Accounting for fraud

Accounting fraud remains one of the most critical and prevalent issues facing the financial industry. By and large, most auditors are not prepared to search for and identify the signs of financial fraud. This lack of preparation is even more pronounced among staff and senior auditors where the majority of the detailed audit work and client conversations take place.

Before you jump to conclusions, this is definitely not due to a lack of professionalism or intelligence. Rather, it is a lack of training focused on fraud that stems from a long history – almost 100 years – of stating that uncovering financial fraud was not the responsibility of certified public accountants. In fact, some CPAs believe that detecting fraud is still not one of their core responsibilities. A few others espouse a more modern day rendition that – because fraud often involves collusion, making it hard to detect – collusive fraud is therefore outside their responsibility to the public. Accountants need to adjust their training if finding fraud is hard. But what is the impetus to change the profession’s education and training programmes? After all, the CPA exam barely addresses the issue of fraud.

The problem is compounded by the fact that business schools barely make a nod towards accounting fraud in their core courses. Of course they are teaching MBAs not accountants. Nevertheless, business schools are teaching the business leaders of the future and by neglecting to brief their MBA students on issues of fraud they are not preparing them to be well-rounded business leaders.

The solution lies with amending the CPA exam and also encouraging universities and business schools to incorporate financial fraud detection more fully into their curriculum. Currently, the CPA exam only allocates 0.5 per cent of the questions to fraud, or, as I view it, 99.5 per cent of the CPA exam is not on fraud.

However, I suspect that if we surveyed investors who rely on audited financial statements, their expectation would be that more than 0.5 per cent of the auditor’s responsibility is to catch material financial fraud. To better align accountants’ skills with their responsibilities, it is therefore important that the CPA exam include more questions on fraud.

The CPA exam must recognise the imperative that has been placed upon the profession since CPAs are the fraud watchdogs of the business industry. While MBA courses focus on ethics in business, an MBA’s core responsibility upon graduation is unlikely to be focused on detecting or stopping accounting fraud unless he or she is in the accounting department. Just as they may not be involved in the daily IT or HR problems of their businesses, most MBA graduates will not be focusing daily on accountancy issues. With the responsibility of fraud detection lying on the accountants’ shoulders, the CPA exam along with undergraduate and masters of accounting programmes need to focus more of their students’ studies within this realm.

In response to the exam’s increasing focus on fraud detection, educators at accountancy and hopefully MBA programmes, will then offer greater exposure – either through standalone courses or by inclusion within an existing course – to forensic accounting with areas of focus that could include tax fraud schemes, financial statement fraud and interviewing skills.

Some schools have already begun doing this, but the profession needs more. Ultimately, this will lead to CPAs being better trained to uncover material frauds and an overall higher level of investor confidence.

The author is founder and president of Capital Confirmation and edu.confirmation.com and adjunct professor of managerial studies at Vanderbilt University.