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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.
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