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Fraud and Corruption in Accounting Put Under the Microscope

Nov 9th 2016
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The 2016 Global Fraud Study by the Association of Certified Fraud Examiners (ACFE) makes clear that fraud is a persistent global threat. More occupational fraud began in the accounting department than in any other business unit, the study reveals.

Of the frauds analyzed for the study, the majority were committed by people in accounting, operations, sales, executive/upper management, customer service, purchasing, and finance.

“We now live in a world where virtually all business and government organizations understand that fraud is a threat they must deal with,” James Ratley, CFE, co-founder and president of the ACFE, says in the study.

Ratley, who headed fraud investigations at a forensic accounting firm before establishing the ACFE, provided AccountingWEB with his perspective on fraud trends.

AW: The 2016 Global Fraud Study indicates that corruption plays a key role in fraud schemes. Why do you think that is, and what’s the most prevalent form of corruption?

James Ratley: Corruption was the scheme that was most common among the reported cases in the banking and financial services sector; 37.5 percent of the cases reported to us that were perpetrated at banks and financial services organizations involved some form of corruption. However, banking and financial services was not the sector with the highest percentage of corruption cases; several industries had a greater percentage of reported cases that involved corruption.

Of the fraud cases perpetrated by an individual in the accounting department, 34.5 percent involved corruption.

Our research shows that corruption is a pervasive problem worldwide. Even with the increases in global anti-corruption enforcement and initiatives, there still remains certain jurisdictions and certain industries in which bribes, nepotism, and other corrupt practices are considered simply a part of doing business.

Additionally, in some ways, it’s a softer form of fraud – one in which perpetrators can often justify their crimes in the name of facilitating business or maintaining professional relationships. So, for some individuals, this can be much easier to rationalize than embezzling funds directly from the victim organization. In the fraudster’s mind, the scheme isn’t directly hurting anyone, and it might even be helping the company.

James Ratley

According to the research conducted as part of our 2016 Global Fraud Study, the most prevalent form of corruption involves conflicts of interest – those cases in which the fraudster undertook transactions on behalf of his or her employer in which he or she had a hidden economic or personal interest in another party to the transaction, such as having a secret ownership in a vendor or a family relationship with a competitor.

AW: When we last talked, accountants or people with an accounting background comprised more than half of your members. Where does that stand today?

Ratley: The ACFE is an extremely diverse professional association made up of members in many different industries and job functions that are all responsible in some way for the prevention, detection, and investigation of fraud in the workplace – accounting, audit, compliance, risk, corporate security, law enforcement, investigation, and several others.

Many of the individuals within these functions come from an accounting background. Currently, accountants or those with an accounting background continue to make up more than 50 percent of our members globally.

Feedback from our members in these sectors indicates that they find the CFE credential to be highly complementary to their current role in their organizations, regardless of their position. While obtaining the CFE, they acquire skills to more effectively identify red flags, as well as enhance their professional skepticism.

AW: In what industries or business sectors do you see the biggest growth of CFEs, and why?

Ratley: With nearly 80,000 members in over 150 countries, the ACFE continues to grow rapidly. Much of the growth in recent years has been global, as overseas markets have begun to more effectively tackle the issue of fraud.

As far as industries go, we have continued to see high growth within financial institutions, as the risk and compliance functions continue to become more regulated and focused on the reduction of financial misdeeds.

AW: What would you say are the top five characteristics of a CFE?

Ratley: Analytical skills, creativity and imagination, resourcefulness, communication skills, and ethics.

1. Analytical skills: CFEs must be able to look at both patterns and anomalies, and discern meaning from them. It’s not enough to gather evidence. CFEs must be able to connect the dots within the evidence.

2. Creativity and imagination: CFEs have to be able to think like a fraudster and identify all the ways a dishonest individual might exploit a situation.

3. Resourcefulness: CFEs must know where and how to get the information they need. They also must be able to know the limits of their professional expertise and how to effectively supplement those areas when a case requires.

4. Communication skills: Fraud is a human crime, not an accounting crime. So, much of preventing, detecting, and investigating fraud requires an ability to read people and interact in a way that makes others feel comfortable.

In addition, CFEs must have strong communication skills to support interviewing, writing reports, testifying to findings, and selling anti-fraud initiatives to organizations.

5. Ethics: CFEs must be a beacon of ethical behavior; they must walk the walk and talk the talk. They should strive to be the embodiment of the culture of fraud prevention that they are trying to help create.

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