Petter Gottschalk - Fraud Investigation: Case Studies of Crime Signal Detection

Investigating white-collar crime is like any other investigation concerned with past events. However, a number of characteristics require a contingent approach to these investigations. This book describes the process of conducting private internal investigations by fraud examiners and presents a number of reports from the United States, Sweden and Norway.

It evaluates a number of internal investigation reports to reflect on the practice of fraud examinations. Empirical studies provide a basis to reflect theoretically on practice improvements for fraud examiners. Rather than presenting normative recommendations based on ideal or stereotypical situations so often found in existing books, this book develops guidelines based on empirical study of current practice.

Internal investigations should uncover the truth about misconduct or crime without damaging the reputation of innocent employees. Typical elements of an inquiry include collection and examination of written and recorded evidence, interviews with suspects and witnesses, data in computer systems, and network forensics. Internal inquiries may take many forms depending upon the nature of the conduct at issue and the scope of the investigation. There should be recognition at the outset of any investigation that certain materials prepared during the course of the investigation may eventually be subject to disclosure to law enforcement authorities or other third parties. The entire investigation should be conducted with an eye towards preparing a final report.

As evidenced in this book, private fraud examiners take on complicated roles in private internal investigations and often fail in their struggle to reconstruct the past in objective ways characterized by integrity and accountability.

Petter Gottschalk is a professor in the Department of Leadership and Organization at BI Norwegian Business School in Oslo, Norway.

Petter Gottschalk

First published 2018
by Routledge
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2018 Petter Gottschalk

The right of Petter Gottschalk to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.

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British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library

Library of Congress Cataloging-in-Publication Data
Names: Gottschalk, Petter, 1950- author.
Title: Fraud investigation : case studies of crime signal detection / Petter Gottschalk.
Description: 1 Edition. | New York : Routledge, 2018. | Includes
bibliographical references and index.
Identifiers: LCCN 2017046730 (print) | LCCN 2017053016 (ebook) | ISBN 9781351139069 (eBook) | ISBN 9780815352556 (hardback : alk. paper) | ISBN 9780815352563 (pbk. : alk. paper) | ISBN 9781351139069 (ebk)
Subjects: LCSH: Fraud. | Criminal investigation.
Classification: LCC HV6691 (ebook) | LCC HV6691 .G68 2018 (print) | DDC
363.25/963--dc23
LC record available at https://lccn.loc.gov/2017046730

ISBN: 978-0-8153-5255-6 (hbk)
ISBN: 978-0-8153-5256-3 (pbk)
ISBN: 978-1-351-13906-9 (ebk)

Typeset in Bembo
by Servis Filmsetting Ltd, Stockport, Cheshire

When there is suspicion of fraud in organizations, private investigators are often hired to reconstruct past events. Signal detection theory may shed some light on why some fraud examiners discover and disclose more facts than other examiners. Signal detection theory holds that the detection of a stimulus depends on both the intensity of the stimulus and the physical and psychological state of the individual. A detectors ability to detect or likelihood of detecting some stimulus is affected by the intensity of the stimulus (e.g. how loud a whistleblowing is) and the detectors physical and psychological state (e.g. how alert the person is). Perceptual sensitivity depends upon the perceptual ability of the observer to detect a signal or target or to discriminate signal from non-signal events (Szalma and Hancock, 2013).

Furthermore, detecting persons may have varying ability to discern between information-bearing recognition (called pattern) and random patterns that distract from information (called noise).

Under signal detection theory, some researchers found that people more frequently and incorrectly identify negative task-related words as having been presented originally than positive words, even when they were not present. Liu et al. (2014) found that people have lax decision criteria for negative words. In a different study, Huff and Bodner (2013) applied the signal detection approach to determine whether changes in correct and false recognition following item-specific versus relational encoding were driven by a decrease in the encoding of memory information or an increase in monitoring at test.

According to the theory, there are a number of determinants of how a person will detect a signal. In addition to signal intensity, signal alertness and pattern recognition, there are factors such as personal competence (including knowledge, skills and attitude), experience and expectations. These factors determine the threshold level. Low signal intensity, low signal alertness and limited pattern recognition combined with low competence, lack of experience and lack of expectations will lead to a high threshold level, meaning that the individual will not detect white-collar crime.

The competence of private investigators is a concern. For several decades the public police have striven to achieve professional status, arguing that their work is a skilled activity requiring long and in-depth training. Private policing, which is not regulated by statute in countries such as the United Kingdom, the United States or Norway, directly challenges this premise. People are not required to undergo any form of training in order to set up as fraud examiners (Gill and Hart, 1997).

In his book on signal detection theory, Wickens (2001) asks us to consider what happens when a person must decide whether or not an event has occurred, using information that is insufficient to completely determine the correct answer. Without sufficient information, some errors are inevitably made. The typical signal detection situation is perceptual. The person, usually known as the observer, is presented with a noisy stimulus, and the person must decide if that stimulus contains a weak signal.

Fraud investigation is like any other investigation concerned with past events. However, a number of characteristics require a contingent approach to white-collar crime investigations, as we limit our case studies to white-collar offenders. Ever since Edwin Sutherland (1939) coined the term white-collar crime, researchers in the field have emphasized the value of preventing and detecting fraud by executives and other members of the elite in society (Piquero and Benson, 2004). The typical profile of a white-collar criminal includes attributes such as high social status, considerable influence and access to resources (Blickle et al., 2006; Dearden, 2016; Fss and Hecker, 2008). White-collar crime is committed in the course of an occupation where the offender can carry out and conceal the offense among legal activities in an organizational context (Arnulf and Gottschalk, 2013). The white-collar offender is a person of respectability and high social status who commits financial crime in the course of his or her occupation (Leasure and Zhang, 2017).