Learning by doing

What do minor league baseball, candy and cupcakes have in common? For Cindy Durtschi, Ph.D., an associate professor at DePaul University, they make great topics for instructional cases in fraud examination. (More on that in a bit.)

Learning by doing — or "problem-based learning" — has proven to be an effective method for motivating students to acquire necessary skills for detecting and preventing fraud.

According to Durtschi, cases help deliver students beyond textbooks and develop life skills. She says professionals must be able to:

1. Make decisions with incomplete information.
2. Determine needed information and where to find it.
3. Synthesize collected information to solve problems and make decisions.
4. Be comfortable if there isn't one "right" answer and defend his or her assumptions and choices.

Tom O'Connor, while working as an IT specialist at a public accounting firm, was struck by how a case he worked was so similar to a simulated classroom scenario in his first university fraud examination course. O'Connor, a former student of mine and now a senior IT auditor at a large regional bank in Buffalo, New York, had to wait until the FBI finished its investigation to discover all the details of the fraud and if his conclusions were correct.

The fraud O'Connor investigated involved weak internal controls in the purchasing area. A fraudster employee was structuring transactions to avoid higher levels of authorization for purchasing goods. He shipped purchases to a residential address — his home — and then sold them to a friend. O'Connor discovered many red flags including irregularities in the inventory numbers when compared to business needs.

"As I attempted to connect the dots throughout the investigation," O'Connor says, "I felt as if I already knew the perpetrator's next step. My classroom case experience gave me the confidence to trust my instinct and the skills to ultimately assist in bringing the fraudster to justice."

According to Dr. Joseph T. Wells, CFE, CPA, founder and Chairman of the ACFE, a successful fraud examiner is part detective, lawyer, accountant and criminologist. The ACFE has identified professional skepticism among the necessary top skills and abilities fraud examiners need to detect and prevent fraud. Educators can use problem-based learning to develop that attitude in students and professionals.

What is professional skepticism?

Webster's defines skepticism as "an attitude of doubting the truth of something (such as a claim or statement)." Skepticism is derived from a Greek word that means "to reflect, look or view" in a philosophical sense.

In practice, skepticism is a search for truth by:

• Applying reason to determine the validity of a claim.
• Critically analyzing all evidence received.
• Finding a factually supported conclusion, not the justification of a preconceived conclusion.

The AICPA defines professional skepticism as "an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence." (See AU-C 200.14, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, Definitions.)

The Institute of Internal Auditors (IIA) refers to professional skepticism in its standards: "Objectivity is an unbiased mental attitude" that "requires that internal auditors do not subordinate their judgment on audit matters to others." (See "International Standards for the Professional Practice of Internal Auditing")

And according to the CFE Code of Professional Standards Interpretation and Guidance: "Certified Fraud Examiners shall exercise due professional care in the performance of their fraud examination services. Due professional care requires diligence, critical analysis and professional skepticism in discharging professional responsibilities." Also, "A CFE should be diligent in his work and should exercise critical analysis and professional skepticism of at least the level that a client/employer ought to reasonably expect from a competent professional in the CFE's field."

Developing professional skepticism

New fraud examiners, staff auditors in public accounting firms, internal auditors for corporations or new recruits for government agencies should practice developing professional skepticism by 1) evaluating information, 2) asking the right questions and 3) thinking critically about situations encountered.

In Durtshi's minor-league baseball scenario, the owner of the "Tallahassee BeanCounters" (TBC) has received an anonymous tip that makes him believe someone within the organization could be perpetrating fraud. The owner asks his auditors to quietly investigate fraud possibilities.

Students take on the role of the fraud examiners. The instructor provides them with a set of documents relating to TBC. They must determine questions to ask and additional documents they need. Then they evaluate all the collected material to determine if fraud was committed. To completely solve the crime, students must include in their report: who committed the fraud, how it was committed, if it was intentional (not error), the fraud's economic impact and if the suspect they've identified gained financially from the fraud. The case includes frauds in the revenue, payroll and purchasing/payment areas. (A second TBC case has a similar goal but focuses on different frauds.)

The TBC scenario forces students to learn about the industry, ask questions, analyze the described internal control systems, draw conclusions and obtain evidence to support the conclusions, much like the process involved in an actual fraud examination.

In the "Grand Teton Candy Company" (GTCC) case, the company is considering an IPO, and one of the owners hires her brother to ensure that operations are in order for a future financial statement audit. He notices some red flags that he feels need to be investigated and brings in his team to follow up on his suspicions.

The crimes include financial statement fraud and frauds in the accounts receivable and inventory areas.

The manufacturing process complicates the situation and requires users to think about what goes into the process of making chocolate. Looking for anomalies in the financial statements as well as determining what is reasonable for spoilage in a business like this helps students develop skills in evaluating information.

The "Alpine Cupcakes" case, which Durtschi is developing with Carol Callaway Dee, Ph.D., associate professor at University of Colorado - Denver and Mary Mindak, Ph.D., assistant professor at DePaul, involves an auditing firm's internal quality review process. It uncovers several deficiencies in the audit and discovers fraud during a site review at Alpine Cupcakes.

Educators and practitioners will benefit from adapting fraud cases and working together to facilitate discussions.

Durtschi, Dee and Mindak require students to run internal quality control reviews to assess internal controls, identify weaknesses that increased fraud risk, learn from their findings and comments, and address appropriate actions.

Most new fraud examiners and entry-level audit professionals — internal or external — haven't studied these types of open-ended, problem-solving cases (to their detriment).

Training and professional development

Employees can also learn from these types of training scenarios. They're particularly good for new hires who will be working in areas where the potential risk of fraud is high — whether in public accounting, industry or government.

Of course, organizations desire employees who can conduct effective interviews, which can only improve with practice in case scenarios. During training sessions, teams can evaluate other teams' presentations. If you're a practitioner, your assessments can direct future training and maximize limited resources.

Many organizations are effectively using professional development and continuing education online webinars — particularly about standards and regulatory updates. But nothing can replace practitioners meeting together to develop higher-level thinking skills and competency.

These interactive, thought-provoking sessions engage participants and promote confidence in solving problems that translate well into the work environment.

Fraud Magazine regularly publishes case studies. You can also find fraud-related cases in Issues in Accounting Education, a journal published by the American Accounting Association. Another source is the Anti-Fraud Collaboration, formed by the Center for Audit Quality, the IIA, Financial Executives International and the National Association of Corporate Directors. The collaboration has released three cases, including the latest that deals with the financial reporting supply chain in a regional bank.

Collaboration between educators and practitioners

The next logical step for businesses that want to provide experiential professional education opportunities is to develop partnerships with higher-ed institutions that teach fraud examination and forensic accounting courses. These businesses can bridge the perceived gap between higher education and the corporate and nonprofit worlds.

Educators and practitioners will benefit from adapting fraud cases and working together to facilitate discussions. Practitioners see firsthand that educators are working to give students examples — not just book knowledge — that will solidly prepare them for anti-fraud jobs. Educators will be gratified by introducing real-life case histories and applications, and learning from practitioners' feedback. These new symbiotic relationships can change the fraud examination profession.

Making it happen

For employers interested in trying out this approach, check with colleges and universities in your area to see if they offer fraud examination courses. The ACFE lists participating institutions on the Anti-Fraud Education Partnership site.

The faculty members teaching these courses are great resources because they have the experience in using cases and can tailor them to specific audiences. External and internal auditors, government employees in audit or investigation positions, and law enforcement professionals working white-collar crime can all benefit.

For educators who are looking to work with anti-fraud professionals, contact your local ACFE chapters. Offer to do a preview of a longer case activity at a chapter meeting, and involve students in role-playing. Utilize your network of employers to publicize the availability of hands-on training that promotes the skills that surveys have indicated are important to them: critical thinking, problem solving, interviewing and communication. Other groups to consider are local IIA chapters, bar associations and state CPA societies.

What next?

I love it when former students in my fraud examination classes tell me that they now look at potential fraud cases differently. They say they're less likely to accept situations at face value and have begun to develop questioning, critical mindsets. They must have these minimum skills if they wish to be successful in audit or investigative roles. And my former students can now help facilitate "learning by doing" with case study analysis in their organizations' professional development courses.

As you attend a sporting event, enjoy a piece of chocolate or celebrate a birthday with cupcakes, you'll be able to view those things in a new light if you'll experience a bit of problem-based learning. Thinking differently — and creatively — about dubious work situations will help you become more proficient at detecting and preventing fraud.

Patricia A. Johnson, MBA, CFE, CPA, is the program coordinator of the Master's in Science in Forensic Accounting program at Canisius College in Buffalo, New York. She's chair of the ACFE Higher Education Advisory Committee. Her email address is: johnsonp@canisius.edu.