When greed is not good: SOM meets the demand for forensic accountants
From the Fall 2010 issue of Reaching Higher: The Binghamton University School of Management Magazine
By Brian Crawford
In the 1987 film Wall Street, Michael Douglas, as the fictional arbitrager Gordon Gecko, tells assembled stockholders
that "Greed, for lack of a better word, is good." Now much maligned, Gecko's point
was that desire for financial gain is an evolutionary force that fosters the building
of new businesses and motivates the creation of empires. But as Associate Professor
Louis Braiotta likes to point out, when greed spirals out of control into fraud, it
also can lead to the downfall of great firms, with harmful ripple effects for employees,
shareholders, customers and entire communities. Braiotta adds that, unfortunately,
greed is by far the primary motivation for business fraud, but accounting students
in his Senior Auditing 460 class are learning how to use internal controls to help
spot deceit in a company’s financial statements and "red flag" behaviors that might
indicate financial deceit.
The financial losses to business due to fraud are enormous. The Association of Certified Fraud Examiners (ACFE) estimates that this year, businesses will lose an average of five percent of their revenues to fraud ? more than $600 billion in the United States alone. Worldwide, more than $3 trillion are lost annually to fraudsters, according to the Association’s 2010 Report to the Nations on Occupational Fraud and Abuse.
Individual scandals on the order of Enron and the more recent Bernard Madoff fraud total in the tens of billions of dollars, garner newspaper headlines and result in Congressional hearings, yet the greatest proportion of occupational frauds take place in smaller organizations that lack the resources to develop strong internal controls and hire external auditors. As a result, small businesses are more prone to be victimized by fraudsters who misappropriate assets, create inaccurate financial statements or engage in conflicts of interest or other forms of corporate corruption. Businesses, both big and small, are looking for employees who have the analytic skills and knowledge to help combat fraud, making forensic (investigative) accounting one of the most in-demand fields in the accounting industry.
Although the School of Management doesn’t have specific classes in forensic accounting, students learn to "follow the money" throughout the SOM accounting curriculum. With rigorous training in generally accepted accounting principles, they learn to understand how a company's financial statements should read — all the better to notice when they don't. In Braiotta's auditing class, students are organized into teams that serve as a virtual CPA firm. Using publicly available documents and records, students develop a broad portfolio of exhibits on firms such as Walmart and FedEx, including a fraud risk assessment. In pre-audit brainstorming sessions, they question where and how a company earns its revenues, what authority corporate executives have to override financial transactions and reports, and whether there are obvious conflicts of interest. They gain the fundamentals of forensic accounting through close analysis of financial statements and utilize analytics — data analysis, vertical and horizontal analysis of financial statements and trend recognition — to discover potential patterns of fraud.
More diabolically, students also learn how fraudsters inflate revenues, steal funds and profit from conflicts of interest. They examine cases such as the Roslyn School District credit-card fraud, where $11 million was stolen from the taxpayers of a Long Island township, and they review videos provided by the Association of Certified Fraud Examiners (ACFE) detailing instances of occupational fraud. For example, they learn about the ZZZZ Best Carpet Cleaning Company stock scam in the late 1980s that raked in more than $200 million for an essentially worthless business. Braiotta says that students are often shocked to learn of the ingenuity with which frauds are committed and covered up, like how the owner of ZZZZ Best even went so far as to spend $2 million to build a phony work site to fool outside auditors. In essence, Braiotta teaches the tricks and deceits of practicing fraudsters, prefaced with the strong admonition, "Don't Do This!"
Students also learn to identify "red flags" that can suggest unscrupulous activities — the outgoing clerk who drives a Ferrari, the stressed-out salesperson with a house in foreclosure or the secretive executive who won't take his vacation lest his schemes be discovered. In fact, most fraud cases are solved as a result of confidential hotlines and tips from co-workers and customers who raise questions about unusual behaviors or financial transactions. Braiotta reminds his students that it was the actions of whistleblowers Sherron Watkins at Enron and Cynthia Cooper at WorldCom that provided federal prosecutors the information they needed to secure convictions in these multi-billion-dollar frauds.
With many of his students preparing to enter the workforce, Braiotta encourages them to be aggressive about fraud prevention and to be knowledgeable about the entire range of techniques available to firms to discourage theft and deception. Even the most thorough audit will find fraud only after it has occurred, so it is far better to prevent fraud in the first place. Braiotta emphasizes the anti-fraud strategies advocated by the ACFE, teaching his students effective anti-fraud measures such as company hotlines, surprise audits, fraud training and strong codes of corporate conduct. Executives in the best organizations establish a climate in their firms that informs employees that ethical behavior will be rewarded — and fraud will be discovered and punished.
Experts agree. There is no way to completely eliminate occupational fraud. Even with the best anti-fraud measures in place, there will always be an unscrupulous person who, driven by greed, will fudge the numbers or pocket a kickback. As a result there will always be job opportunities for accountants with forensic skills. Currently, the public fascination with fraud and white-collar crime is helping drive demand for forensic accountants — though they also are frequently hired to help untangle complicated financial arrangements in civil cases such as divorces. Even the FBI and CIA are hiring accountants who can track the funds of terrorists and drug cartels. With divorce rates at 50 percent and the costs of corporate fraud increasing annually, it is no wonder that forensic accounting consistently ranks among the "hot jobs" available for business students.
SOM students are very well-prepared to take jobs in this growing field. Braiotta says that his students are "bright, independent, skilled communicators," who are adept at both the technical and human side of accounting. The background they have in business ethics, as well as their classroom exposure to the different vignettes of fraud cases and theoretical knowledge of fraud prevention, ensures that they are well-prepared to take jobs in this growing field.