AntiFraud Education in Academia

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Anti-Fraud Education in Academia

• Presented by
• Thomas Buckhoff, Ph.D., CPA, CFE
• EideBailly Professor of Forensic Accounting
• North Dakota State University

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Quote of the Day

• In order to boost revenues from consulting
  services, the ancient profession sacrificed the
  public confidence that underpinned its
  reputation. Now accountants wallow at the bottom
  among professions in public-opinion polls they
  topped 20 years ago.
• Source Wall Street Journal 3/14/02

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Agenda

• Definitions
• Auditors and fraud
• Why teach fraud examination?
• Fraud examination course
• Future of anti-fraud education

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Part 1 Definitions

• Forensic accounting
• Asset-theft fraud
• Financial statement fraud
• Fraud examination

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What is forensic accounting?

• The application of accounting principles,
  theories, and discipline to facts or hypotheses
  at issue in a legal dispute and encompasses every
  branch of accounting knowledge.
• Source AICPA

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Occupational Fraud and Abuse (aka asset-theft
fraud)

• The use of ones occupation for personal gain
  through the deliberate misuse or theft of the
  employing organizations resources or assets.

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Asset-theft fraud Example

• Fraud perpetrator
• Bookkeeper for small health care facility
• Fraud methodology
• Theft of checks
• Fraud facilitator
• Inadequate controls
• Fraud loss 320,000

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Financial Statement Fraud

• 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.
• Source Association of Certified Fraud Examiners

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Financial Statement Fraud Examples

• Adelphia
• Dynegy
• Enron
• Kmart
• Merck
• Qwest
• Tyco
• WorldCom
• Xerox

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What is fraud examination?

• Fraud examination encompasses
• Fraud detection
• Fraud investigation
• Fraud prevention
• Skills required of forensic accountants
• Financial expertise
• Fraud knowledge
• Knowledge of legal system
• Ability to work with people

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Part 2 Auditors and Fraud

• Historically, auditors were hired to ferret out
  financial statement fraud
• Pressure to boost revenues via consulting
  services compromised the integrity of audits
• Emergence of drive-by audits

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ACFE Fraud Survey (2002)

• 600 billion lost to fraud annually
• Median losses by type of scheme
• Asset misappropriations 80,000
• Corruption 530,000
• Fraudulent statements 4,250,000
• Small businesses most vulnerable to fraud
• Only 11.5 of fraud schemes detected during
  financial statement audits

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The Worsening Crisis of Confidence on Wall Street
(2002)

• Findings from Weiss Ratings, Inc.
• Auditors gave clean opinions to 94 of public
  companies subsequently involved in accounting
  irregularities
• Aggregate loss in market value to shareholders
  1.276 trillion
• Of the audit clients going bankrupt between
  1/1/2001 and 6/30/2002, 42 received clean
  opinions

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The COSO Study (1999)

• Examined a random sample of 204 financial
  statement fraud cases investigated by the SEC.
  Some highlights
• Mean misstatement 25 million
• Common target CEO (72 of cases)
• In 29 of cases, the external auditor was named
  by the SEC as a target.
• Board members were not independent.
• No audit committee or inactive one.

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KPMG Fraud Survey (1998)

• Why did most of the frauds occur?
• Poor or non-existing internal controls
• 62 of respondents reported that they had
  suffered losses due to fraud during the past
  year.
• Only 4 of frauds were discovered during
  financial statement audits.

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Average Fraud Losses by Type of Scheme
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Why Dont Auditors Detect Fraud?

• Asset-Theft Fraud
• Financial statements are fairly presented
• Financial Statement Fraud
• Financial statements are not fairly presented
• Auditors focus on outcomes of transactions rather
  than the reasons underlying them.

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The AICPA and Fraud

• We will design anti-fraud criteria and controls
  intended for public corporations.
• We believe all members of the AICPA should
  commit more time to continuing education in the
  area of fraud detection.
• Source Barry Melancon on 9/4/02.

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Part 3 Why teach fraud examination?

• Fiduciary duty
• Accounting curriculum
• Employment opportunities

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Fiduciary Duty

• Restore credibility in the profession
• Instill students with professional skepticism
• Provide students with specific anti-fraud
  knowledge and skills

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Accounting Curriculum

• Consistent with AECC and AACSB recommendations
• Stimulates critical thinking
• 150-hour requirement

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Employment Opportunities

• Most secure career track
• Demand for accounting detectives expected to
  increase 20 to 50
• Diverse array of lucrative job
  opportunities

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Part 4 Fraud examination course

• Course enrollments and placement in the
  curriculum
• Course objectives
• Specific course topics and assignments

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Course Enrollments by Major

• Total enrollments over six years 217
• Average class size 31 students
• Attracts students outside of College of Business
• Popularity triggered addition of advanced fraud
  examination course

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Placement in the Curriculum

• Prerequisites Accounting principles course and
  computer proficiency
• Good to take early in program to make adjustments
  to career aspirations
• Required for all criminal justice majors
• Elective for accounting and MBA students

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Course Objectives

• Understand nature, extent, and causes of fraud
• Explore methods for fraud detection,
  investigation, and prevention
• Recognize financial statement fraud

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Fraud Examination Specific Topics

• The nature and extent of fraud
• The fraud triangle
• Fraud symptoms/red flags
• Legal elements of fraud
• Evidence gathering
• Investigative methods
• Fraud investigation reports
• Fraud prevention programs
• Criminal justice system

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Resolving Irregularities

• Identify irregularity
• Review source documents and other records
• Employ other investigative procedures
• Interview suspect(s)

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Conducting Fraud Examinations

• Understand controls over cash flows
• Identify weaknesses
• Generate fraud theories
• Collect and evaluate evidence
• Estimate losses
• Report findings
• Assist in filing charges and/or claims

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Fraud Examination Assignments

• Reading assignments
• Research paper on specific fraud case
• Respond to end-of-chapter questions in IRS book
• Financial statement analysis team project
• Examine and evaluate bank statements and public
  records
• Mock trial of embezzlement case

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Part 5 Future of Anti-Fraud Education

• Fraud examination course to become required
  course
• Fraud examination minors and/or majors
• Increased interest in CFE credential

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Anti-Fraud Education

• University accounting programs should provide
  students with the knowledge and skills to
  understand the fundamental characteristics of
  fraud, identify factors that indicate it exists,
  and acquire enhanced interviewing skills.
• Source Barry Melancon on 9/4/02

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Dedicated courses in fraud examination
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Final Thought

• With the profession facing a credibility crisis,
  a wide array of criticshave begun calling for a
  major overhaul of the accounting system.
• Source Wall Street Journal (2/6/2002)
• That overhaul must extend all the way to the
  halls of academia.

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Who has the first question?
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Contact Info

• Thomas Buckhoff
• Accounting Info. Systems
• 403D Minard Hall
• North Dakota State University
• Fargo, ND 58105-5075
• 701-231-8512
• Thomas.Buckhoff_at_ndsu.nodak.edu
• Fraud Examination Course Website
• http//www.ndsu.nodak.edu/ndsu/buckhoff/courses/AC
  CT410610/