perceptions regarding fraud detection and prevention methods

perceptions regarding fraud detection and prevention methods

perceptions regarding fraud detection and prevention methods
perceptions regarding fraud detection and prevention methods

Accountants’ perceptions regarding fraud detection and prevention methods

James L. Bierstaker
Department of Accountancy, College of Commerce and Finance, Villanova University, Villanova, Pennsylvania, USA
Richard G. Brody
School of Business, University of South Florida, St Petersburg, Florida, USA, and
Carl Pacini
Department of Accounting and Finance, College of Business, Florida Gulf Coast University, Ft Myers, Florida, USA

Purpose – The purpose of this study is to examine the extent to which accountants, internal auditors, and certified fraud examiners use fraud prevention and detection methods, and their perceptions regarding the effectiveness of these methods.
Design/methodology/approach – A survey was administered to 86 accountants, internal auditors and certified fraud examiners.
Findings – The results indicate that firewalls, virus and password protection, and internal control review and improvement are quite commonly used to combat fraud. However, discovery sampling, data mining, forensic accountants, and digital analysis software are not often used, despite receiving high ratings of effectiveness. In particular, organizational use of forensic accountants and digital analysis were the least often used of any anti-fraud method but had the highest mean effectiveness ratings. The lack of use of these highly effective methods may be driven by lack of firm resources.
Practical implications – Organizations should consider the cost/benefit tradeoff in investing in highly effective but potentially underutilized methods to prevent or detect fraud. While the costs may seem prohibitive for small organizations, substantial cost savings from reduced fraud losses may also be significant.
Originality/value – By identifying methods that work well for fraud detection and prevention, prescriptive information can be provided to accounting practitioners, internal auditors, and fraud examiners.

Keywords Internal auditing, Fraud, Accountants
Paper type Research paper


Recent corporate financial accounting scandals (e.g. Enron, WorldCom, Global Crossing, Tyco, etc.) have increased concerns about fraud, wiped out billions of dollars of shareholder value, and led to the erosion of investor confidence in financial markets (Peterson and Buckhoff, 2004; Rezaee et al., 2004). Globally, the average estimated loss per organization from economic crimes is $2,199,930 over a two-year period (PriceWaterhouseCoopers (PWC), 2003). In the USA, the Association of Certified Fraud Examiners (ACFE) estimates that about six percent of firm revenues, or $660 billion, is lost per year as the result of occupational fraud (Association of Certified Fraud Examiners, 2004).

Although larger businesses are more likely to experience economic crime, fraud may be more costly for small businesses (Thomas and Gibson, 2003; PriceWaterhouseCoopers (PWC), 2003). The average small business fraud amounted to $98,000 per occurrence compared to $105,500 per incident for large companies (Association of Certified Fraud Examiners, 2004). On a per employee basis, losses from fraud can be as much as 100 times greater at small firms than large firms (Association of Certified Fraud Examiners, 2004; Wells, 2003). In addition, the damage inflicted by fraud goes beyond direct monetary loss. Collateral damage may include harm to external business relationships, employee morale, firm reputation, and branding (PriceWaterhouseCoopers (PWC), 2003). In fact, some of the collateral effects of fraud, such as damage to firm reputation, can be long-term (PriceWaterhouseCoopers (PWC), 2003). Despite the increased incidence of fraud and enactment of new anti-fraud laws, many organizational anti-fraud efforts are not current and are somewhat superficial (Andersen, 2004). Hence, many entities are trying new and different steps to combat fraud (KPMG Forensic, 2003; PriceWaterhouseCoopers (PWC), 2003).

One reason that entities of all types are taking more and different steps to fight fraud is that the traditional red flags approach is not considered effective. The well-known red flags approach involves the use of a checklist of fraud indicators. The existence of red flags does not portend the presence of fraud but represents conditions associated with fraud; they are cues meant to alert an auditor to the possibility of fraudulent activity (Krambia-Kardis, 2002). Numerous commentators have cast doubt on the red flags approach as it suffers from two limitations:

(1) red flags are associated with fraud, but the association is far from perfect, and
(2) since it focuses attention on specific cues it might inhibit internal and external auditors from identifying other reasons that fraud could occur (Krambia-Kardis, 2002).

In fact, critics of SAS 99 – Consideration of Fraud in a Financial Statement Audit – point to its heavy reliance on the red flags approach (Kranacher and Stern, 2004).

A second reason that organizations are trying more and different ways to attack fraud is that most entities have used an impractical strategy of fraud detection (Wells, 2004). Fraud prevention is a more viable strategy since it is often difficult to recover fraud losses once they are detected (Wells, 2004). Many companies and their auditors deal with fraud on a case-by-case basis rather than implement a long-term plan. Also, recent legislation such as the Sarbanes-Oxley Act of 2002 (SOX) does not do much in terms of fraud prevention; instead, the law focuses on punishment and accountability (Andersen, 2004).

In the Fall 1997 issue of the Auditor’s Report, the American Accounting Association (AAA) encouraged research directed toward assisting auditors and investigators in preventing and detecting fraud. The growth in fraud cases indicates that a strong need exists for research approaches that better enable auditors and investigators to prevent and detect potential fraud. Thus, the purposes of this study are to analyze and understand accountants’ perceptions of the myriad techniques used to combat fraud, shed light on whether the techniques actually used by firms are considered the most effective and offer suggestions to practitioners as to what prevention and detection techniques are the “best.” Organizational management attempting to comply with SOX and similar laws by launching new anti-fraud programs, as well as external and internal auditors, will benefit from this study’s findings, when considering which anti-fraud methods to pursue. The benefits consist of less time spent on the use of ineffective techniques and reduction of fraud risk through earlier implementation of more effective fraud prevention and detection techniques.

The remainder of this paper is organized as follows. The next section reviews past research addressing fraud detection and prevention methods. The third section discusses various techniques for combating fraud. The fourth section presents the design of the study. The fifth section analyzes the results and the last section concludes the paper.

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