Sadly, some of the most innovative people in the world are on the wrong side of the law, and some of the most creative people in finance use their skills for theft and embezzlement.
At the same time, new tools and technologies -- from e-mail and the Web, to automated accounting software and tax preparation programs - are empowering fraudsters as never before, allowing them to be more active, and more successful, than ever.
Fortunately, the accounting profession has risen to the challenge, taking on a range of new credentials and expanding rapidly into forensic accounting and fraud detection and prevention services over the past several years. As it's a fast-changing field, we gathered a quartet of experts to share their insights into the latest developments and what's new in fraud.
It sometimes seems as if we're hearing more about fraud, and on a more regular basis, than in the past. Is fraud on the rise, or are we just uncovering more of it? If it is on the rise, why do you think that's happening?
Annette Stalker, CPA/CFF/CITP, CFE (Principal, Ueltzen & Co.; current chair of the AICPA's Forensic & Litigation Services Committee and its Fraud Task Force): Fraudulent activities do seem to be hitting the headlines more frequently these days, although it's difficult to pinpoint whether it's due to the fact that fraud is on the rise or that the discovery is getting better. I believe there are two things at play simultaneously: new modeling tools available to identify financial "anomalies," and new regulatory leadership who are taking assertive positions with regard to potential enforcement actions and investigations. We are continuously getting better at establishing ways to monitor and detect fraud, which, in turn, should stem the flow of similar schemes and resulting losses to victims.
James Ratley, CFE (President and chief executive officer, Association of Certified Fraud Examiners): I think it is a little bit of both. What we have seen during the economic recession is an increase in financial pressure on individuals, which is one of the three legs of Donald Cressey's "Fraud Triangle" (the others being opportunity and rationalization). When wages and hours are being cut, a person might find themselves in a situation where they will make decisions that they normally would not be inclined to make -- such as the decision to commit fraud. It might begin small, just trying to make ends meet or sustain a certain lifestyle, and then grow over time.
Charlie McGimsey, CPA (Litigation support practice leader, Windham Brannon): Fraud has always been a part of our society, but in recent times, media attention has contributed to the awareness of fraud being perpetrated. Here's why it's rising:
1. A further decline in moral underpinnings in our society (people seem to be more willing to do dishonest things); and,
2. While a great tool, technology has enabled willing fraudsters to commit fraud. When computers are involved, fraud is much easier to commit, and difficult to detect.
Randall Wilson, CPA/CFF/ABV, CFE (Partner, RGL Forensics): From my perspective, fraud appears to be on the rise. Certainly it is increasing in real numbers. According to its Report to the Nations, the Association of Certified Fraud Examiners reported that worldwide fraud totaled approximately $3.5 trillion in 2011 compared to the 2009 estimate of $2.9 trillion, which is more than a 20 percent increase.
Based on our experiences in recent cases, fraud is also being discovered more often. Continued sluggishness in the economy may be playing a role in discovering some schemes in that corporations have to more tightly manage operations and cash flow and this could be triggering a higher incidence of management review of transactions.
What are the main things that firms considering getting into fraud/forensic accounting should bear in mind? What are the biggest obstacles?
Ratley: As with any field that involves investigation and cases that have the potential for prosecution and litigation, there are procedures, rules and laws that must be carefully understood and followed or a firm could find themselves in trouble. There are privacy laws that govern data collection in the workplace and other areas. There are chain-of-evidence rules that need to be followed, or a case might be jeopardized.
McGimsey: [Firms need to] employ people who are trained in fraud and forensic matters. While accounting is core, understanding fraud is key to successful engagements. Put a different way, just because someone is a first-class accountant doesn't mean he or she will understand how to detect and account for fraudulent activity.
Stalker: The first step to expanding service offerings is to ensure that you have appropriate skills and credentials to provide quality services. There are bound to be initial challenges related to launching a new practice area with a unique client base (primarily attorneys) and balancing existing client demands.
Wilson: Computer forensics is an integral component to detecting corporate fraud. As such, it is critical that firms looking at building a fraud practice have a department or division that can mine and manage big data, or develop relationships with outside consultants to partner with them in the investigations. ... Certification in fraud examination is also central. ... In our experience, attorneys and corporate clients are looking critically at the education, certification and experience of forensic accounting specialists.
What are the biggest mistakes that accountants make in getting into this area?
McGimsey: Assuming that top-drawer accountants will naturally be gifted fraud and forensic accountants.
Wilson: In my view, one of the biggest mistakes is underestimating the nuances and differences associated with this type of analysis when compared to a traditional tax and audit practice. While the skillsets of CPAs performing these more traditional services are certainly transferrable, it is important to understand that much preparation is necessary to expand these skills and acquire the tools required to properly complete these types of engagements.
It seems that some firms, in their zeal to provide forensic services, jump in a little too fast and do not carefully consider the planning and training required to move into this specific area of practice.
Ratley: I think one of the most important things to understand is that fraud examination is much more than just accounting, so any professional going into this field will need to build a strong skillset in areas that previously might not have been in their repertoire. Interviewing techniques, for example, are critical in a successful investigation. You might have uncovered the numbers that indicate fraud, but how do you get the answers you need in a face-to-face encounter with a witness? How do you handle an uncooperative or even hostile interviewee? ... Proper training is key.
Stalker: It's also difficult to work "on occasion" in the litigation arena. The court-mandated timing is firm and yet ever-changing. It is not easy to meet traditional service deadlines and timing - along with looming trial dates. Of course, once you have an established forensic or valuation practice area, it provides an attractive career path for staff as their career and interests evolve.
What's new in forensic accounting? Are there new tools or techniques that forensic accountants should be implementing?
Wilson: Managing big data has become a critical component of forensic accounting, as we are often called upon to examine millions of transactions that must be analyzed efficiently without sacrificing accuracy. The requirement to have the most current and effective software tools to upload and assess data is paramount.
Stalker: New analytical tools and software are always evolving and may provide the forensic accountant a competitive edge in analyzing potential fraudulent activities. Within each of the niche areas, I think it's important for the practitioner to stay current on case law developments.
And what's new in fraud? What should accountants be warning their clients about?
McGimsey: The ability to commit fraud easily, and over a prolonged period of time, using computers is new.
Ratley: One trend we are seeing, and I think we will continue to see in the coming years, is the rise in cybercrime. On a frequent basis, we are reading about thefts of millions upon millions of individual records. These happen to large corporations and create dramatic headlines, but also getting worse in this realm are attacks on small businesses.
Stalker: Everything old is new again. That seems to be the trend among fraud schemes I have seen recently. As soon as one scheme is uncovered and publicized, a new version or iteration comes out. With the increasing complexity of financial activities, fraud is becoming more difficult to detect, as fraudsters are creating more complex schemes.
Wilson: Earlier this summer, the Securities and Exchange Commission introduced new initiatives in its fight against financial fraud. Based on the apparent nature of these initiatives, it is obvious that the SEC is serious about being more proactive in its effort to protect investors and the public overall from financial fraud. As part of these efforts, the SEC is advancing its sophistication and use of data analytical software.
Ratley: I believe that we will also see a continuation of large financial statement manipulations at corporations. The emphasis that is placed on share price, along with computerized programs that can buy and sell large blocks of stock in an instant, have just added to the pressure on corporate management to perform. In a difficult economy, this pressure can create the right environment for normally honest people to make dishonest decisions.
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