Igniting anti-fraud research via ACFE Foundation

On March 14, the Institute of Fraud Prevention (IFP) merged with the ACFE Foundation, which expanded the Foundation’s mission beyond college scholarships to cutting-edge, anti-fraud research that’s accessible to all CFEs. The IFP will now be known as the ACFE Research Institute. ACFE members and other anti-fraud professionals are the beneficiaries.

Why should you keep up with new anti-fraud research? Perhaps you’re thinking, “I use tried-and-true fraud examination principles every day in my cases. New research doesn’t really affect me. I’ll leave all that to the academics.”

But the insights that researchers discover now could give you that competitive differentiator when your organization is deciding who to assign to a prime project, help you find that missing link in your current investigation or spark new thinking into your uses of technology.

For example, a team of researchers¹ using data from past editions of the ACFE Report to the Nations surveys examined the characteristics of fraud cases in which management overrode internal controls. They found several distinctions between management overrides and other frauds in which victim organizations simply lacked internal controls.

Among the implications of this study is that organizations with strong anti-fraud environments might be more at risk of management override frauds. Boards, auditors and management at these organizations need to carefully focus on the risk of control overrides and look at specific capabilities (skill sets, position, coercion skills, etc.) of those in key management positions.

Now that’s information you can use. And there’s a lot more where that came from.

Fraudsters are always changing their methods

The ACFE contends that organizational fraud schemes don’t change (the branches of the Fraud Tree remain intact), but the ways in which fraudsters perpetrate their crimes are continually evolving. That’s why the ACFE Foundation has agreed to expand its traditional focus on education and scholarships and include anti-fraud research in its charter. On March 14, the Foundation agreed to acquire the Institute of Fraud Prevention (IFP), an industry-university think tank led by Richard Riley, Ph.D., CFE, CPA, professor of public accounting at West Virginia University. Riley will continue as research director.

The IFP’s mission was to foster and support multidisciplinary academic research focused on the prevention, detection, deterrence, investigation or remediation of fraud and white-collar crime. Previously housed at West Virginia University, the IFP funded or supported more than 70 studies by researchers from more than 50 different academic institutions around the world.

The ACFE Foundation intends to build on this important body of work by continuing to issue grants for research that will yield practical benefits for anti-fraud practitioners and encourage more corporate participation. To help underscore the ACFE’s deep commitment to this mission, the institute will now be known as the ACFE Research Institute.

A look at the ACFE Foundation

Prior to the merger, the mission of the ACFE Foundation was to increase the body of anti-fraud knowledge by supporting future anti-fraud professionals worldwide through the funding of the ACFE’s longtime Ritchie-Jennings Memorial Scholarship Program. The scholarship program provides an opportunity for individuals of all ages, races, religions and income levels to advance their education. Many of these outstanding and deserving students go on to become Certified Fraud Examiners.

The Foundation’s expanded mission will increase the body of anti-fraud knowledge — not just by supporting future anti-fraud professionals worldwide but also by providing leading innovation and research.

“When the Foundation was originally conceived its goal was to simply raise scholarship funds for deserving students,” says ACFE Founder and Chairman Dr. Joseph T. Wells, CFE, CPA. “However, it soon became apparent that we could expand our mission to include cutting-edge research into the causational factors of fraud. I’m excited about this new revitalization of the IFP under the ACFE Foundation umbrella, and I hope it encourages organizations — large and small — to submit, sponsor or benefit from the ACFE Research Institute.”

The scholarship portion — the Ritchie-Jennings Memorial Scholarship fund — will remain intact and operate the same. No funds that were earmarked for current and future scholarship funding will be changed. However, the ACFE Foundation will now also raise funding from ACFE members, government grants, corporations or other third-party sources to support and fund Research Institute studies. (See ACFE Research Institute encourages your participation.) Recipients of grants might include current CFEs, academics or other anti-fraud professionals.

The Research Institute will award two kinds of grants: 1) monetary support awards of up to $15,000, which could eventually increase in amount as corporate sponsorship, grant and donations increase 2) database grants, through which researchers receive access to proprietary Research Institute databases.

Benefits to anti-fraud practitioners globally

Providing leading research and collaborating with major organizations, government and academic institutions on topical fraud risk matters will help ensure the ACFE is providing timely and relevant content to its members. The Foundation will also disseminate research initiatives and findings to ACFE members and the anti-fraud community via Fraud Magazine and other publications, social media and the ACFE website.

“We are excited to see the ACFE Foundation expand its reach,” says ACFE President and CEO Bruce Dorris, J.D., CFE, CPA. “It seems only natural that we add innovation and research to a well-established foundation that represents the ACFE’s mission to not just create tools to fight fraud but share them, as well.”

Researchers will submit progress reports on their work. The Foundation will only pay monetary grants after it sees demonstrated progress (such as 50% payment when the research project reaches its midpoint and the remaining 50% upon completion) to ensure that Research Institute funds are only spent on studies that yield demonstrated results.

The mandate that researchers must demonstrate how their studies are important to practicing professionals will help ensure that the Institute’s research will have tangible benefits.

What can you expect in 2020 from the ACFE Research Institute?

With a new decade, comes a renewed focus on innovation. You can expect to see more collaboration, more distribution and more channels to distribute the Institute’s research findings.

When ACFE members, government authorities, academia and corporate sponsorship are more aware of the Research Institute, we hope to significantly increase the amount of research submissions in the next year. This will allow the selection committee to choose from a broad range of topics that will have the greatest impact to ACFE members and anti-fraud professionals globally. The Institute also hopes to eventually increase the monetary support awards for each grant.

The Institute encourages targeted industry or threat-based research sponsored and funded by corporate organizations and government agencies. The Institute would seek qualified researchers to conduct the analyses.

More recent research examples that the new ACFE Research Institute would support

Example 1: Professional skepticism

Summary: While professional skepticism is necessary to conduct a sound audit, clients that perceive an auditor to be too skeptical will often be less willing to assist with an audit or investigation.

Researchers² conducted an experiment in which they tested several communications strategies to measure those approaches that work best at limiting damage to a client relationship while still allowing auditors to maintain high levels of skepticism. They found that certain strategies were effective while others didn’t work.

This study has obvious implications for audit firms in managing client relations during an audit or investigation. The study also implies that — counterintuitively — clients with little evidence to support their financial assertions or who might have something to hide are actually less likely to have a negative reaction to professional skepticism than clients whose assertions are strongly supported by evidence.

Example 2: Single vs. multiple perpetrators

Summary: Collusive frauds involving multiple perpetrators can be especially difficult to prevent and tend to be much costlier than single-perpetrator frauds. Researchers³ examined the characteristics of collusive frauds and found several unique dimensions that differ from frauds committed by one person.

Among other characteristics, they found that collusive frauds tend to be led by younger males with close ties to customers or vendors, and they tend to display different behavioral warning signs than solo fraudsters.

While anti-fraud professionals typically look to the Fraud Triangle components of pressure, opportunity and rationalization to understand fraud risk and behavior, this study suggests that they should also consider a potential fraudster’s ability to build and lead a team to commit more complex frauds that a single perpetrator couldn’t commit.

Research submission process

The Research Institute invites those interested in seeking grants to submit research proposal overviews that: 1) define a specific research question 2) address past studies on the topic 3) explain the specific methodology of the proposed study 4) outline the data that will be collected 5) explain why the research question is important to practicing professionals. Email richard.riley@mail.wvu.edu and visit ACFE.com/ACFE-Research-Institute/.

The applicants who are selected for further screening will be invited to present their proposals at a Research Institute meeting with the Institute’s selection committee. This selection committee will be comprised of anti-fraud professionals and include representatives from the ACFE Foundation Board.

The selection committee will decide those proposals that the Institute will support. Those who receive grants must return to a future Research Institute meeting to present the results of their research and assist, when appropriate, with dissemination to the anti-fraud professional community.

Support research or wither

If the anti-fraud profession is to grow into the next decade, it must draw from cutting-edge, timely research. Fraudsters aren’t going to slow down, so we have to accelerate our research to combat new fraud methods. The new ACFE Research Institute’s greatest beneficiary is you — the practitioner.

Vincent M. Walden, CFE, CPA, is a managing director with Alvarez & Marsal LLP in New York and president of the ACFE Foundation. Contact him at vwalden@alvarezandmarsal.com.

John Warren, J.D., CFE, is vice president and general counsel of the ACFE. Contact him at jwarren@ACFE.com.

¹ “Unique Characteristics of Management Override Fraud Cases,” by Carol C. Bishop, Dana R. Hermanson, Jonathan T. Marks and Richard A. Riley. (Interested parties may contact Richard Riley for more information about this study at: Richard.riley@mail.wvu.edu.)
² “The Effect of Auditor Skepticism on Client Ill Will,” by Jared Eutsler, D. Kip Holderness, Jesse C. Robertson and Mary B. Curtis. (Interested parties may contact Kip Holderness for more information about this study at kip.holderness@mail.wvu.edu.)
³ “Collusive Fraud: Leader, Incident, and Organizational Characteristics,” by Carol C. Bishop, Dana R. Hermanson and Richard A. Riley. (Interested parties may contact Richard Riley for more information about this study at: Richard.riley@mail.wvu.edu.)

ACFE Research Institute encourages your participation

The goal of the ACFE Research Institute is to foster a collaboration among academic researchers, anti-fraud practitioners and government agencies. The Institute will hold annual meetings each year at the ACFE Global Fraud Conference, where researchers will present the results of their latest studies and practitioners can share thoughts, concerns and insights about current research or areas that are ripe for future study.

The collaborative aspect of the Research Institute is a key to its future success. To truly achieve our goal of fostering useful, practically applicable research, the academic community needs to hear from those in practice about the issues they’re facing and the areas in which they suffer from a lack of knowledge.

The Institute also needs the financial support of the anti-fraud community. Members or organizations that contribute to the ACFE Foundation’s Research Institute will have the opportunity to shape the future direction of anti-fraud research and support the growth of our industry’s common body of knowledge.