White-Collar Wipeout

It’s no secret that many companies manipulate their numbers to present a certain picture to their investors.  It’s called earnings management, and it’s just as legal as any other common business practice.

Earnings management, however, can easily cross the fine line from legality into flat-out corporate fraud.

Since Enron’s fraud calamity in 2001, America has uncovered an epidemic of white-collar crime.  In 2005, losses from fraud rose to an estimated $638 billion—up from $600 billion in 2002.  Since 2003, the number of companies reporting cases of fraud has risen dramatically, with reports of money laundering up 133 percent and financial misrepresentation up 140 percent. 

The government has made numerous attempts to squash fraudsters, including beefing up laws and implementing more aggressive enforcement.  Penalties for corporate fraud are also on the rise with most fines and settlements regularly topping $100 million.  While these efforts have yielded some success, corporate charlatans continue to prove their shiftiness by finding new ways around the rules.

With corporate fraud alive and well in the U.S., the demand for a new breed of accountant has risen dramatically: the forensic accountant.  Part accountant, part investigator, part auditor, and part attorney, forensic accountants are the new task force on the corporate battlefield.

Perhaps nobody is more aware of this growing need than Utah State forensic accountant Cindy Durtschi.  While spending her academic career delving into the cogs of corporate fraud, Durtschi has devoted her research to helping her students hone their fraud-detection abilities.  

“For many years, auditors simply said it wasn’t their job to find fraud, and it became obvious after Enron that the public expected us to be finding fraud, and that if we didn’t, our auditing firms would suffer,” said Durtschi.  “I quickly became convinced that for our own survival, we needed to become better at doing it.”

This notion of helping auditors become better forensic accountants has escalated into a personal crusade of sorts, and Durtschi has spent the past ten years seeking a more effective and long-lasting teaching methodology for fraud detection.   

   
“I am trying to create and disseminate a methodology for teaching that helps auditors detect fraud and also helps them retain what they have been taught for a longer period of time,” said Durtschi.  “I needed a methodology that would stick with auditors even after doing years of ‘normal’ audits.”

Because most auditors don’t encounter fraud on a daily basis, it can be difficult to keep fraud-detection skills in top form.  Consequently, many universities across the country have begun to consider the idea of implementing forensic accounting courses into the regular auditing curriculum. 

Durtschi believes that such courses will instill a keen sense of skepticism in students that will allow them to be better prepared to detect fraud.

“A raised sense of skepticism is important because once students become auditors, finding fraud is rare,” said Durtschi.  “The best we can do is hope that a higher level of skepticism will help auditors detect more frauds.”

Teaching this heightened sense of skepticism in the classroom can be a tall order, but Durtschi believes that a problem-based learning approach may be the answer. 

Often used in the medical field, problem-based learning is a method that encourages problem-solving skills through realistic, carefully-selected problems.  Students work through such problems systematically, just as they would in any real-life situation.

“Just as novice doctors examine a real body, accounting students are given a realistic set of books provided by a realistic company with employees, a competitive environment, and a perpetrator with realistic motivations,” said Durtschi.  “Like the novice doctors, the accounting students must identify the symptoms, make a diagnosis, collect additional information, and prescribe treatment.”

Problem-based learning sounds good in theory, but will it really do the trick for accounting students? According to Durtschi’s research, the outlook is definitely promising.

To conduct her research, Durtschi follows different cohorts of students enrolled in a USU forensic accounting class.  She tests the students on their fraud detection abilities at different points in time: the first day of class, the last day of class, and seven months after class ended. 

“We find that students who have taken the forensic accounting classes provide significantly higher initial fraud risk assessments than students who have taken a typical auditing course,” said Durtschi.  “We also find that seven months later, their performance is sustained, suggesting that their knowledge was retained.”

In addition to scoring higher on fraud-detection tests, students enrolled in forensic accounting courses generated responses quite similar to experts already well-established in the fraud-detection field—even seven months after the course.

In addition to promising statistics, students are raving about the success of Durtschi’s courses as well.

“We are told to be aware of fraud and some potential areas where it may occur, but only in the forensic accounting class did we learn how we could proactively discover fraud through such techniques as the Benford analysis and observation of human behavior during interviews,” said Brad Schultz, a student in one of Durtschi’s forensic accounting classes.

“We also investigate actual companies where fraud occurred to see if we can discover the incidence. If I am ever in a situation in the future where I suspect fraud during an engagement, I won’t have to try and remember what to do from something I once read in a textbook. I can look back to the hands-on experience I had in this class and use the techniques of discovery that had already proven to be successful.”

“I feel that I am more marketable because I had to function completely differently in this course,” said Tom Colligan, another student in one of Durtschi’s forensic accounting classes. “In other courses I have only had to look out and work for myself.  Durtschi’s class forced me to work with and care about my team.  The only other option was to fail.  I found this class stretched me and helped me to think outside the box.”

Durtschi’s promising results are a glimmer of hope in a time of mounting fraud and corporate mischief.   Durtschi is working to move this research out of the classroom and into audit firms where working auditors can sharpen their skepticism.

Fortunately for America, it looks like embezzlers and launderers may finally be out of luck; by changing the way accountants are trained, Durtschi is helping put the kibosh on these kinds of white-collar crime once and for all.