Research funded by the Institute for Fraud Prevention can radically change profession

While collaboration might seem like the obvious answer to solving complex — and even simple — problems, the world of fraud detection and prevention has been slow to embrace it in a critical area. We've underestimated the importance of research to assist fraud fighters in staying ahead of the curve. For years, the Institute for Fraud Prevention (theifp.org) has been addressing that gap by supporting research on fraud-related topics and providing the mechanism by which practitioners, regulators and academics can come together to solve problems.

IFP's beginnings

Established in 2006 by Dr. Joseph T. Wells, CFE, CPA, founder and Chairman of the ACFE, and the AICPA, the organization's primary mission is to improve the ability of business and government to combat these [fraud and corruption] crimes and to educate the general public on effective methods of recognizing and deterring them.

In 2008, the IFP became an affiliate of West Virginia University, where the operations of the organization are housed. Since its inception, the organization has supported research on topics as diverse as small business fraud, the psychology and motivation of fraudsters and professional skepticism. The IFP supports two research project types: 1) funded research, which involves a monetary award to pursue a particular topic and 2) research requesting use of either the IFP's Public Company Financial Reporting Frauds Database or the ACFE's Report to the Nation(s) Database.

Importance for practitioners

William Olsen, CFE, CAMS, CIA, principal and practice leader of the forensic, investigative and dispute services at Grant Thornton, says he's "passionate about fraud prevention." As the president of the IFP, Olsen has the opportunity to help drive the direction of future research and benefit from what has been accomplished to date.

From the standpoint of Grant Thornton, which is a contributing member of the IFP, some of the benefits of research supported by the IFP, according to Olsen, include:

1. The ability to look at fraud prevention from many different levels. From the standpoint of government, research can provide regulatory guidance to help both inform and improve the process and outcomes. In the public accounting arena, increasing expectations to address fraud and corruption in conjunction with audits of financial statements puts new emphasis on the need for identifying prevention and detection strategies. From the business viewpoint, an increased awareness of risks and what's being done to implement controls is essential — particularly in a global environment — in mitigating risk.
2. A "domino effect." The IFP helps all these sectors to do a better job in addressing the issues of fraud prevention, deterrence and detection, assists them to peer into the future and provides thought leadership to address fraud risks.

Olsen says it's been a rewarding experience to see how the organization has grown not only in size but also in its mission as it focuses on issues most critical for preventing fraud and corruption. "It has been a pleasure watching the evolution of the IFP," he says.

John Warren, J.D., CFE, vice president and general counsel of the ACFE, says actionable research is one of the main benefits to those involved in the IFP. "Fraud examiners, auditors, and others involved in the prevention and detection of fraud are so involved in their day-to-day work that it is often difficult to think ahead three to five years to anticipate what the new risks will be," Warren says. "The IFP is the logical group to fill the gap between the daily work of fraud fighters and the forward thinking necessary to successfully combat fraud in the future," he says. "The exclusive focus on research in the area of fraud and corruption makes this anti-fraud organization unique. The value in assisting organizations in being proactive rather than reactive is often underestimated," Warren says. "Investigating and litigating cases of fraud, whether it be an asset misappropriation or a violation of the Foreign Corrupt Practices Act, are costly — both on a monetary and reputational level," he says.

Past research projects and applications

Prior to the IFP's affiliation with West Virginia University in 2008, researchers completed three projects. As of publication, the IFP had approved 50 projects and 35 had been completed. Richard Riley, Ph.D., CFE, CPA/CFF, director of research for the IFP, is in charge of shepherding the projects to completion. Here are a few examples of the impact of the research:

A study by Robert Davidson of Georgetown University, Aiyesha Day of the University of Minnesota, and Abbie Smith, "Executives' ‘Off the Job' Behavior, Corporate Culture, and Financial Reporting Risk," examines how executive behavior outside the workplace is related to financial reporting fraud risk.

Their findings show that executives with legal infractions are more likely to commit fraud. Though they didn't find any direct relationship between the lack of frugality of these executives and the likelihood of committing fraud, they wrote that the loose control environment in which these individuals often operate is conducive to increasing the probability of other insiders perpetrating fraud as well as unintentional material errors in the financial statements. U.S. federal government regulators have considered adding this risk factor from this research to a list of potential fraud indicators.

A research study conducted by Jared Eutsler and Erin Burrell Nickell, both at the University of Central Florida, "Fraud and Audit Opinion Modifications: Investigation of Fraud Characteristics, Resulting Opinion Modifications, and Subsequent Auditor Punishments," found that juries tend to reward audit firms for putting more effort into finding fraud. CPA firms can utilize this research to help determine the appropriate level of work they need to do when identifying and following up on red flags they've found as part of financial statement audits.

The IFP is the logical group to fill the gap between the daily work of fraud fighters and the forward thinking necessary to successfully combat fraud in the future."

Performance evaluations that "punish" individuals for pursuing red flags and finding no actual fraud appear to impede the exercise of skepticism in the future, according to the researchers. Professional service firms can utilize this study to address concerns in this area.

Other topics that researchers have addressed, which the IFP has supported, include asset misappropriation fraud, verbal and nonverbal communication, accidental fraudsters vs. predators, and auditor tenure and reporting fraud.

Role of academics

Academic research plays a critical role in the future of fraud prevention and detection. The effectiveness of this research is enhanced by bringing academics together with representatives from government and the private sector — especially on a global level — to receive all participants' perspectives on identifying important issues. The IFP envisions creating more cross-disciplinary teams of researchers to provide well-rounded attacks on fraud problems. Giving academics more access to business, industry and government leaders will help guide their research and ensure their reports don't sit on shelves but help make real changes.

Involving regulators and governmental agencies

U.S. regulations drive anti-fraud practices in many areas. So it's critical to have representatives from the U.S. federal government — particularly regulators — involved in identifying areas of interest that can affect future decisions.

The Public Company Accounting Oversight Board (a private-sector nonprofit corporation created by the Sarbanes-Oxley Act of 2002) and the Securities and Exchange Commission have participated in past IFP meetings. Representatives from U.S. federal agencies, such as the FBI and the Bureau of Alcohol, Tobacco and Firearms, help provide different perspectives.

Crystal-ball gazing

The IFP's member organizations will define its future. IFP voting members set the research agenda. Members receive early access to all completed research projects, which allows them to leverage their investments. The IFP is setting a more targeted research agenda so that researchers will have a "starting point" for their proposals.

Riley encourages academics to reach out to the IFP. "For academics interested in exploring cutting-edge research into problems that are facing practitioners and can be researched or dialogued, we'd love to have your insights to help shape the research agenda," Riley says.

The ACFE has said for years that fraud examiners need to set the pace in identifying new fraud risks for business and society. The IFP wants to determine the levels of risk to evaluate and help organizations become more proactive in the fight against fraud. The IFP is in a unique position to provide "thought leadership" on such technology and organizational issues as the impact of big data, cybersecurity, and bribery and corruption.

Warren says the biggest challenges facing the IFP stem from a lack of full understanding of the organization's mission. "As in many other organizations, a limited budget has provided constraints on the type of projects that can be funded," he says.

Both Warren and Olsen see the keys to the IFP's progress as gathering more funds plus funders' input on the research agenda. More participation from the private sector and law enforcement would enrich the discussion. Research involving multiple constituencies is far superior to individual efforts by multiple organizations.

Olsen says the potential impact that research supported by the IFP could have on organizations of all sizes is great. "I can't emphasize enough the potential that the right funding would have to really address these issues," he says. "There is not a lot of dialogue between government regulators, the private sector and non-governmental organizations (NGOs). Facilitated discussion like the IFP provides is more effective for everyone."

Patricia A. Johnson, CFE, MBA, CPA, is the program coordinator of the Master's of 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.

Heitger finishes column editorship; Johnson assumes position

Les Heitger, Ph.D., Educator Associate, has finished his term as editor and writer of the "Fraud EDge" column, and Patricia A. Johnson, CFE, MBA, CPA, program coordinator of the Master's of Science in Forensic Accounting program at Canisius College in Buffalo, New York, steps into the position, which is one of her volunteer duties as the chair of the ACFE Higher Education Advisory Committee.

"Les did a marvelous job as he wrote cutting-edge columns with his collaborators on integrating digital forensics and data mining into fraud examinations and how to present that knowledge to budding fraud examiners," says Dick Carozza, CFE, editor-in-chief of Fraud Magazine. "We look forward to Pat’s contributions as she further explores the symbiotic relationships among academics, practitioners, business and government, and the best ways to transfer anti-fraud principles to students."