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The Role of Research in Fraud Prevention

Mary-Jo Kranacher, MBA, CPA/CFF, CFE

The focus of antifraud efforts is evolving from detection to prevention. Antifraud professionals would agree that, at best, it's difficult for most victims to recover assets stolen as a result of fraud schemes. Fraudsters tend not to save their ill-gotten gains, and by the time a fraud is detected, the victim can generally kiss the stolen assets goodbye.

Fraud has had a significant impact on the bottom line of organizations worldwide. One of the biggest challenges for fraud examiners is staying a step ahead of white-collar criminals. Rather than simply reacting to this problem, professionals can take proactive measures to help substantially mitigate fraud losses. Increasingly, practitioners are turning to cutting-edge research for ideas, insights, and tips to reduce the incidence and impact of fraud and financial crime.

Potential Research Areas

To address these issues, thought leaders from the Institute for Fraud Prevention (IFP)—a coalition of business, government, and academic institutions dedicated to multidisciplinary research focused on the prevention of fraud and corruption—have shared their ideas on potential research areas and on how the profession might find answers to the following questions:

  • How long should prison sentences be for white-collar criminals in order for them to be effective? Is the primary purpose of incarceration retribution or deterrence? Do longer periods of incarceration provide greater deterrence for others who might consider committing fraud?

  • Is there a particular personality profile that can help predict who is likely to commit fraud? (This concept might remind some readers of the movie Minority Report, and they might wonder how such information could be used without violating individuals' civil liberties. No one is suggesting that individuals be prosecuted for crimes they might commit in the future, but preventative training could target those individuals who represent a heightened risk of committing fraud.)

  • Are there specific types of transactions that could help identify moneylaundering activities? (Financial institutions are required by the Bank Secrecy Act of 1970—as amended by the Patriot Act of2001—to establish anti-money laundering programs; these institutions are also willing to put their money behind quality research in this area.)

Challenges and Benefits of Research

In the past, some academics were accused of “straying too far off the reservation” for their research to be worthwhile. Today's model, in which academics and practitioners collaborate on research projects, helps ensure that studies focus on topics that are applicable and useful to business practice.

The Association to Advance Collegiate Schools of Business (AACSB) International—a global accrediting organization for undergraduate and graduate programs in accounting and business—recognized in a published study, “Impact of Research: A Guide for Business Schools” (http://aacsb.edu/Publications/researchre-ports/currentreports/impact-of-research-exploratory-study.pdf), the need for researchers to show evidence that an investment in research will positively affect a business's bottom line.

Like other researchers, individuals who are studying in the area of fraud prevention face a significant hurdle in gaining access to data needed to conduct studies, as well as grant money to help support their research; however, the IFP is helping fraud researchers on both counts. Just as crucial is the effective dissemination of the research results to external stakeholders. When research outcomes are poorly communicated to the appropriate audience, the financial investment used to support these studies falls short of its maximum potential impact.

Practitioners often lament that they waste limited time and resources catching small frauds or sifting out false positives with the numerous metrics used to identify red flags for fraud. Perhaps current and future research will pinpoint factors that can more reliably portend the likelihood of major fraud schemes. In the meantime, we should recognize that detecting minor schemes today might prevent them from growing into major frauds tomorrow.

As always, I welcome your comments.

The opinions expressed here are my own and do not reflect those of the NYSSCPA, its management, or its staff.

Mary-Jo Kranacher, MBA, CPA/CFF, CFE. Editor-in-Chief. ACFE Endowed Professor of Fraud Examination, York College, The City University of New York (CUNY) mkranacher@nysscpa.org.

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