Draft Guidelines for Fraud and Forensic Accounting Education

Since many of the highly publicized corporate scandals hit the newspapers, the demand for entry-level professionals with formal education in fraud detection and deterrence has grown. As a result, educational institutions and other stakeholder organizations have wrestled with issues surrounding the nature, extent, and format for curricula that would effectively address the knowledge, skills, and abilities needed for entry into this profession.  

On Oct. 14, 2005, the final meeting of the Technical Working Group (TWG) for Fraud and Forensic Accounting took place in Washington, D.C. Co-chairs and principal investigators, Richard Riley, Ph.D., CFE, CPA, and Bonnie Morris, Ph.D., directed the project, which was funded by a grant from the U.S. Department of Justice to West Virginia University. ACFE founder and Chairman Joseph T. Wells and I were members of the TWG.

The TWG was initially formed in March 2004 to develop educational and training guidelines for fraud and forensic accounting. It was composed of representatives from private industry, professional service firms, law enforcement, the legal community, government and regulatory agencies, professional organizations, and higher education. All the individuals involved had a special interest in enhancing the education of future fraud and forensic accounting professionals. The TWG sought to provide guidelines; following is a summary of its findings.

Prerequisite knowledge and skills
To clearly understand the issues associated with fraud and forensic accounting, a basic foundation in accounting, auditing, and business law concepts is necessary. (The following prerequisite knowledge and skills are adapted from the Fraud and Forensic Accounting Exposure Draft.)

Basic Accounting Concepts 

• Key concepts of accounting such as the definitions of assets, liabilities, stockholders' equity, revenue and expenses, revenue recognition, expense measurement, reliability, objectivity, verifiability, materiality, accruals, deferrals, etc.
• Basic financial statement presentation and appropriate disclosure.
• The effects of debits and credits on account balances. This understanding is essential in identifying fraud schemes and financial statement manipulation. Students need to be able to analyze accounts (i.e., recognize a normal balance for each type of account and ascertain how a given transaction would affect each account balance).
• Account balance analysis for both over- and understatement.
• Basic ratio analysis: Students need to be able to calculate ratios and interpret the results, such as identifying trends across time, and unusual variances in comparison to key industry ratios and other benchmarks (skills normally covered in entry-level accounting courses).

Basic Auditing Concepts 

• The basic elements of auditing, including professional skepticism in evaluating statements or representations made.
• Different types and quality of audit evidentiary matter and how to evaluate types of evidence (definitive, circumstantial, direct, corroborative and conflicting).
• Relevant current accounting and auditing standards and the roles and responsibilities of standard setting, professional, and regulatory bodies.
• Development of working papers.

Transaction Processing Cycles and Control Environment 

• Internal control concepts and the ability to recognize a potential weakness in a company's internal control structure.
• Corporate governance and culture (e.g., tone at the top), including entity-level controls.

Operational processes and transaction flows within an organization and tracing transactions (cash and non-cash) from source documents to initial entry in the accounting system through the various sub-ledgers and ledgers to reported financial statements. The documentation of processes and transaction flows includes both manual activities and those that incorporate automated information systems.

Business Law Concepts 

• The fundamental legal principles associated with contracts, civil and criminal matters, social goals associated with the legal system, and the role of the justice system.
• Securities and other laws that demonstrate how fraud and fraudulent financial reporting violate the law and how the regulatory, professional, civil, and law enforcement systems operates to prevent, detect, and deter violations.
• Ethical duties and legal responsibilities associated with confidentiality.

General Business Communications Skills and Business Ethics 

• Communications: Fraud and forensic accounting professionals must have strong written and oral presentation skills. Therefore, a general communications course is extremely beneficial. Students without formal training in oral and written communication may wish to complete such a course before entering a fraud and forensic accounting program.
• Ethics: Many states specify a business ethics course as a requirement to sit for the CPA exam. Accounting majors in such states are likely to have completed a business ethics course as part of their degree requirements. Because ethics is such an important part of the fraud and forensic accounting curriculum, students who have the opportunity to take a business ethics course are advised to do so.

Primary content areas
1. Criminology, the Legal, Regulatory, and Professional Environment and Ethics
Criminology should cover theories of crime causation; the nature, dynamics and scope of fraud and financial crimes; and effective interviewing and interrogation techniques.

Legal, regulatory, and professional environment includes an overview of the civil, criminal, and regulatory systems; the federal criminal justice system as it applies to fraud; regulatory entities and legislation; standards of conduct; the discovery process; confidentiality; privacy laws; rules of evidence; legal remedies; and legal and professional guidelines.

Ethics should be pervasive throughout the fraud and forensic accounting curricula. Identifying ethical issues in business, such as conflicts of interest, the role of ethics in corporate governance, and differentiating between unethical acts versus illegal, are some of the topics that should be discussed to effectively address this subject.

2. Fraud and Forensic Accounting
All the experts who participated on this project agreed on a core foundation of knowledge, skills, and abilities related to fraud and forensic accounting. These fundamentals include the ability to define and recognize the characteristics of fraud, know the various functions involved in forensic accounting, and understand the differences between the roles of independent auditors, fraud professionals, and forensic accountants. The basic concepts of fraud are also part of the core foundation: an understanding of who commits fraud and why (the Fraud Triangle); the legal elements of fraud; fraud prevention; deterrence, detection, and investigation techniques; common fraud schemes; the "red flags" of fraud; and methods of fraud remediation. Developing the fraud professional's mindset, that is, "thinking like a criminal," is critical to learning how to identify systemic vulnerabilities and, consequently, determine the necessary procedures to minimize the risk of fraud.

The members of the TWG identified major categories commonly used in the commission of fraud: Asset Misappropriation, Corruption, False Representations and Other Frauds, and Financial Statement Fraud. The learning objectives in each of these categories should focus on fraud prevention, deterrence, and detection. Students should also develop an understanding of various fraud investigation procedures including how to gather and evaluate evidence, estimate losses, and determine available remedies. Learning to effectively communicate the findings of an investigation through written reports, graphical presentation, or oral testimony can't be overemphasized.

Because the area of financial statement fraud often involves management override and collusion, there are special risks and challenges associated with this type of an engagement. Legal and regulatory issues, such as the 1933 and 1934 Securities Acts, the Foreign Corrupt Practices Act, and Sarbanes-Oxley Act, are especially pertinent here.

Conducting business in a digital environment requires knowledge of information technology (IT) governance and IT risk assessment. Students should understand the ways in which IT systems are typically used to commit fraud, special requirements for digital evidence collection and preservation in an investigation, various types of digital evidence, online resources, rules related to e-discovery, and available data extraction and analysis software. The coordination of this type of investigation with a forensic computer specialist is essential to preserving the admissibility of evidence for legal proceedings. Furthermore, knowledge of the laws related to cyber-crime will assist students in recognizing situations that violate criminal laws, rights to privacy, and other related issues.

3. Forensic and Litigation Advisory Services
In this final section, students are expected to learn that forensic and litigation advisory services encompass the use of accounting knowledge and investigative skills to assist in legal actions by acting as a consultant or expert witness. Forensic accounting engagements may include the investigation of damage claims, economic damages related to work-place issues, matrimonial asset investigations, or business valuations. Because of the adversarial nature of these engagements, an understanding of the various approaches to financial and economic modeling and the use of authoritative sources for model selection are critical. Developing working papers will assist in documenting the work performed for the investigation. The concept of "legal privilege" should also be discussed as part of this topic.

The summary provided here is meant to provide our readers with a general overview of the contents of the Exposure Draft document entitled, "Education and Training in Fraud and Forensic Accounting: A Guide for Educational Institutions, Stakeholder Organizations, Faculty and Students." If you would like to receive an electronic "read only" Word file of the exposure draft, e-mail your request to FFAModel@mail.wvu.edu. Additional information may be found at the ACFE Web site (www.ACFE.com).

As always, I welcome your comments and suggestions on these and other issues. -Mary-Jo

Mary-Jo Kranacher, MBA, CFE, CPA, is an associate professor of accounting and department chair of accounting & business at York College of The City University of New York. She's also an ACFE Regent and the chair of the ACFE's Higher Education Committee.