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Corporate
Fraud Handbook: Prevention and Detection, Second Edition
By Joseph T. Wells
John Wiley & Sons, Inc., 2007; ISBN: 0-470-09591-1;
442 pages, hardcover, $68.
Reviewed by Allan M. Rabinowitz
NOVEMBER 2007
- Joseph Wells has updated his exceptional writings on the topic
of fraud by basing this volume on the 2006 Report to the Nation
on Occupational Fraud and Abuse, the latest of four periodic surveys
conducted by the Association of Certified Fraud Examiners (ACFE).
He founded that organization in 1988 after spending nine years
as an FBI agent specializing in investigating white-collar crime
and another decade heading Wells & Associates, consulting
criminologists in the field of white-collar crime prevention,
detection, and education.
As chairman
of the ACFE since its inception, he has sought to identify and
widely disclose the principal patterns of fraud that result from
the many thousands of cases with which he has become familiar.
His research has encompassed the work of thousands of certified
fraud examiners (CFE), who usually have responsibility for fraud
deterrence and detection in the organizations for whom they work.
During the past three years, the ACFE has grown from nearly 30,000
members to more than 38,000, indicating the heightened significance
of this profession. Antifraud training and education is provided
by the ACFE, and it sponsors the CFE credential.
The 2006
Report is a study of 1,134 actual cases of occupational fraud,
more than double the number in the 2004 Report, additionally showing
how specific fraud methods relate to particular organizational
departments or jobs. Cases that did the greatest harm were focused
upon. Fraud examiners participating in the survey estimated that
an average 5% of gross revenue was lost by U.S. organizations
to fraud and abuse, which would project to a startling $650 billion
slice of the nation’s gross domestic product. The median
loss in these cases was $159,000, with one-fourth of them reaching
a million dollars or more and nine cases reaching at least a billion
dollars.
Statistics
are presented on perpetrators’ position levels, genders,
ages, education, tenure, extent of collusion and criminal histories,
along with the victims’ type of organization and number
of employees. Case results are quantified in terms of an employer’s
adverse actions taken against perpetrators, criminal referrals,
civil suits, legal actions not taken, and recoveries by victims.
An exhibit discloses how the frauds were initially detected.
Upon reviewing
the more than 3,600 fraud cases covered in total by the four ACFE
periodic surveys, it was found that they could all be meaningfully
grouped into three broad categories—asset misappropriations
involving theft or misuse, corruption by perpetrators who improperly
used business influence to benefit themselves or others, and fraudulent
statements that purposefully misreported information in order
to mislead their readers. An exhibit indicates the percentage
of the total 2006 survey cases falling into each of these categories
and the median cost of each case in each category.
Early in
the book, Wells defines both fraud and abuse and reviews social
research done by others in these areas as well as the conclusions
they reached. The bulk of the book delves into the types of improprieties
that make up each of the three broad categories of fraud, with
21 interesting cases described in some detail to provide insight.
Dozens of improper acts are carefully explained and illustrated
so that readers with little or no background in accounting or
finance will have no difficulty in understanding them. Statistics
along the lines previously mentioned for the cases in the 2006
report are broken down for specific acts, such as cash skimming,
check tampering, billing schemes, noncash theft, bribery, conflicts
of interest, and fraudulent financial statement schemes. Practical
guidelines for the detection and prevention of each act are concisely
outlined.
The section
on fraudulent statements contains a summary of the Sarbanes-Oxley
Act (SOX), the work of the Public Company Accounting Oversight
Board (PCAOB), and the value of ratio analysis in detecting fraud.
A final chapter contains a discussion of fraud deterrence by organizations
through employee education, proactive and evident fraud policies,
surprise audits, and convincing employees to report suspicious
activity. A sample code of business ethics and conduct is included
in an appendix.
Wells has
long been recognized as the leading authority on organizational
fraud, and this book certainly reinforces that reputation. The
book is of distinct value to everyone engaged in auditing practice,
middle managers and executives in all forms of entities, and small
business owners, all of whom too often easily fall prey to the
types of employee wrongdoing that are discussed.
I also strongly
believe that the book should be required reading for anyone embarking
on an auditing career, because it effectively presents the wide
variety of pitfalls that may lay in store for the neophyte auditor.
These persons, who are assigned the detailed audit work, are typically
unaware of what improprieties they might encounter. A reasonable
study of this comprehensive handbook can infuse readers in an
audit position with a healthy measure of wariness and skepticism
as they go about their duties, sparing a business the grief of
not detecting existing conditions of fraud.
Allan
M. Rabinowitz, CPA, is a professor of accounting at the
Lubin School of Business, Pace University. His review of the first
edition of the Corporate Fraud Handbook was published in
the January 2005 issue of The CPA Journal.
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