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An
Ounce of Prevention …
JUNE 2007
- If you were to ask John or Jane Q. Public how to deter white-collar
crime, I suspect the most common response would be “harsher
punishment.” Unfortunately, research shows that longer prison
sentences are rarely a consideration on the part of a fraudster,
who is generally convinced that his crime will go undetected.
According to the Association of Certified Fraud Examiners’
(ACFE) Report to the Nation on Occupational Fraud and Abuse (www.acfe.com/fraud/report.asp),
organizations victimized by fraud rarely recover their losses.
Many fraud
experts agree that the most cost-effective way to fight fraud
is to prevent it from happening, and that one of the best ways
to prevent it is by increasing the perception of detection.
This concept is relatively simple: A fraudster who perceives that
he might be caught is less likely to commit the crime. One way
to enhance the perception of detection is to increase the number
of fraud and forensic accounting experts in the field. Just as
law enforcement agencies put more cops on the beat to reduce street
crime, an increase in the number of fraud “cops” could
do the same for white-collar crime.
Interest
in the area of fraud and forensic accounting has grown dramatically
since the large corporate financial acounting scandals broke in
late 2001 and 2002. And independent auditors of public companies
are not the only ones seeking to learn more about fraud detection
and deterrence. The IRS has increased its fraud-detection training
for agents in an effort to improve taxpayer compliance. Current
accounting regulations and legislation require that corporate
officers, boards of directors, and audit committees demonstrate
their commitment to detecting and deterring fraud by establishing,
for example, effective internal controls and a whistleblower hotline.
Educators from the accounting, criminal justice, and business-related
disciplines are investing in professional development in this
area because of student demand for fraud and forensic accounting
classes.
A
Prescription for Detection
Last month
I was one of about 200 attendees at the First Annual Fraud and
Forensic Accounting Education Conference. Georgia Southern and
West Virginia universities cosponsored this national conference,
which was a byproduct of a project funded by the U.S. Department
of Justice. The purpose of the project was to develop a model
curriculum for fraud and forensic accounting education based on
input from experts in the field. The conference attracted an almost
equal mix of educators and practitioners, and the result was a
near-perfect blend of theory and practice. The sessions included:
how to conduct a fraud examination, expert witness testimony,
data mining, forensic interviews and interrogations, litigation
support services, the legal environment of forensic accounting,
and fraud examination/auditing case simulations for the classroom.
At the conference’s
opening ceremony, ACFE founder and chairman Joseph T. Wells offered
two main suggestions for the accounting profession: 1) fraud detection
and deterrence should be an integral part of accounting education;
and 2) a fraud expert should be required to be part of the audit
team for every public company audit.
In light
of the recent academic cheating scandals at some high-profile
business programs, perhaps we should extend Wells’ first
suggestion to all business-related education. After teaching an
undergraduate fraud examination course for several semesters,
I noticed that the students’ mindset changed about halfway
through the course. By the end of the course, they demonstrated
greater awareness with regard to fraud and ethical issues—an
outcome generally associated with the purpose of a business ethics
course.
Similarly,
the recent financial scandals in the Long Island, New York, school
districts lead me to suggest that Wells’ second recommendation,
to require a fraud expert on all public company audits, should
be expanded to cover audits of publicly funded entities. This
would include schools, hospitals, and other significant public-interest
entities (SPIE), such as banks, insurance companies, utilities,
and charities.
If regulators
and legislators are serious about protecting the public, they
need to deter fraud before it happens. As my grandma used to say,
“An ounce of prevention is worth a pound of cure.”
As always,
I welcome your comments and suggestions.
Mary-Jo
Kranacher, MBA, CPA, CFE
Editor-in-Chief
mkranacher@nysscpa.org
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