Forensic Accounting as an Investigative Tool
Developing a Model Curriculum for Fraud and Forensic Accounting

By Max M. Houck, Mary-Jo Kranacher, Bonnie Morris, Richard A. (Dick) Riley, Jr., James Robertson, and Joseph T. Wells

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An understanding of effective fraud and forensic accounting techniques can assist forensic accountants in identifying illegal activity and discovering and preserving evidence. Forensic accounting is the application of accounting knowledge and investigative skills to identify and resolve legal issues. It is the science of using accounting as a tool to identify and develop proof of money flow. These tools and techniques can be invaluable for fraud and forensic accounting investigators.

Because employee and management fraud, theft, embezzlement, and other financial crimes are increasing, accounting and auditing personnel must have training and skills to recognize those crimes. In addition, high-visibility corporate scandals, such as Enron, WorldCom, and Adelphia, demonstrate the need to better prepare entry-level accounting graduates and practicing CPAs in the areas of fraud prevention, deterrence, detection, investigation, and remediation. Finally, news reports following the September 11 attacks depicted how terrorists used the international banking system to fund their activities, transfer money, and hide their finances, and signaled a need for investigators to understand how financial information can provide clues as to future threats. These events raised public awareness of fraud and forensic accounting, and highlighted the importance of ensuring that financial professionals have the necessary training and skills to understand and act appropriately on any important evidence generated from financial information.

The TWGED-FFA

In December 2003, the division of accounting at West Virginia University received a grant from the National Institute of Justice to develop a model curriculum for fraud and forensic accounting. The impetus for this activity was the need for an in-depth examination of the intellectual competencies necessary to perform entry-level forensic investigation and analysis in a constantly changing environment. The objective was to develop a model curriculum in fraud and forensic accounting that would assist academic institutions, CPA firms, and other public and private employers in preparing prospective students and employees with the necessary skills for entry into this profession.

This project was named the Technical Working Group for Education in Fraud and Forensic Accounting (TWGED-FFA). An exposure draft of the curriculum proposal was circulated in November and December 2005 for public comment. The outcome, a model curriculum, will be a set of voluntary guidelines for educational institutions, stakeholder organizations, faculty, instructors, and students that outlines the requisite entry-level knowledge, skills, and abilities for fraud and forensic accounting professionals.

Forensic Accounting

Forensic accounting includes the use of accounting, auditing, and investigative skills to assist in legal matters. It consists of two major components: litigation services that recognize the role of an accountant as an expert consultant, and investigative services that use a forensic accountant’s skills and may require possible courtroom testimony. According to the definition developed by the AICPA’s Forensic and Litigation Services Committee, forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, the law, and research. It also requires investigative skills to collect, analyze, and evaluate financial evidence, as well as the ability to interpret and communicate findings. Forensic accounting encompasses litigation support, investigation, and dispute resolution and, therefore, is the intersection between accounting, investigation, and the law. Fraud examination is a methodology for resolving fraud allegations from inception to disposition, including obtaining evidence, interviewing, writing reports, and testifying. The ACFE’s manual states that fraud examiners also assist in fraud prevention, deterrence, detection, investigation, and remediation. Like most forensic sciences, fraud and forensic accounting may include using financial information to piece together or reconstruct past events in instances where that reconstruction is likely to be used in some judicial proceeding (e.g., criminal or civil court, deposition, mediation, arbitration, or settlement negotiation). Fraud and forensic accounting is a broad area that includes occupational fraud, corruption and abuse, financial statement fraud, and civil litigation matters. While the reconstruction activity tends to look backwards, the impact may have implications for the future, particularly in civil torts and breach of contact claims.

Model Curriculum Outline

Two distinct yet interrelated groups, a planning panel and a technical working group (TWG), developed the model curriculum. The planning panel had 14 representatives from important stakeholder groups, including law enforcement, the legal community, government and regulatory stakeholders, professional services providers, professional organizations, and academics in the broad areas of fraud and forensic accounting. The full TWG had 46 subject-matter experts in fraud and forensic accounting, including the 14 members of the planning panel.

At a March 2004 meeting, the planning panel determined that the model curriculum developed for fraud and forensic accounting should ensure that entry-level forensic accountants have the knowledge, skills, and abilities necessary to begin work in the specialized area of fraud and forensic accounting. More specifically, entry-level fraud and forensic accounting professionals should possess knowledge, skills, and abilities in the following areas:

• Criminology specifically oriented to the nature, dynamics, and scope of fraud and financial crimes; the legal, regulatory, and professional environment; and ethical issues.
• Fraud prevention, deterrence, detection, investigation, and remediation in the following areas: asset misappropriation, corruption, and false representations; financial statement fraud; and fraud and forensic accounting in a digital environment, including computer-based tools and techniques for detection and investigation, electronic case-management tools, and other issues specific to computerized environments.
• Forensic and litigation advisory services, including research and analysis, valuation of losses and damages, dispute investigation, and conflict resolution (i.e., arbitration and mediation).

Because fraud and forensic accounting are relatively new areas of study, a series of working definitions should be established to ensure a common understanding.

Fraud-Related Definitions

Fraud (sometimes referred to as the fraudulent act) includes all the multifarious means human ingenuity can devise that are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes surprises, tricks, cunning or dissembling, and any unfair way by which another is cheated (Black’s Law Dictionary, 5th edition, 1979). Occupational fraud is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets (ACFE Report to the Nation, 1996). Corruption is the “paying off” of officials, public or private, for preferential treatment. Corruption encompasses four types of schemes: bribery, conflicts of interest, extortion, and illegal gratuities (W. Steve Albrecht et al. Fraud Examination, 2003). According to the FBI “White Collar Training Manual,” white-collar crime encompasses those criminal acts characterized by fraud, concealment, or a violation of trust that are not dependent upon actual or threatened physical force or violence.

The ACFE’s “Fraud Examiners Manual” defines financial statement fraud as the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements in order to deceive financial statement users.

When providing litigation advisory services, accountants use their knowledge, skills, abilities, experience, training, and education to support legal actions; forensic accountants normally carry out such activities by acting as consultants, expert witnesses, masters, or special masters. While forensic accountants may provide litigation support services in criminal cases, the majority of litigation support services involve civil litigation.

Another important facet of fraud and forensic accounting is the use of computer software, referred to as CATTs (computer-aided tools and techniques), to aid in the detection and investigation of fraud and other white-collar crimes. This includes the use of generalized audit software for data extraction and analysis; spreadsheet, database, and statistical software use for fraud detection and analysis; investigative tools such as data mining, link analysis software and case management software; as well as use of the Internet.

Identifying Skills and Abilities

Broad-based knowledge within the themes listed above is crucial to the success of entry-level forensic accountants. Beyond imparting knowledge, any viable academic or professional education program is expected to develop fraud and forensic accounting skills and abilities.

Identifying important skills and abilities (i.e., student-focused outcomes) is more challenging than simply identifying broad-based knowledge, and this was the primary task faced by the TWG. In short, the TWG answered the question, what specific skills and abilities, in addition to knowledge areas, should an entry-level forensic accountant possess to successfully enter the field and be effective? The answer entailed identifying and ranking specific skill sets. For example, should entry-level job recipients know how to determine whether an individual has failed to report income to the appropriate taxing authorities? Should they understand how assets can be hidden, and how to locate hidden assets?

Method of Curriculum Development

The planning panel concluded that anticipated career paths and the student applicant pool would drive curriculum choices by interested educational entities, instructional organizations, and others responsible for creating appropriate training material. The Exhibit captures those potential career paths.

The Exhibit begins with students. Based on the applicant pool, educational and instructional providers will determine the appropriate entry-level requirements. Once students are admitted to a program, the educational institution or agency will then be charged with developing students’ knowledge, skills, and abilities to enter the fields of fraud and forensic accounting. Identified career paths include positions at professional services firms, corporations, government or regulatory agencies, law enforcement, and legal service providers. The bottom two blocks of the Exhibit recognize that achieving long-term success in fraud and forensic accounting may require additional specialized training. Specialized training for entry-level professionals helps those individuals achieve the required level of competency, usually within a specific organization, where competency is considered a step beyond entry-level knowledge, skills, and abilities. Some specialized training will be organization-specific (e.g., FBI versus local law enforcement), while other specialized training may be task-specific (e.g., tracking down life insurance or property ownership rights, investigating stolen funds from a local business, tracing laundered drug money, or tracking terrorist financing schemes). Furthermore, experienced fraud and forensic accounting personnel require continuing professional education to maintain proficiency in the profession. Specialized training and continuing professional development (beyond entry-level fraud and forensic accounting skills) were outside the scope of the TWGED-FFA.

Drivers of Curriculum Choices

The outcome of the efforts of the TWG is a model curriculum for fraud and forensic accounting that identifies those areas of knowledge, skills, and abilities necessary to enter the field given the multiple career paths outlined in the Exhibit. In an applied discipline such as accounting, student placement and initial on-the-job investigative success are usually viewed as key performance indicators. Therefore, consideration was given to what potential employers require of entry-level employees and typical initial assignments.

Nearly all of the experts agree on certain essential skills and abilities for entry-level individuals. This list includes:

• Utilizing a variety of techniques to prevent, detect, and investigate fraud and financial crimes;
• Gathering, analyzing, and reporting evidence and other information; and
• Avoiding becoming a victim of fraud.

In addition to the core foundation of knowledge, these skills and abilities are essential for initial success in the field of fraud and forensic accounting.

Fighting Fraud

Fraud and forensic accounting affect the accounting profession every day. The need to identify the sources and uses of money in illegal activity is a sine qua non in every investigation, including terrorism and counterintelligence. Through the development and implementation of the TWGED-FFA, accountants will have one more tool to effectively and efficiently deal with the challenges faced in detecting financial crimes and tracing ill-gotten gains from illegal activities.

To receive the exposure draft of the model curriculum, e-mail your request to FFAModel@mail.wvu.edu.