Fraud is a very costly problem in our society today. Fraud examinations are conducted to determine if fraud has occurred and if so to gather evidence of the crime. Fraud is usually considered a white collar crime and the examination will involve surveillance and analysis of complicated financial records. Fraud investigators are often referred to as financial detectives.
Fraud examination, according to Joseph T. Wells, "is defined as the skills necessary to resolve allegations of fraud from inception to disposition; to obtain evidence, take statements and write reports; to testify to findings; and to assist in the detection and prevention of fraud. Fraud examination consists of specialized knowledge from four fields: accounting and auditing, investigation, law, and criminology." Mr. Wells is the founder and chairman of the Association of Certified Fraud Examiners.
Fraud is ever-present. Experts say that 20 percent of people will not commit fraud no matter what, 20 percent of people are always looking for a chance to steal or commit fraud and 60 percent of people will steal or commit fraud if they think they can get away with it. The Association of Certified Fraud Examiners published their “Report to the Nation” on fraud in 2008. In this report they estimate that businesses lose 7 percent of revenue to fraud. When applied to the gross domestic product, this equates to $994 billion lost to fraud. They also found that most fraud schemes that are detected have gone on for an average of two years before being detected. Fraud examinations begin after fraud is suspected or it has been detected. While some frauds are discovered routinely through internal controls or internal audits, most are reported by tipsters. Fraud examiners usually do not get involved until after the crime has been detected.
Fraud Examination is a growing field. Experts agree that fraud in business and government is epidemic and the CPA's role in fighting fraud has increased because of corporate scandals and the resulting media attention. However, most CPAs are not trained properly for the role of fraud examiner and few frauds are caught before big losses occur. Again according to Wells, this is because accountants and auditors wrongfully assume fraud can be detected and prevented through traditional audit techniques. Scandals such as Enron and WorldCom and others have resulted in a great deal of media scrutiny and new legislation aimed at preventing fraud and/or enhancing the ability to catch perpetrators earlier rather than later. The most significant legislation has been the Sarbanes Oxley Act, commonly referred to as SOX. This legislation has brought about significant changes for public companies regarding internal controls, reporting to the SEC and governance and has also brought significant changes to the audit industry regarding oversight and the scope of services that can be provided to an individual client. While SOX may represent some improvement on the regulatory and prevention front for combating fraud and protecting the public interest, fraud cannot be stopped with legislation.
Fraud is difficult to detect because fraudsters are clever people. They figure out ways to circumvent laws, rules, regulations, policies and procedures. This is why traditional audits only find a small portion of the fraud that occurs. Auditors are verifying the accuracy of financial statements, not necessarily looking for fraud. This is where fraud examiners come in. They design procedures to actively look for fraud in an organization, and when they find it, they dig deeper to find all the evidence and build a case against the perpetrators
Fraud investigators receive special training in various techniques. Until recently, training was almost totally on the job; now there is a certification program. The Certified Fraud Examiner credential requires ongoing continuing education. As training continues to evolve and new and more sophisticated techniques are developed, fraud examination will become more scientific and fraud schemes will be easier to detect using the right procedures. The fact that fraud is a growing area may be because of more sophisticated techniques. That is, the fraud may have always been there; it just was not known, and now more of it is being uncovered.
Fraud examination is a growing field with exciting opportunities for those interested in a career as an investigator. There will always be a need for fraud examiners and as fraud examination techniques evolve and become more scientific, more and more fraud will be uncovered. This field is predicted to continue growing as fraud is found to be a bigger and bigger problem in our society.
Drew Nelson is a Certified Public Accountant with over 20 years experience. As a professional he has written dozens of reports, presentations and manuals. His articles appear on various websites, covering finance, economics, politics and health topics.