Fraud Education for Accounting Students

Fraud Education for Accounting Students BONITA K. PETERSON Montana State University Bozeman Bozeman, Montana T he accounting profession recently has suffered several highly publicized fraud cases, including the Enron, WorldCom, and Waste Management cases. One result of this negative publicity is that leaders in the accounting profession have called for more fraud education in our country s universities. Joseph T. Wells, Chairman and Founder of the Association of Certified Fraud Examiners (ACFE), has implemented a program with the goal of having at least half of the universities in the United States teaching a fraud course within 5 years (Carozza, 2002). In addition, Barry Melancon, President and CEO of the American Institute of Certified Public Accountants (AICPA), stated that the AICPA will work toward promptly incorporating fraud prevention materials into the accounting curriculum and university textbooks. This will give students the knowledge and skills to understand the fundamental characteristics of fraud, identify factors that may indicate it exists and acquire enhanced interviewing techniques. The AICPA will work with academic institutions to develop appropriate materials, targeted for inclusion in college courses in the fall of next year (Melancon, 2002, pp. 29 30). Providing students with fraud education benefits both students and employers. After studying topics such as document examination, interviewing ABSTRACT. Most accounting educators agree that their students need to learn about fraud. In fact, Peterson and Reider (1999) reported that 74% of the 215 accounting educators responding to a survey strongly disagreed with the following statement: It is unlikely that students will encounter fraud in their career. Accounting students presently are receiving very little, if any, education in the area of fraud (Peterson & Reider, 2001). In this article, the author describes the status of fraud education today, explores possible reasons for its scarcity, and provides suggestions for content and materials that instructors can use to develop a fraud course. techniques, and public records searches, students become better consultants, auditors, tax professionals, and managers. Further, fraud specialists are highly employable, with some surveys showing this career to be among the most marketable and exciting ones for today s accounting students. For example, a recent U.S. News & World Report cover story listed forensic accountant as one of the eight most secure career tracks in the country (Levine, 2002). Levine stated that nearly 40% of the top 100 accounting firms are expanding their forensics and fraud services. Another survey found that forensics/fraud ranked seventh as growth areas among services provided by accounting firms (Klein, 2002). In addition, Mounce and Frazier (2002) reported preliminary empirical evidence indicating that the successful completion of a specific fraud course does have a positive effect on the hiring potential of a candidate applying for the position of assistant controller. Bundy, Ward, and Ward (2003) noted that, because of the increasing demand for expertise in forensic accounting, they expect universities to offer an increased number of fraud courses and even forensic accounting tracks in traditional accounting programs. In this article, I describe the limited fraud education offered today, explore reasons for its scarcity, and suggest content and materials that professors can use to develop a fraud course. The Current Status of Fraud Education in the United States Given the magnitude of the fraud problem and the frequency with which auditors are associated with fraud cases, one might expect that most accounting curricula would include fraud training. However, this is not the case. Groomer and Heintz (1994) discovered that 6 of 19 internal auditing courses surveyed included coverage on employee and management fraud. Furthermore, the coverage was limited, averaging 8.2% of the total class time. Peterson and Reider (1999) reported that most May/June 2003 263

accounting programs (83.7% of 215 respondents) covered fraud topics in a first auditing course (78.3%), an advanced auditing course (15%), or accounting information systems (7.2%). 1 On average, 6.7 hours of class time per term was devoted to discussing fraud. Peterson and Reider identified only 13 institutions offering a separate fraud course. Buckhoff and Schrader (2000) also identified 13 universities with a specific course devoted to fraud and found 76 institutions that taught fraud topics as part of another course. However, the fraud segment comprised only approximately 11% of those courses. Combining the findings of these two studies, Peterson and Reider (2001) identified only 19 universities currently offering a specific course on fraud. Interestingly, the few instructors who taught a specific fraud course frequently noted that the class was the most popular elective in their accounting curriculum (Peterson & Reider, 2001). Similarly, Buckhoff and Schrader (2000) found that the student reaction to the fraud examination course was extremely favorable (mean rating = 9.14 on a 10-point scale ranging from 1 [extremely unfavorable] to 10 [extremely favorable], n = 13). Possible Explanations for Limited Fraud Education Misunderstanding the Extent of the Fraud Problem Perhaps one reason for the limited amount of fraud education in our country s accounting curricula is that educators are not aware of the sheer magnitude of the fraud problem, even though they may understand that it is present. In recent years, researchers have conducted several large-scale national and international surveys to monitor the seriousness of fraud s effect on society. The findings reported in all of these studies are consistently alarming, especially when one considers that these fraud statistics are estimates. Not all cases of fraud have been discovered, and not all discovered cases of fraud are reported. A summary of three of the more recent surveys can provide an idea of the extent of fraud losses. In April 2002, the ACFE released the 264 Journal of Education for Business results of its most recent survey of certified fraud examiners (ACFE, 2002). The 2002 report was based on 663 fraud cases that were reported by the certified fraud examiners (CFEs) who investigated them. In total, the cases caused over $7 billion in losses. The ACFE report included the following findings: Over half of the fraud cases caused losses of at least $100,000; nearly one in six caused losses in excess of $1 million. Over 80% of the reported cases involved asset misappropriation, with cash being the targeted asset 90% of the time. Small businesses are especially vulnerable to asset misappropriation schemes, with the average loss being $127,500 (compared with $97,000 for larger businesses). Fraudulent financial statements, though the least common scheme, are the most costly form of occupational fraud; median losses were reported to be $4.25 million per occurrence. The most common methods of detection were by tip or by accident. The CFEs estimate that fraud losses in 2002 will be approximately 6% of revenues, or about $600 billion. Ernst & Young began conducting an international fraud survey in 1996 and performs new international surveys every few years to monitor changes in the environment in which fraud occurs. In the firm s most recent study, it reported results from 739 surveys received from respondents in 15 countries, representing 29 business sectors (Ernst & Young, 2000). Ernst & Young s survey also reported troublesome statistics. For example, the firm found that more than two thirds of the respondents had suffered from fraud in the prior 12 months, and almost 1 in 10 had suffered more than 50 frauds. These fraud losses were not restricted to a particular country or business sector. In terms of dollar losses, the firm reported that the total of the worst fraud loss suffered by each respondent over the previous year equaled $172 million. In addition, the survey indicated that 82% of all identified frauds were committed by employees. Rarely were these employees new to the organization, as Ernst & Young found that nearly half of the employees had been with their organization for over 5 years and that almost a quarter had been employees for more than 10 years. In fact, almost a third of the frauds were reported to have been committed by management. In its third U.S. fraud survey, KPMG Peat Marwick (1998) sent a questionnaire to 5,000 leading U.S. publicly held companies, not-for-profit organizations, universities, and governments. Individuals returning the questionnaire represented 21 industries, with sales ranging from under $100 million to over $5 billion. Sixty-two percent of the respondents reported that they were aware of fraud occurring in their organization during the past year. Forty-six percent of those respondents indicated awareness of 11 or more frauds during that time period, with the median fraud loss being $116,000. Perhaps not surprisingly, 35% of the respondents reported the belief that fraud was a major problem in their organization. All three of these surveys were follow-up studies; their results and those of their earlier counterparts consistently indicate that fraud is not an anomaly, but a trend. KPMG s 1998 survey reported that 94% of its respondents indicated the belief that the incidence of fraud will stay the same or increase, primarily because of economic pressures, inadequate punishment of convicted fraudsters, a weakening of society s values, and insufficient emphasis on prevention and detection. Lack of Room in the Accounting Curriculum Another possible reason for the limited amount of fraud education is that there may be little room for an additional course in the undergraduate accounting curriculum. Most educators would agree that courses in accounting principles, intermediate accounting, advanced accounting, accounting information systems, auditing, tax, cost accounting, and governmental or not-for-profit accounting are needed. Often intermediate accounting comprises two or three courses, and tax and auditing may be two terms each. These required accounting classes, in addition to the other

required business and nonbusiness courses needed to maintain accreditation, leave little room for a separate course on fraud. However, a fraud course is well suited as an elective for accounting seniors. In addition, with the implementation of the 150-hour semester rule required for candidates who sit for the Certified Public Accountant (CPA) Exam, a rule that most states have adopted, most of the country s future CPAs will possess a master s degree, and a fraud course makes an excellent graduate elective. Developing a Fraud Course Content For an idea of what topics to include in a fraud course, a look at any relevant professional certification can be useful. The certification most closely related to fraud expertise is that of the Certified Fraud Examiner, which is offered by the ACFE. The ACFE, currently numbering approximately 26,000 members, is the largest organization dedicated to informing and educating professionals in the field of fraud. Established in 1988, the ACFE defined fraud examination as a methodology for resolving allegations of fraud from inception to disposition. More specifically, fraud examination involves gathering evidence, taking statements, writing reports, testifying to findings, and assisting in detection and deterrence (ACFE, 1998). The ACFE identified the following four common bodies of knowledge in the discipline of fraud examination: fraudulent financial transactions, fraud investigation methods, legal elements of fraud, and criminology and ethics. A segment on fraudulent financial transactions can concentrate on specific schemes used to defraud organizations, including the methods used to commit and conceal these frauds. Fraud investigation methods focus on how to gather evidence legally of a potential fraud; they cover proper interview techniques, cataloging and maintaining evidence for the chain of custody, and obtaining records from public sources. A section on the legal elements of fraud can help students become familiar with the legal environment in which fraud is prosecuted. Topics might include the Constitution and Bill of Rights, civil and criminal fraud, rights of witnesses and suspects, and expert witnessing. Finally, a segment on criminology and ethics can help students understand psychological and sociological aspects of crime, as well as ethical issues in dealing with fraud. Buckhoff and Schrader (2000) noted that a well-designed fraud course should provide students with an opportunity to develop skills and knowledge in the following areas: (a) financial expertise; (b) fraud perpetrators and their motivations; (c) evidence collection and evaluation; (d) legal elements of fraud; (e) ethical and legal issues; (f) report writing, testifying, and interviewing of witnesses and/or perpetrators; and (g) critical thinking skills that enable understanding of the big picture. Buckhoff and Schrader s recommendations and the CFE common body of knowledge are both consistent with the AICPA President s call for accounting students to obtain the knowledge and skills to understand the fundamental characteristics of fraud, identify factors that may indicate it exists and acquire enhanced interviewing techniques (Melancon, 2002, p. 30). Teaching Materials The attempt to develop a fraud course covering the content suggested may seem overwhelming to instructors. However, fraud training material available on the market is sufficient for adaptation to the classroom. In the Appendix, I provide an assortment of textbooks, workbooks, trade books, case materials, and videos that an instructor may find useful in developing a fraud course. In addition, guest speakers have been a popular element of the few fraud courses currently in existence (Reider & Peterson, 1999). Potential guest lecturers can be found through the ACFE s Web site (www.cfenet.com), which maintains a listing of CFEs by state. In addition, CPAs, certified internal auditors, FBI agents, and law enforcement personnel who have investigated frauds can also make excellent guest speakers. Conclusion Fraud statistics and several recent national fraud cases leave no doubt that fraud is a serious problem for the accounting profession. It is critical that our accounting students the CPAs of the future learn the skills necessary to prevent, detect, and investigate fraud. Armed with fraud knowledge, our accounting students will be able to provide improved service to their future clients. As CPAs, our students will be in a better position to educate their clients about the risks of fraud and about fraud deterrence. Also, if our accounting students have been exposed to the various fraud schemes, they are more likely to recognize them during their careers as CPAs (Wells, 2002). As one graduate student who recently completed a fraud examination class wrote on his course evaluation, This training will be extremely important to me as an auditor because I am responsible for providing reasonable assurance of finding material fraud. If my life depended on swimming to shore, it would be nice to have attended swimming classes. NOTE 1. The total is greater than 100% because some programs teach fraud topics in more than one course. REFERENCES The Association of Certified Fraud Examiners (ACFE). (2002). Report to the nation on occupational fraud and abuse. Austin, TX: Author. The Association of Certified Fraud Examiners (ACFE). (1998). Fraud Examiners Manual (3rd ed.). Austin, TX: ACFE. Buckhoff, T. A., & Schrader, R. (2000). The teaching of forensic accounting in the United States. Journal of Forensic Accounting, 1(1), 135 146. Bundy, T. L., Ward, S. P., & Ward, D. R. (forthcoming 2003). Forensic accounting: The new face of the accounting professional. Journal of Business, Industry, and Economics. Carozza, D. (2002). Accounting students must have armor of fraud examination. The White Paper: Topical Issues on White-Collar Crime, 16(1), 30 33. Ernst & Young. (2000). Fraud: The unmanaged risk. An international survey of the effects of fraud on business. New York: Author. Groomer, S. M., & Heintz, J. A. (1994). A survey of advanced auditing courses in the United States and Canada. Issues in Accounting Education, 9(1), 96 108. Klein, M. (2002, June 3 16). Fraud warriors: CPAs uncover hidden niche with forensics. Accounting Today, 16, p. 1. KPMG Peat Marwick. (1998). 1998 fraud survey. Montvale, NJ: Author. May/June 2003 265

Levine, S. (2002, February 18). Careers to count on. U.S. News & World Report, p. 46. Melancon, B. (2002). A new accounting culture. Journal of Accountancy, 194(October), 27 30. Mounce, P. H., & Frazier, J. J. (2002). The effect of forensic accounting education on an accountant s employment potential. Journal of Forensic Accounting, 3(1), 91 102. Peterson, B. K., & Reider, B. (1999). Fraud education of accounting students: A survey of accounting educators. The National Accounting Journal, 1(1), 23 30. Peterson, B. K., & Reider, B. (2001). An examination of forensic accounting courses: Content and learning activities. Journal of Forensic Accounting, 2(1), 25 41. Reider, B., & Peterson, B. K. (1999). Share your expertise: Survey indicates ways to help teach next generation of CFEs. The White Paper: Topical Issues on White Collar Crime, 13(6), 35 36. Wells, J. T. (2002). Occupational fraud: The audit as deterrent. Journal of Accountancy, 193(April), 24 28. APPENDIX Examples of Teaching Materials Available for a Fraud Course Textbooks and Workbooks Financial Investigations: A Forensic Accounting Approach to Detecting and Resolving Crimes, by the Internal Revenue Service Criminal Investigation Division. 384 pages for textbook, 170 pages for workbook. Revised versions published in 2002. Sold as a set only. Can be purchased online at <www.gpo.gov> (click on U.S. Government Online Bookstore ). Facilitator s guide also available, and consists of a CD-ROM and booklet. The CD-ROM contains a test bank and PowerPoint slides. Facilitator s guide is a restricted controlled item. Fraud Examination, by W. Steve Albrecht. 530 pages. Published in 2003 by South-Western. Instructor s manual is also available. Fraud Examination for Managers and Auditors, by Jack C. Robertson. 590 pages. Published in 2000 by R. T. Edwards, Inc. Instructor s manual is also available. Occupational Fraud and Abuse by Joseph T. Wells. 564 pages. Published in 1997 by Obsidian Publishing Company. A college edition is being written, with plans for fall 2003 availability. A CD-ROM is available upon request to the ACFE, and the contents include PowerPoint slides and a final exam with solutions. Trade Books a Accountant s Guide to Fraud Detection and Control, 2nd edition, by Howard R. Davia, Patrick C. Coggins, John C. Wideman, & Joseph T. Kastantin. 368 pages. Published in 2000 by John Wiley & Sons, Inc. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 2nd edition, by Howard Schilit. 296 pages. Published in 2002 by McGraw-Hill. 266 Journal of Education for Business Financial Statement Fraud: Prevention and Detection, by Zabihollah Rezaee. 315 pages. Published in 2002 by John Wiley & Sons, Inc. Fraud 101: Techniques and Strategies for Detection, by Howard R. Davia. 245 pages. Published in 2000 by John Wiley & Sons, Inc. Fraud Auditing and Forensic Accounting: New Tools and Techniques, 2nd edition, by G. Jack Bologna & Robert J. Lindquist. 249 pages. Published in 1995 by John Wiley & Sons, Inc. a Instructor s resources not avaliable. Case Materials Contemporary Auditing: Real Issues & Cases, 4th edition, by Michael C. Knapp. 458 pages. Published in 2001 by South- Western. All cases may not be applicable to a fraud course. Professor/Practitioner Case Development Program: Cases on Fraud, Corporate Governance and Ethics, various authors. CD-ROM compiled in 2002 by the AICPA. Additional case materials can be found in various academic accounting journals that publish cases. Examples include the following: Issues in Accounting Education Developing Student Abilities to Recognize Risk Factors: A Series of Scenarios, by Carolyn A. Strand, Sandra T. Welch, Sarah A. Holmes, & Steven L. Judd, (February 2002), 57 67. Comptronix, Inc.: An Audit Case Involving Fraud, by James L. Boockholdt, (February 2000), 105 128. Brodnax Minerals Company: A Case Study on Auditors Responsibilities, by John T. Reisch, (November 1999), 589 612. Fraud Detection and Investigation: Microcomputer Consulting Services, by Bonita K. Peterson & Thomas H. Gibson, (February 1999), 99 115. Embezzlement at the University of California: An Instructional Case in Employee Fraud, by Peggy D. Dwyer, (November 1998), 975 984. Journal of Accounting Education Student Health Services: A Case of Employee Fraud, by Bonita K. Peterson & Thomas H. Gibson, (First Quarter, 2003), 61 73. Computer Assisted Analytical Procedures Using Benford s Law, by Philip D. Drake & Mark J. Nigrini, (Spring 2000), 127 146. The Journal of Accounting Case Research Soccer Club Embezzlement, by Asbjorn Osland (Fall 2002), 49 59. The Smiths and the Government Welfare Benefit Case, by Bonita K. Peterson & Angela D. Ammann, (Fall 2002), 38 48. Qualitative Analytical Procedures and Management Fraud: The Case of The Regina Company, by Thomas G. Calderon, Edward J. Conrad, & Brian Patrick Green, (Summer 2000), 163 174. The High Cost of Low Prices at Phar- Mor: A Research Case on Financial Statement Fraud and Auditor Liability, by David M. Cottrell & Steven M. Glover, (Summer 2000), 147 154. Videos a Beyond the Numbers: Professional Interview Techniques. Includes three hidden camera interviews conducted by a CFE investigating cases of possible missing assets and embezzled funds. Cooking the Books: What Every Accountant Should Know About Fraud. Highlights three large financial statement frauds and includes interviews with the actual people involved. The Corporate Con: Internal Fraud and the Auditor. Illustrates common financial frauds committed by employees and managers within business. Features interviews with seven former employees, many taped in prison. Finding the Truth: Effective Techniques for Interview and Communication. Focuses on effective communication, including identifying signs of deception. The Fraud Trial. Examines the legal process involved in trying someone suspected of fraud. Contains actual footage of the trial of an assistant police chief suspected of embezzling money from the police department. Fundamentals of Computer Fraud. Discusses how to prevent and detect computer fraud schemes. How to Detect and Prevent Financial Statement Fraud. Analyzes the financial statement fraud of Crazy Eddie, a chain of electronics stores in New York. Includes interview with the CPA involved. Making Crime Pay: How to Locate Hidden Assets. Provides an overview of common asset-hiding methods and teaches the techniques necessary to detect these schemes. Other People s Money: The Basics of Asset Misappropriation. Concentrates on specific asset misappropriation methods that employees commonly use to defraud their organizations. a Produced by the ACFE. Additional Instructor Reference Materials Fraud Examiners Manual, 3rd Edition, by Joseph T. Wells, Nancy S. Bradford, Gilbert Geis, John D. Gill, W. Michael Kramer, James D. Ratley, & Jack Robertson. Three

volume set, published in 2001 by the Association of Certified Fraud Examiners. Fourth edition due out in 2003. PPC s Guide to Fraud Detection (formerly Guide to Fraud Investigations), by W. Steve Albrecht, Douglas R Carmichael, Michele M. Stanton, D. Keith Wilson, Meryl L. Reed, & Cherie W. Shipp. Available in print, CD-ROM, or online for various prices depending on the number of users. Published in 2003 by Practitioners Publishing Company. May/June 2003 267