud. Haataja cites the example of an Asian bank that had a major problem with fraudulent borrowing. The bank's loan-approval system was highly automated, he says, and certain people had figured out how to manipulate it to receive loans they then failed to repay. After the bank installed software designed to analyze applicants' personal profiles and financial history, cases of suspected fraud were regularly identified, and some led to arrests.

"You can use these techniques on anything that involves data, but especially finance and telecommunications, since it's mostly in those areas that there's enough data to work with," says Haataja.

In the case of Indonesia's Bank Bali, a Pricewaterhouse Coopers audit included allegations of political pay-offs and diversion of funds. Though he wouldn't discuss this specific case, Paul Carter, a partner at Pricewaterhouse Coopers in Sydney who worked on the audit, says "it would be usual to use computer forensic techniques" on this type of project.

Typically, the team would begin by "imaging" relevant hard drives onto CD-ROMs, a process that copies the information without altering it and therefore makes it admissible in court. The team would then use data-mining tools to search for keywords, documents or transactions in existing and deleted files. "The data is harder to erase on a computer than it is on paper," says Carter, explaining that when a computer file is deleted it's removed from the computer's index but the information itself remains on the hard drive.

When data is not in digital format, the time and effort required to input it into a computer can make the software process too expensive, says Michael Kessler, president of Kessler & Associates, an American forensic-accounting firm that recently opened an office in Shanghai.

Kessler and others say every case is different and requires a unique approach and set of software. Software designers such as Vogon International, i2, Experian and Carreker-Antinori provide different pieces of the programming puzzle, which accounting firms then supplement with their own proprietary software.

One of the more interesting jobs performed by this software is "link analysis." This type of analysis allows accountants to see and manipulate complex interactions between individuals, accounts, companies or any combination of elements--"things that would take hours upon hours to review, and you'd be lucky to catch a link, but that the computer catches automatically," says Kessler.

Kessler says link analysis worked particularly well in a case in which one of his clients, a fragrance maker in the United States, had been plagued by a major counterfeiting operation. Police uncovered the operation and seized the counterfeiters' records and computers. Kessler's firm then applied a link-analysis program to the seized data and discovered that many of the bottles, pumps and caps used in the fake fragrance bottles originated in Hong Kong and China--whose authorities subsequently apprehended the culprits.

Asian companies and organizations are growing increasingly interested in the new software. i2, a producer of link-analysis software based in Britain, recently appointed a regional business development manager to capitalize on that interest. The firm's standard program, Analyst Notebook, costs Pounds3,300 ($5,400) and is being used by four clients in Hong Kong as well as customers in Macau, India, the Philippines and Malaysia.

Despite the technological advances, accountants maintain that where fraud is concerned, there's still no substitute for gut feelings. The key to unlocking the majority of these cases, says Kessler, is "instinct--and a computer program doesn't have that yet."