Accounting, business, and criminal justice students in colleges and universities are graduating unprepared for the “real world,” because few are receiving any fraud examination training. Consequently, when they stumble upon fraud in the workplace, they do not know what to do.
Occupational fraud and abuse costs organizations billions of dollars annually; higher-education business and criminal justice schools have a responsibility to help stave off this horrendous dilemma. Fraud examination and forensic accounting classes have to become part of the academic curriculum.
An accepted business principle is that successful organizations must satisfy the needs of customers. In academia, the customers include the organizations providing employment to those graduating from colleges and universities. Successful academic institutions must satisfy the needs of the organizations hiring their graduates.
Accordingly, there are four compelling reasons why fraud examination is a “customer need” and should be taught to accounting, business, and criminal justice graduates. First, the substantial yet unnecessary costs associated with occupational fraud and abuse make it more difficult for businesses to compete in an increasingly competitive world. Second, the failure to detect fraud during financial statement audits costs accounting professionals billions of dollars in litigation expenses and this damages their credibility as professional consultants. Third, the demand for fraud examiners and forensic accountants has been increasing dramatically over the last decade. Fourth, the limited supply of people with the knowledge and skills needed to fight the battle effectively against fraud has created a huge void in the market. The following sections discuss each of these reasons in more detail.
The Cost of Fraud
The complexity of today’s business transactions and computerized information systems creates abundant opportunities for employees to defraud their employers. Recent fraud surveys suggest that more and more employees take advantage of these increasing opportunities for committing fraud. In 1998, KPMG, LLP – one of the “Big Five” accounting firms – conducted a fraud survey of 5,000 leading U.S. companies and organizations. The results of the survey revealed that the median loss per fraud incident was $116,000. Moreover, 59 percent of the respondents believed that fraud will become more of a problem in the future (Sherman, 1999).
According to a survey of 2,608 Certified Fraud Examiners conducted by the Association, occupational fraud and abuse costs organizations in the United States more than $400 billion per year or an estimated 6 percent of total revenues (Wells, 1997, 35). The hidden nature of fraud makes it difficult, if not impossible, to determine how much fraud actually is costing organizations today. However, both the frequency and magnitude of fraud losses have convinced most organizations that to remain competitive they must intensify their efforts to detect and prevent fraud.
Fraud and the Accounting Profession
The accounting profession’s inability to detect fraud costs it billions of dollars in litigation-related expenses. In 1998, the “Big Five” accounting firms faced an unprecedented $30 billion in total legal claims arising from audit and consulting malpractice lawsuits (MacDonald, 1998). Some recent examples: KPMG agreed to pay $75 million to settle four lawsuits brought by Orange County, Calif., for “failing to detect and warn of risky investments” that caused $1.6 billion in losses and led to the nation’s biggest municipal bankruptcy (Petersen, 1998). The accounting firms formerly known as Price Waterhouse and Ernst & Whinney paid $125 million to the liquidators of the Bank of Credit and Commerce International (BCCI) to settle legal actions initiated after BCCI collapsed under a debt load exceeding $12 billion (Business, 1998). The majority of lawsuits against accounting firms implicate the firms for failing to detect fraudulent financial statements. The litigation costs associated with the settlement of these lawsuits totals billions of dollars and, by some estimates, approaches 9 percent of accounting and auditing service revenues.
In an effort to clarify the accounting profession’s responsibility for detecting fraud, the Auditing Standards Board (ASB) recently issued Statement on Auditing Standards (SAS) No. 82, “Consideration of Fraud in a Financial Statement Audit.”
According to the standard, “because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. … The auditor’s responsibility relates to the detection of material misstatements caused by fraud” but does not ensure the detection of fraudulent activity per se (Mancino, 1997, 32).
Notwithstanding the profession’s official position, many accounting professionals accept the reality that both the public and the courts expect auditors to detect fraud. As a matter of survival, they seek to acquire knowledge and skills in the area of fraud detection, investigation, and prevention.
The Demand for Forensic Accountants and Fraud Examiners
Forensic accounting is a rapidly growing specialization of accounting concerned with: (1) the detection, investigation, and prevention of both occupational fraud and financial statement fraud, and (2) the rendering of other litigation-support services.
Forensic accounting has been defined formally as “the application of an investigative mentality to unresolved issues, conducted within the context of the rules of evidence. … . It encompasses financial expertise, fraud knowledge, and a strong knowledge of the legal system (Bologna et al., 1993, 232)”. Recently, U.S. News and World Report listed forensic accounting as one of the “20 hot job tracks” for the future (Beddingfield et al., 1996, 89). Robert Half International, a recruiting organization for financial professionals, estimates that the demand for forensic accountants increases by 100 percent per year.
Since 1992, Price Waterhouse had more than doubled the number of its forensic accountants to 500, and Coopers & Lybrand had increased the number of its forensic accountants by more than fivefold to 380 (MacDonald, 1996, B1). (These firms have since merged to form PricewaterhouseCoopers.) In a matter of years, forensic accounting and fraud examination have become “an incredibly important discipline for today’s complex business environment” (Inkster, 1996).
A Void in the Market
Although the demand for fraud examiners and forensic accountants is high, the supply of people possessing knowledge and skills in this area is low. Historically, the accounting profession has been relied upon to develop a system to safeguard the assets of an organization. However, as discussed earlier, the accounting profession does not accept the responsibility to detect fraud during financial statement audits. In all fairness to external auditors, they are in a poor position to detect fraud during financial statement audits. Indeed, the 1998 fraud survey by KPMG, found that only 4 percent of the frauds identified by respondents were discovered during financial statement audits. Those in the best position to detect and prevent fraud are the people within the organization. Unfortunately, those within the organization typically have little or no knowledge and skills in fraud detection and prevention.
The seriousness of the fraud problem combined with the lack of people possessing knowledge and skills in this area has created a void. In response, the Association emerged in 1988 to help fill this void. Since that time more than 20,000 Members have joined the ranks of this fraud-fighting professional organization. However, more “soldiers” are needed to wage war effectively against occupational fraud and abuse.
If colleges and universities are truly concerned about the needs of their customers (i.e., employers of their graduates), then they should provide accounting, business, and criminal justice students with courses in fraud examination and forensic accounting. Accordingly, I conducted a survey of higher-education institutions across the United States to determine the extent to which courses in forensic accounting are being taught to accounting and business students.
Of the 610 colleges and universities contacted, 267 returned the survey – a response rate of 44 percent. The results of the survey are given in the following table:
| Academic Institutions’ Coverage of Forensic Accounting | |||
| Number | Percent | Perceived Importance of Topic* | |
| Currently offer or plan to offer a course in forensic accounting | 24 | 9 | 7.8 |
| Discuss forensic accounting as part of another course | 76 | 28 | 5.9 |
| Do not cover the topic of forensic accounting at all | 167 | 63 | 4.1 |
| Total (Average) | 267 | 100% | (4.7) |
*Based on a 10-point scale in which 1 = “not important” and 10 = “extremely important.” |
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As indicated in the table, 24 institutions currently offer (13) or plan to offer (11) in the near future full courses in forensic accounting. The 76 institutions teaching forensic accounting as part of another course estimated that approximately 11 percent of the content of these courses relates to forensic accounting. Finally, 167 institutions reported that they do not discuss forensic accounting in any of their courses.
Based on a 10-point scale (in which “1 = not important,” and “10 = extremely important”), the 267 institutions considered offering courses in forensic accounting to be only moderately important (average = 4.7). As shown in the table, 24 institutions that either offer or plan to offer a course in forensic accounting placed much more importance (average = 7.8) on offering the course. Given the increasing importance and demand for fraud examiners and forensic accountants, the number of academic institutions offering courses in fraud examination and forensic accounting should increase dramatically over the next decade.
In 1997, I developed a course in forensic accounting and fraud examination with some assistance from W. Steve Albrecht, Ph.D., CFE, CPA, CIA, director of the School of Accountancy and Information Systems at Brigham Young University in Provo, Utah (and first president of the Association).
I teach the course once a year at North Dakota State University (NDSU) and also offer it as an Internet-based course at various times during the year. The required books for the course include:
These books are supplemented with videos and publications from the Association. Topics covered in this course include:
Students enrolled in the course are required to participate in fraud examination projects to acquire some “hands-on” experience in fraud detection, investigation, and/or prevention, and to provide fraud examination services to local businesses. The projects expose students to the reality and magnitude of the fraud problem facing businesses today and show them the importance of a good system of internal controls.
Following are some examples of fraud projects students have completed in this course.
One student noticed that the dining center at a local university did not have controls in place to ensure that those who were given food actually paid for it. Customers easily could bypass cash registers and sit down or exit without paying. The student discussed this with the dining center manager who did not consider it a serious problem. Consequently, the student received permission to conduct a surveillance to determine the extent of the problem. During a two-hour surveillance, 28 people picked up food and then either sat down or exited without paying for their meals. These unexpected findings motivated the dining center manager to implement many of the recommendations made by the student conducting the project.
A group of students reviewed the internal controls over cash receipts at a fast-food establishment in a local mall. They found the controls inadequate to ensure that all of the cash received during a day was deposited in the bank. The store was not reconciling any of the cash register tapes to the bank statements. The students reconciled two years worth of cash register tapes to the corresponding bank statements and found a $40,000 shortage. One of the students confronted the manager (the most likely suspect) with the evidence and the manager refused to answer questions and promptly resigned his position. The owner chose not to prosecute the manager but did implement most of the students’ recommendations for improving control over cash receipts. The profits of the business have more than tripled since the manager’s resignation.
A group of students received permission from a business owner to see how easily they could shoplift merchandise from a collectibles store in a mall. The students easily shoplifted the small high-priced merchandise without being detected. Moreover, they also were able to return the items – without receipts – and receive cash refunds. Consequently, the business owner implemented many of the students’ recommendations for improving internal controls.
A certified public accountant (CPA) was under investigation for an audit of a bankrupt local business college. Working in conjunction with a local law firm engaged in a civil action against the college, a group of students reviewed the working papers of the CPA and found them to be incomplete and inconsistent with Generally Accepted Auditing Standards (GAAS). A report citing the deficiencies was sent to the attorney representing the CPA who responded by saying, “My client (the CPA) admits she was in over her head on this audit.”
Consequently, the CPA is being sued for negligence to help compensate students who suffered economic damages while attending the now-bankrupt business college.
Student/Employer Reaction to the Course
The 13 colleges and universities currently offering a course in forensic accounting each were asked to rate both student reaction and employer reaction to the course on a 10-point scale in which 1 = “extremely unfavorable” and 10 = “extremely favorable.” Student reaction to the course has been extremely favorable (average rating = 9.1) and employer reaction had been solidly favorable (average rating = 7.7). The students who have taken my forensic accounting course consider it to be both interesting and academically stimulating. In 1998, my students gave the course a 4.73 rating in which 5 is “very good” and 1 is “very poor.”
The forensic accounting course has attracted students from various backgrounds including accounting majors, criminal justice majors, MBA students, CPA practitioners, accounting professors, a state auditor, a private investigator, and a paralegal. Three of the CPA practitioners who have taken the course recommend that forensic accounting become a required course for all accounting majors. Many students have decided to pursue the Certified Fraud Examiner designation as a result of their experiences in this course.
To succeed in the battle against fraud, organizations need employees who understand how to detect and prevent fraud. However, at present, relatively few academic institutions provide students with courses in this area. Teaching fraud examination and forensic accounting benefits the colleges and universities, the students who attend them, and the organizations that employ their graduates. First, as academic institutions provide their customers – the employers of their students – with graduates educated in fraud detection and prevention, the demand for graduates from those institutions should increase. Second, college graduates increase their marketability by acquiring knowledge and skills currently in high demand by employers. Third, organizations benefit because the newly hired graduates educated in fraud examination and forensic accounting greatly enhance their ability to fight the battle against occupational fraud and abuse.
As academic institutions begin to recognize their benefits, the number of courses offered in fraud examination and forensic accounting should dramatically increase and the amount organizations lose to fraud should decrease.
Thomas A. Buckhoff, Ph.D., CFE, CPA, is assistant professor of accounting at North Dakota State University.
References
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