Assignment: Detect, Identify, and Define Reporting Fraud (5-6 pages)

Journal of Business Behavioral Sciences

Vol. 28, No. 1; Spring 2016

106

USING REPORT TO THE NATIONS ON OCCUPATIONAL

FRAUD AND ABUSE TO STIMULATE DISCUSSION OF FRAUD IN

ACCOUNTING AND BUSINESS CLASSES

Sandra Gates

Texas A&M University – Commerce

Cheryl L. Prachyl University of Dallas

Carol Sullivan University of Texas of the Permian Basin

ABSTRACT: With the globalization of commerce and the interdependence of world economies, prevention of fraud has become an issue of global importance. Major corporate frauds have been

discovered in not only the United States but also in France (Vivendi Universal), Italy (Parmalat),

India (Satyam Computer Services), and other countries. Accounting educators need to address the

issue of fraud in accounting classes so that students will be aware of both the magnitude and

frequency of fraudulent financial reporting as well as other types of fraud and corruption. New

accounting graduates need to understand how they can help to prevent and/or detect fraud within

their organizations. One way to help raise students’ awareness of fraudulent schemes and the

pervasiveness of fraud is to provide them with real world data about different types of fraud, types

of perpetrators, types of victims, and the magnitude of financial losses from fraud. This paper

provides suggestions for using the “Report to the Nations on Occupational Fraud and Abuse,”

published by the Association of Certified Fraud Examiners, as a resource to provide topics for

discussion and research in accounting and other classes.

Key Words: Fraud, Occupational Fraud, Global Fraud, Accounting Education

INTRODUCTION

The financial landscape has changed dramatically as a result of the globalization of commerce and

the internet. There is an interdependence of world economies and capital markets more extensive

than has ever existed before. A catastrophic failure of one market system potentially has effects

worldwide with huge losses on an international scale. Given the dramatic changes in worldwide

economies and globalization of financial markets, preventing corporate fraud is not strictly a

domestic issue but has significant implications for financial markets internationally.

Across the globe we have seen instances of corporate accounting frauds. In 2002, the highly

publicized United States fraud of Enron Corporation rocked the capital market system. Around the

same time in Europe, Vivendi Universal (France), the world’s second largest media group, was in

the midst of a financial accounting scandal. In 2003, the multinational company Parmalat (Italy)

had more than $8.5 billion in “missing” assets. Parmalat’s fraudulent activity significantly affected

insurance companies in the U. S. In the Netherlands, Royal Ahold, the world’s third largest

supermarket operator, was found to have overstated its 2001 and 2002 income by more than $500

million. In 2009 Satyam Computer Service (India), a company responsible for more than one-third

of the outsourcing services provided to Fortune 500 companies, was found to have inflated earnings

and assets in excess of $1 billion. These examples illustrate that there are no geographical limits

to fraud.

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National and international surveys on fraud indicate that the financial magnitude of fraud is

significant and remains a problematic issue for businesses worldwide (Kroll Report, 2013/2014;

ACFE report, 2014; Ernst & Young, 2014). Preventing and detecting fraud has become paramount

for both domestic and international businesses. Lawmakers and standard setters have responded

with increased regulatory requirements, including AICPA Statement on Auditing Standards (SAS)

No. 99, Sarbanes-Oxley Act of 2002, the creation of the Public Company Accounting Oversight

Board (PCAOB), SEC Post-Madoff reforms (2008) and Dodd Frank Act (2010). These

requirements address corporate governance, internal controls, and auditor/accountant

responsibilities for detecting and preventing fraud.

Educators must similarly respond by raising student awareness of fraud schemes, detection

methods, and prevention tools. Consequently, there is an increased demand for graduating students

to possess the requisite skills to detect fraud and consider the global implications of fraud.

The accounting curriculum should keep pace with the dynamic ever-changing complexities of the

profession (AECC, 1990) so that graduates are prepared to detect and prevent fraudulent activities

(NCFFR, 1987). Students must be exposed to domestic and global economic organizations in order

to understand the roles and responsibilities of accountants in a global context (AACSB, 2015). A

broader view, one taken by the NCFFR, recommends that the entire business curriculum reflect a

focus on understanding factors related to fraud. Integrating fraud awareness across the business

curriculum will better prepare students to combat fraudulent activities in this global economic

environment.

The Association of Certified Fraud Examiners (ACFE) publishes the Report to the Nations on

Occupational Fraud and Abuse (hereafter, The Report). The Report reflects the results of survey

responses from thousands of professionals predominantly with accounting related backgrounds

(fraud examiners, internal auditors, and accountants) in various industries. The Report’s survey

results detail the financial losses that result from fraud by industry and by the type of fraud scheme.

It also discusses the anti-fraud control mechanisms implemented by companies and the methods

used to detect fraud. The Report details the perpetrators of fraud based on several factors, including

by department and by gender. After its first publication in 1996, the ACFE published its second

report in 2002 and continued to publish The Report in even numbered years thereafter. Beginning

in 2010, The Report evolved from primarily focusing on domestic fraud and white-collar crime to

a more global focus. The Report examines both domestic and international fraud cases. It

illustrates that fraud is not just a domestic issue but can be encountered in many countries

throughout the world. Thus, The Report is an ideal tool to use to expose students to the implications

of global fraud.

This paper suggests ways of integrating international fraud awareness into the existing curriculum

using The Report as a 1) research tool for class projects, 2) resource for class discussions, and 3)

link between disciplines.

LITERATURE REVIEW

In 2002 the accounting frauds brought new attention to the quality and content of accounting

education. Russell and Smith (2003) implicate educators, “If we are looking for a primary

contributing cause of corporate malfeasance at firms such as Enron, Equity Funding, WorldCom,

Sunbeam, Arthur Andersen, and HealthSouth, we need look no further than the classrooms of

college and university accounting programs that have not significantly adapted their methods of

instruction or approach to accounting and management education over the last 50-60 years”.

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According to Dosch and Wambsganss (2003), the educational system is not the primary blame, but

does share responsibility to help foster an environment that leads to well-trained employees. The

challenge faced by educators is developing ways to provide students with the needed exposure to

increase their fraud awareness throughout the accounting and business curriculum.

Historically, accounting programs have not kept pace with changes in the profession (AECC,

1990), not the least of which includes addressing factors associated with fraud (National

Commission On Fraudulent Financial Reporting, 1987 – Treadway Commission). As early as

1954, regulators criticized higher education’s lack of substantial focus on educating students about

the importance of auditing, internal controls, and related topics (AAA 1954 & AAA 1955). While

accounting students are technically savvy, they lack sufficient training in fraud awareness and

analytical skills to explore issues in context. The egregious and highly publicized accounting

scandals in the U.S. and abroad have brought increased focus on fraudulent behaviors and concerns

about future professionals’ ability to detect fraud.

The academic community has responded to the need for more education by 1) developing programs

in forensic or fraud accounting, 2) creating discrete courses in forensic or fraud accounting, or 3)

by integrating fraud concepts into auditing courses (Seda and Kramer, 2008; Meier, Kamath and

He, 2010). These efforts have focused primarily on accounting courses to the exclusion of other

business courses. While it is understandable that accountants must be aware of fraud signals, The

Report indicates that internal auditors (13.4%) and external auditors (4.0%) account for a small

percentage of the effective methods of detecting fraud in the U.S. (ACFE 2014). In the U.S., the

method that most often results in fraud detection is “a tip” (38.4%) (ACFE 2014). Detecting fraud

via tips is consistently the most effective method noted for each region cited in The Report since

2010. Therefore training not only accounting professionals, but also other business students,

increases fraud awareness for employees throughout the organization. We therefore want to ensure

that all business students have an awareness of fraud related issues in a global context.

The published Reports from 2010, 2012 and 2014 offer a source of information compiled from

more than 1,000 companies in nearly 100 countries. The Report is a rich document that allows for

customizability in all business courses. It is dynamic data that varies with each publication. Thus,

instructors can customize projects, assignments, and class discussions.

SUGGESTIONS FOR USING THE REPORT

Research for class research projects: A research project is a broad approach without a pre-

defined question. It allows students to discover and explore the differences and similarities of fraud

among countries. The length of the paper may be scaled based on the size of the class. It is equally

suitable for Independent Studies or a Master Thesis.

The Report may offer the opportunity to develop research questions related to global fraud. There

is disaggregated data by region for 2010, 2012, and 2014 in the following areas: Detection methods,

Victim organizations, Anti-fraud controls, Position of perpetrator, Gender of perpetrator, and

Corruption cases.

This information provides students with an opportunity to examine the regional effect of fraud,

regional differences among perpetrators of fraud, gender differences among regions, and methods

used to control/detect fraud among different regions. Students may be asked to derive their own

research questions from the data in The Report. The research project may require students to gather

data from The Report, formulate a specific research question, and draw conclusions and interpret

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the data. Students should also be required to incorporate other relevant literature, i.e. industry

specific, country specific, advances in technology, etc.

Resource for Class Discussions: Post-SOX, most accounting textbooks have at least one chapter

on fraud, ethics, internal controls, or other topics related to security of assets and quality of financial

reporting. In addition to the textbook coverage of the aforementioned material, The Report can be

incorporated to serve as an additional tool to bolster the need for concern about the security of

information and need for controls. The Report (2014) includes a “Fraud Tree” that graphically

displays types of fraudulent schemes under three headings: Corruption, Asset Misappropriation,

and Financial Statement Fraud. This graphic can help the instructor to correlate information in the

report to topics being discussed in class on a particular day.

The many charts included give many options in selecting topics appropriate for discussion with a

given class. For example, Frequency of Fraud Schemes by Industry (Figure 1) allows the user to

select one or more industries to compare the percentage of each type of fraud committed in each

type of industry.

This could lead to a discussion of why some schemes are more prevalent in an industry than others.

The discussion could also include examples of how businesses differ in their processes that might

make some fraud schemes more prevalent there.

The Report indicates that a “tip” is the most common and effective detection method used by every

region over the years as shown in Figure 2.

Students may be surprised however to see that “hotline” is not the most frequently used anti-fraud

tool cited by The Report for all regions. On average, a hotline was implemented by about 50% of

the respondents (ACFE 2014). Based on the effectiveness of tips, a hotline should be a top priority

among anti-fraud tools. This is an interesting paradox that can generate a vibrant class discussion.

The topic may be framed with the following question: Are companies utilizing the most effective

anti-fraud tools or are they implementing tools based on statutory requirements? Examining the

following tables in The Reports, Anti-fraud Controls and Detection Methods, will help guide the

discussion.

Another discussion can be based on the differences in detection method by size of the organization

as depicted in Figure 3. Reviewing this data provides a starting point for a discussion of the

differences in types internal controls and management review between small and large businesses.

The information in the report also indicates that (with the exception of Canada) fraud occurs most

frequently among managers and employees rather than owners/executives. However, the financial

losses attributed to owners/executives were generally higher than losses among managers and

employees. Students may be challenged to discuss why lower-level employees commit fraud with

a greater frequency than executives. A second discussion related to perpetrators may require

students to examine the magnitude of fraud losses among the various countries. Tables related to

the position of perpetrators by region indicate significant variability among the amount of loss

incurred. These tables will demonstrate to students the financial impact of fraudulent behavior.

The Report provides an examination on the impact of corruption. It states, “…multinational

companies often have increased corruption risks to consider.” (ACFE 2014). The Reports indicate

that corruption consistently accounts for a significant portion of the fraud schemes committed for

every region. However, there is significant variability among the growth or decline in reported

corruption cases among the reporting countries. Students can examine the difference between

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corruption and other types of fraud. They may be asked to examine the extent to which corruption

has increased or decreased in the various regions. Perhaps they may be able to theorize why

corruption increased in some regions while in other regions corruption decreased.

Link Between Disciplines: The Report offers the opportunity to tailor research projects or

class discussions to specific business disciplines. In each of the three years, The Report provides

summary information that highlights the perpetrators of fraud by department. During 2010 and

2012 the ACFE provided a regional analysis of perpetrators by department as illustrated in Figure

4.

These tables provide opportunities to foster research projects and discussions in courses outside of

accounting. In each of the three years, the report indicates that the following departments

collectively account for more than 75% of fraud cases: accounting, operations, sales,

executive/upper management, customer service, and purchasing. The departmental information

provides an opportunity to focus discussions by related class or major. Discussions may include

fraud schemes that are most prevalent in the respective field.

In order for students to effectively understand fraud they should know how the various schemes

may be committed. The appendix of The Report provides a glossary of terms which define the

various types of fraud schemes. In each course, the glossary may be reviewed and students may be

asked to discuss how the specific fraud scheme could be perpetrated in their specific discipline,

how fraud could be detected, and recommended anti-fraud controls. Students may also be

challenged to consider the implications of fraud outside of the U.S.

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Figure 1 (Source: ACFE, 2014)

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Figure 2 (Source: ACFE 2014)

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Figure 3 (Source: ACFE 2014)

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Figure 4

CONCLUSION Fraud awareness should not be incidental to the curriculum. It is an important element in the ever

increasing global environment. This paper suggests ways to supplement the existing curriculum to

include increased fraud awareness. We have not limited our recommendations to accounting

courses, but recommend integration and inclusion for all business courses.

Students can examine the different types of fraud as well as the differences in the types of

perpetrators and geographic incidence of fraud. Students may be familiar with common types of

embezzlement schemes but study of The Report can provide an opportunity to learn about less

common schemes that may cause the most financial loss.

By studying The Report, students will have a better idea of what to expect in their jobs as

accountants, financial executives, or auditors. The Report provides statistics that are more objective

and specific than what the students may read in a textbook or hear about in the media.

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Using The Report gives professors an opportunity to bridge the gap between textbook learning and

the “real world” so the students gain a better understanding of what they may encounter in their

careers. Finally, the geographic diversity found in the report allows students to learn about business

environments in different countries before they actually travel to or conduct business in these

countries. The Report is a great teaching tool to enhance business education for all students.

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