Certified Fraud Examiners: A Survey of Their Training, Experience and Curriculum Recommendations

Transcription

1 Journal of Forensic Accounting /Vol.VII(2006), pp R.T. Edwards, Inc. Printed in U.S.A. Certified Fraud Examiners: A Survey of Their Training, Experience and Curriculum Recommendations Rayman D. Meservy, Marshall Romney and Mark F. Zimbelman Brigham Young University The certification of professionals dedicated to preventing and detecting fraud began in 1988 with the formation of the organization now known as the Association of Certified Fraud Examiners (ACFE). Today, membership in the ACFE includes approximately 16,000 Certified Fraud Examiners (CFEs) and 33,000 total members. The work that CFEs perform, their training, and their perceptions of important skills and knowledge for detecting and preventing fraud have not yet been documented. This paper provides survey results from 725 CFEs regarding their training, job experiences, and curriculum recommendations. In particular, we provide data on why professionals become CFEs and describe the typical educational background and employment history of CFEs. We also document CFEs recommended career path and the types of frauds CFEs work on including both the number and magnitude of the frauds. Finally, we document the skills and knowledge that CFEs believe are most important for preventing and detecting fraud and which skills and knowledge bases CFEs believe are deficient among financial statement auditors. In the last few years, there has been a heightened interest in and concern about fraud. Scarcely a day goes by without a news story about a major business scandal involving fraud such as Enron, WorldCom, Adelphia, HealthSouth, Tyco, Qwest, Xerox, or any number of the smaller, less-publicized frauds. These frauds have led to higher costs for products and services, mistrust for business leaders, lost retirement funds and job insecurity. They also led to legislation, such as the Sarbanes-Oxley Act of 2002, the regulation of the auditing profession with the creation of the Public Company Accounting Oversight Board and new auditing standards such as SAS No. 99, Consideration of Fraud in a Financial Statement Audit. Fortunately, public accounting firms are responding to these frauds by stepping up their efforts to detect fraud, including more and better training for auditors on detecting fraud. Educational institutions have also responded as more institutions of higher education are implementing new courses on fraud prevention, detection, and audit. Finally, these frauds have also led to an awareness of and a greater need for the growing body of professionals known as Certified Fraud Examiners (CFEs). 1

2 2 R.D. Meservy, M. Romney and M.F. Zimbelman The CFE designation has become the standard in the fraud industry. Requirements for CFE certification include earning a Bachelor s degree, passing a ten-hour exam, and having at least two years of professional experience in a related field ( Today, there are over 16,000 CFEs worldwide. Professionals from many different disciplines have earned the CFE certification, including industry and governmental accountants, internal and external auditors, law enforcement personnel, government employees, lawyers, business leaders, and educators. An additional 17,000 associate members of the Association of Certified Fraud Examiners (ACFE) have not met the requirements to become a CFE but have chosen to affiliate with the organization. Because of their specialized training and experience in fraud related matters, CFEs are increasingly called on to prevent, detect, investigate, report, and testify about fraud. However, not much research has focused on who CFEs are and what they do, or on how to design college curriculum to more effectively prepare students to pursue careers involving fraud examination, prevention or detection. To gain a better understanding of these issues, we surveyed CFEs and documented their responses to questions such as: Who are CFEs? What is their education and job background? What do CFEs do? Do they spend most of their time in fraud prevention, detection, investigation, reporting, or litigation support? What types of frauds do CFEs investigate? What skills or knowledge do CFEs view as most critical to their career? What skills or knowledge should universities teach aspiring CFEs? Where are most CFEs employed? Are they in government service (IRS, FBI, etc.), external auditing, internal auditing, specialized forensic accounting firms, or specialized industries such as banking or insurance? What are the best career paths to follow to become a CFE? What are the compensation levels of CFEs? Importantly, we also gather information about the skills and knowledge bases that CFEs need so that fraud examination courses will be more relevant and better prepare students for a career in fraud examination. This paper is organized as follows. The first section reviews related literature and describes our study. The second section focuses on gaining an understanding of CFEs and introduces our findings with regards to why people become CFEs, their educational background and

3 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 3 work experience, how CFEs spend their time and their compensation. The third section takes a look at the types of frauds CFEs investigate. The fourth section examines the skills CFEs see as important to investigating fraud. The fifth section discusses curriculum implications for professors and students. The sixth section discusses limitations of the study. The last section offers conclusions and a summary our results. RELATED FRAUD RESEARCH This paper provides insights on the work of CFEs on the following three dimensions: 1. Their background, including their education, career paths and the skills needed to perform their work 2. Their exposure to various forms of fraud (e.g., disbursement fraud, financial statement fraud, etc.) 3. Their perceptions of important skills and curriculum recommendations for those pursuing a career as a CFE or designing curriculum for future CFEs While we are not aware of prior research on CFE s education and career paths, we review prior research related to the other two dimensions. Our review is organized by these two areas: empirical studies of various forms of fraud and fraud education. Empirical Studies of Business Fraud Two survey studies provide the primary body of knowledge regarding the occurrence of the different types of fraud that impact the business world: the Association for Certified Fraud Examiners (ACFE) 2004 Report to the Nation and the KPMG Fraud Survey The 2004 Report to the Nation is the result of an online survey conducted by the ACFE. The report is based on 508 occupational fraud cases and updates previous reports in 1996 and Respondents had an average of 16 years experience dealing with fraud and were asked to select and report on one fraud case they had experience with. Respondents may have chosen to report on a particular fraud case because it involved a large amount of money, because it put a company at great risk, because the case was interesting, or for some other reason. Because of this data collection methodology, generalizing the results of this survey is potentially problematic. However, because the survey was conducted with CFEs who are experts in their field, their opinions give legitimacy to the results and the data is valuable and interesting.

4 4 R.D. Meservy, M. Romney and M.F. Zimbelman In the KPMG Fraud Survey 2003, KPMG commissioned telephone interviews with executives from 459 public companies (annual revenue of $250 million or more) and state and federal government agencies. By focusing on relatively large public companies and government agencies, the survey excluded important groups such as small and private companies. Therefore, the results of the survey should not be compared with the results of studies that include small and private companies in their target populations. The survey does include results from government agencies, which makes it possible to compare the survey results with other surveys which have included government agencies in their target populations. Both these studies provide information on the broad spectrum of fraud affecting businesses. In addition, other studies have focused on one of the many types of business fraud, fraudulent financial reporting. In addition to these surveys of general forms of business fraud, several studies have documented important characteristics of financial statement fraud (e.g., frequency, method and magnitude). These include a study sponsored by the Committee of Sponsoring Organizations of the Treadway Commission (hereafter, Beasley, et al. 1999), The Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002, and an analysis of fraud type and auditor litigation by Bonner, et al. (1998). These studies provide significant insights into the types of fraud cases faced by financial statement auditors. For example, all three publications give data on the frequency of various types of financial statement fraud (e.g., fictitious revenues or revenue recognition). While these studies are extremely valuable in understanding financial statement fraud schemes that have led to restatements and/or auditor litigation, we focus on a broader topic of all types of fraud investigated by CFEs. As such, these studies are tangentially related to our study. Our study overlaps with both these groups of research as we report on CFEs experience in all types of fraud. In addition, we extend this research by asking CFEs about their professional and educational background as well as their recommendations for careers and curriculum. Below we review the research in these areas. Research on Fraud Curriculum A recent study by Rezaee, et al. (2004) focuses on current and future forensic accounting education curricula. Data was gathered from various accounting syllabi and also from a survey administered to academicians and practitioner CPAs. The survey asked respondents for their perceptions of the importance, relevance and delivery of forensic accounting education. One finding is that the demand for forensic accounting is rising and expected to continue to rise and that forensic accounting courses will be offered by a larger number of universities

5 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 5 in the future. Also, the survey compares the academics views of important curriculum content with the CPAs views and finds some differences. For example, while report writing is considered to be the third most important content by CPA practitioners, academics perceptions placed it as the 20th most important area. Rezaee et al. (2004) documents perceptions of two important groups: CPAs and academics. In contrast, we focus on the education and backgrounds of CFEs and on the various skills needed to perform work typically carried out by CFEs. Similar to the above articles, we also provide data on the magnitude and frequency of the many forms of business fraud. However, our results are likely more generalizable than the studies referred to above since we randomly sampled from the population of CFEs and asked them to report average cases based on their experience. Lastly, we focus on training and skill recommendations from CFEs so as to document their perceptions for career paths and educational recommendations for both students and faculty. Our Contribution We prepared a three-page survey that elicited information about CFEs, pretested it on a small sample of CFEs and professors that conduct fraud research, and modified the survey based on the results of our pretest. In the summer of 2003, we mailed our survey to 2,000 CFEs randomly selected from approximately 16,000 CFEs. We gave the recipients a choice of filling out the questionnaire on-line or returning it by mail. Because respondents were asked to complete the survey only if they held the Certified Fraud Examiner designation, there were no responses from non-cfes. Thirty-six percent (725) of the surveys were returned, either online or by mail. CFE DEMOGRAPHICS, ACTIVITIES, AND COMPENSATION This portion of the paper reports our finding with respect to why people obtained the CFE designation, their educational and experience backgrounds, the activities that occupy their time, and how much they are paid Motivations for Obtaining the CFE Designation To gather information on why people decided to become a CFE, the questionnaire asked respondents to choose the one sentence shown in Table 1 that best described the main reason they became a CFE. These statements were developed by the researchers and modified and refined during our pre-test of the questionnaire. As shown in Table 1, 45.7% felt the cer-

6 6 R.D. Meservy, M. Romney and M.F. Zimbelman tification would provide them with status and respect, 26% felt that the training leading to the CFE would help them become successful in their careers, and 12% wanted the knowledge and skills gained by becoming a CFE. Only 6.9% felt the CFE designation would provide challenging and exciting job opportunities. It appears from this data that the primary reasons people become CFEs have less to do with obtaining challenging and exciting job opportunities and more to do with providing status, respect, and training for job responsibilities that they already have. Education Table 1 Primary Reasons Respondents Chose To Become a CFE Response Percent I believed the CFE designation would provide status and respect that would help me in my career I believed that the training leading to the CFE certification would help me be successful in my job. 26 I wanted the knowledge and skills gained by going through the CFE certification process. 12 Other 8.1 I believed the CFE designation would provide challenging and exciting job opportunities. 6.9 Almost seventy percent (68.5%) of our respondents had the required Bachelors degree. As shown in Table 2, almost thirty percent (29.7%) have an advanced degree. When the CFE certification process first began, for a short period of time anyone who could show significant fraud-related experience was grandfathered into the CFE certification. That is the most likely explanation for the few (1.9%) who do not meet the minimum requirements for a Bachelors degree. A majority of the CFEs (59%) reported that their college major was accounting. The next most popular undergraduate degrees were in criminal justice and related degrees (10%) and other business majors (9%). Table 2 Educational Background of Respondents Highest degree earned Percent obtaining the degree Major Percent PhD 2.50% Accounting 59% Law 2.20% Criminal Justice / Law / etc. 10% Masters 25.00% Other Business 9% Bachelors 68.50% Other degrees 22% Associate 1.90%

7 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 7 Experience On average, survey respondents have held the CFE title for over seven years. In addition, respondents averaged over 26 years of total work experience and have a wide variety of employment backgrounds. This means that, on average, the CFEs have 19 years of non-cfe work experience. The short amount of time that CFEs have held their certification is to be expected, as the ACFE was organized in 1988 and it takes time for the CFE certification to gain credibility and respect. Table 3 Employment History of Respondent CFEs Public service (e.g., IRS, FBI, law enforcement) External (financial statement) auditor Percent with some experience Average years for CFEs with experience Percent employed more than 20 years Percent listing as current position Percent listing as starting position Percent recommended as starting position Difference between actual starting and recommended starting position 46% 16.4 yrs 18% 15.60% 30.30% 32.20% 1.90% Internal auditor - private sector Government Auditor Litigation / Forensics Management accountant / Controller Public accounting other than audit (tax, write-up) Consultant / Private Investigator Insurance (investigator, adjustor, underwriter) Bank / Financial institution (officer / examiner) Other CFE responses describing the number of years the CFEs have been employed in the positions listed, the CFEs current position, starting position, and the preferred entry-level job for those wanting to become CFEs.

8 8 R.D. Meservy, M. Romney and M.F. Zimbelman The survey also asked CFEs to describe their employment history by listing the number of years each CFE had worked in different positions. Table 3 lists these positions. Most CFEs have experience in more than one job category. In fact, since the first column in Table 3 (Percent with some experience) totals 230% we can conclude that, on average, CFEs have had experience in 2.3 different job categories. More CFEs have experience in public service (46%) than in any other job category. Public service is also the job category where CFEs tend to remain the longest (16.4 years), with 18% of them having over 20 years of experience. This means that 39% (18% 46%) of the CFEs with public service experience have worked in that area over 20 years. No other job category is anywhere close to the public service percentages. The other positions in which CFEs have been employed the longest are government auditor (14.1 years), internal audit (13.0 years), and bank/financial institution (13.0 years). These positions are held by CFEs for roughly twice the amount of time they have held the positions of management accountant/controller (6.6 years) and consultant/private investigator (7.5 years). The majority (56%) of the CFEs have experience as auditors, whether external (26%), internal (23%) or governmental (20%). As one might expect, some of the CFEs (13%) had experience in more than one area of auditing. Some of the CFEs have had experience in litigation/forensics (18%), as consultants/ private investigators (15%), management accountants (16%), or non-audit public accountants (16%). Twelve percent have worked in either insurance companies or financial institutions. More respondents currently work in public service (15.6%) than any other industry; government and internal auditing positions were listed next (11.4% and 11% respectively). Very few respondents are currently employed as a management accountant/controller (3.3%), external auditor (4.2%), or non-audit public accountant (4.2%). The positions in which CFEs are currently working are more evenly distributed than starting positions, which tended to have either high or low frequencies. This may result from job experience generating new career options. Almost half (47.8%) of respondents began their careers in either public service (30.3%) or external auditing (17.5%). CFEs were least likely to start their careers as a consultant/private investigator (1.1%) or in litigation/forensics (1.5%).

9 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 9 More than two-thirds of the respondents recommend that people who want to become CFEs start in public service (32.2%), external auditing (20.8%), or internal audit (16.4%). The least desirable starting positions are consultant/private investigator (.8%), management accountant/controller (1.1%), and bank/financial institutions (1.9%). The last column in Table 3 shows the difference between where CFEs started their careers and where they recommend that people start their careers. Twice as many CFEs think CFEs should start in internal audit (where 8.2% started and 16.4% recommend CFEs start). The next highest positive difference is in litigation/forensics (5%). The largest negative differences were in bank/financial institutions (-3.3%), non-audit public accounting positions (- 3.2%), management accounting/controller (-3.1%), and governmental auditor (-3.1%). How CFE s Spend Their Time We asked the respondents to report the time they spend in various activities. As shown in Table 4, respondents reported spending only 62% percent of their time in fraud-related activities. More than half of that 62% was in fraud detection, investigation, and audit (34%). Fraud prevention and fraud litigation (including serving as an expert witness) each occupied 6% of their time. Fraud consulting, fraud education, and bankruptcy and divorce work were 4.5%, 3.5%, and 1% respectively. Table 4 How CFE Respondents Spent Their Time Category Percent Non CFE-Related Work 38 Fraud Detection, Investigation, and Audit 34 Fraud Prevention 6 Fraud Litigation 6 Fraud Consulting 4.5 Fraud Education 3.5 Bankruptcy and divorce 1 Other 7 CFE Compensation Many CFEs did not report their compensation and some who reported it did not break compensation out between fraud and non-fraud activities. As a result, we were only able to analyze compensation for 301 of the 725 respondents. Total compensation figures varied sig-

10 10 R.D. Meservy, M. Romney and M.F. Zimbelman nificantly, ranging from $10,000 per year to $1,000,000 per year. Table 5 shows that average total compensation for this group was $129,284 (a median of $100,000), of which $74,103 (57%) was from fraud-related work. We only had 49 useable female responses as compared to 252 useable male responses. On average, women earned more ($78,527) from CFE compensation than men ($73,243). Women also earned a greater percentage of their total compensation from CFE work (68.4%) than men (55.4%) did. However, the women had lower total compensation ($114,779) than men ($132,105) did. Table 5. CFE Compensation CATEGORIES OF FRAUD INVESTIGATED BY CFEs Since one of the more important things CFEs do is investigate frauds we elicited information about the different fraud schemes they have examined. We asked respondents to indicate how many times they had investigated the most common fraud schemes and to report the average and maximum damages from the different schemes. A summary of their responses is found in Table 6 and discussed below. Fraudulent Financial Reporting Average non-cfe compensation Average CFE compensation as % of total Number reporting Average CFE compensation Total Women 49 $78, $36, $114, % Men 252 $73, $58, $132, % Total/Averages 301 $74, $55, $129, % CFE responses describing their average annual compensation. Total compensation is split into CFE and non-cfe compensation. In recent years, many fraudulent financial reporting schemes have been reported in the news. For example, Enron has become a household word synonymous with such activities. Considering the effect on stock prices when a fraud is announced, it is no surprise that the type of fraud with the largest dollar losses was fraudulent financial reporting. A total of 85 respondents (16.9%) reported having investigated a financial statement fraud. On average, each respondent had investigated 9.9 such frauds. The median dollar loss per

11 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 11 Table 6 Types of Fraudulent Activities Investigated Number of CFEs reporting Percent of CFEs reporting Average numbers of cases reported Median dollar amount of fraud Average amount per fraud Average of CFEs maximum fraud case Fraudulent financial reporting % 9.9 $500, $8,735, $475,639, Corruption % 20.8 $50, $2,837, $167,812, Organizational information theft % 7.5 $150, $1,306, $19,113, Health care fraud % 44.9 $75, $453, $26,060, Insurance fraud % 97.5 $40, $430, $21,514, Disbursement fraud % 19.6 $20, $245, $3,842, Tax fraud % 24.2 $50, $137, $1,510, Cash receipts fraud % 14.9 $10, $29, $447, Theft of assets other than cash % 25.5 $10, $17, $3,893, Check Tampering % 33 $5, $14, $405, Cash Theft % 34.3 $4, $13, $720, A summarization of CFE responses showing: the number and percent of respondents who have encountered certain types of fraud, the average number of times those CFEs have encountered each type of fraud, the mean and average dollar losses for each type of fraud, and the average of the CFEs largest fraud cases. With regards to the types of fraud reported, 62 of the 725 records were deemed to be outliers or had significant logic (inconsistency) problems and thus were not used in this part of the analysis. 159 did not disclose any information, leaving 504 useable CFE responses. It is significant that the median was the same before and after the adjustments listed above. case is $500,000 and the average is $8.7 million. Survey respondents were also asked to report the amount of the largest financial statement fraud they had investigated. The average dollar amount of these maximum fraud cases was almost $476 million. Because of the magnitude of these losses, it is not surprising that the U.S. Congress passed legislation (e.g., Sarbanes-Oxley Act of 2002) addressing fraudulent financial reporting. Corruption and Theft of Organizational Information Corruption involves the dishonest abuse of organization position (or power) for private gain. A total of 117 respondents (23.2% of respondents) reported having investigated an average of 20.8 corruption cases. The corruption cases averaged $2.8 million, with a median of

12 12 R.D. Meservy, M. Romney and M.F. Zimbelman $50,000. Some CFEs reported cases of as much as $10 billion, with the largest reported cases averaging almost $168 million. Corruption normally comes from within, whereas theft of organizational information may come from within or outside the organization. Only 22 CFEs (4.4% of respondents) reported investigating an average of 7.5 thefts of organizational information frauds, which is lower than any other type of fraud. The average theft investigated was $1.3 million, with a median of $150,000. The largest case was $330 million and the average maximum was $19.1 million. These statistics show that while theft of information may not occur frequently, it is a very costly problem for some organizations. Insurance and Health Care Fraud Because the health care and insurance industries are particularly susceptible to fraud, we asked respondents to provide information about fraud in those industries. On average, almost 45 health care frauds were investigated by 57 CFEs (11.3% of respondents) with an average and median loss of $454,000 and $75,000, respectively. The average of the largest frauds was a little over $26 million. There were 72 CFEs (14.3% of respondents) who reported investigating an average 97.5 insurance frauds. One reason CFEs can investigate so many insurance frauds is that many are smaller (average loss of $430,000, median of $40,000). However, there are many large insurance frauds as is shown in the $21.5 million average of the CFE s largest insurance frauds. These two categories, along with fraudulent financial reporting, corruption, and theft of organizational information, are the top five fraud categories in terms of loss amounts. The six smaller types of fraud are discussed next. Disbursement Fraud Disbursement fraud involves the accounts payable function, including unauthorized payment for supplies and services. More CFEs (181, 35.9% of respondents) reported having investigated disbursement fraud than any other category of fraud. CFEs said they had investigated, on average, almost 20 cases with an average loss of $245,843, and a median loss of $20,000. The largest reported disbursement fraud was $250 million, with the average of the largest frauds being $3.8 million.

13 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 13 Tax Fraud Although we hear a lot about tax fraud in the media, fewer CFEs (48, 9.5% of respondents) investigated this type of fraud than any other except theft of organizational information. This may be due to the government s interest and specialty in investigating this activity. The average tax fraud investigation was $137,000, with a median of $50,000. The largest reported tax frauds averaged $1.5 million. Cash Receipts Fraud, Cash Theft, and Check Tampering Cash receipts, cash theft, and check tampering frauds were reported by a relatively large percentage (roughly 25% to 30%) of the respondents. These frauds are much smaller, averaging between 13,000 and almost $30,000 and with a median between $4,000 and $10,000. Although respondents investigated twice as many cases, on average, of check tampering and theft of cash fraud than cash receipts fraud, the cash receipts frauds were roughly twice as much. Even so, the magnitudes of these frauds were lower than any other type of fraud. Theft of Assets other than Cash Theft of assets other than cash has the largest variability in amounts reported. Although the median was $10,000, many CFEs reported thefts in the millions of dollars, with the average of the largest reported frauds being almost $3.9 million. In all likelihood, most non-cash thefts are relatively small due to the difficulty of stealing assets and then converting them to cash. However, almost 28% of the CFEs reported investigating theft of assets other than cash. IMPORTANT CFE SKILLS An important part of our questionnaire was eliciting perceptions about the skills and characteristics required to be a successful CFE. The questionnaire listed nineteen different skills or knowledge bases and asked respondents to indicate the importance of each in performing CFE work. Possible responses ranged from unimportant (1) to critical (7) and were independent of each other. The mean of each skill or knowledge base and the percentage of CFEs listing that skill as critical are presented in Table 7 below. An analysis of the top ten skills shows that, in general, the respondents listed non-technical skills such as people and human relations skills as being critical to CFE work more often

14 14 R.D. Meservy, M. Romney and M.F. Zimbelman Table 7 Critical Skills Needed by Certified Fraud Examiners Percent (Rank) Receiveing a Rating of 7 Average (Rank) Rating on a Scale of 1to 7 Ethics 49 (1) 5.76 (5) Oral Communication Skills 44 (2) 5.96 (1) Evidence sources, collection, evaluation and documentation 43 (3) 5.87 (2-3) Writing skills and methods 42 (4-5) 5.85 (4) People and human relations skills 42 (4-5) 5.87 (2-3) Interrogation and interviewing skills 39 (6) 5.62 (6) Internal control knowledge 28 (7) 5.41 (8) Skill at analytical techniques/procedures 26 (8) 5.45 (7) Criminology/justice/legal/regulatory elements of fraud 23 (9) 5.11 (12) Computer/internet fraud techniques or skills 22 (10) 5.25 (9) Fraudulent financial statement schemes 20 (11) 5.15 (11) Misappropriation of asset schemes 19 (12-13) 5.2 (10) Financial statement analysis 19 (12-13) 5.09 (13) Business strategy and industry knowledge 18 (14) 5.02 (14) Psychology of criminal decision making and behavior 13 (15-16) 4.76 (16) Risk assessment 13 (15-16) 4.91 (15) Public record searches 11 (17) 4.69 (17) Intermediate accounting 10 (18) 4.58 (18) Sampling techniques 6 (19) 4.34 (19) Percentage and mean of respondents responses to Please indicate the importance of each of the following skills or knowledge bases in performing your work as a CFE on a scale of 1 (unimportant) to 7 (critical). Skills are ordered by percentage reporting the skill as critical. than they listed technical skills. Several non-technical skills are at the top of the list. More survey respondents (49%) gave Ethics the highest score (7) than any other skill or knowledge base. Communication and people skills were reported as critical by many respondents, as oral communication (44%), written communication (42%), and people and human relations (42%) ranked in the top five most critical skills. Evidence collection, evaluation, and documentation skills (43%) and interrogation and interviewing skills (39%) were the third and sixth most often mentioned skills.

15 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 15 The next four highest skills (ranked 7-10) are more technical in nature and more knowledge based. They include knowledge of internal controls (28%); skills in analytical techniques and procedures (26%); understanding criminology, criminal justice, legal, and regulatory elements of fraud (23%); and skills in computer/internet techniques (22%). These skills are more easily taught and can be applied to a wide range of fraud investigation activities. The next most important knowledge bases included an understanding of both fraudulent financial statement schemes (20%), misappropriation of asset schemes (19%) and an ability to analyze financial statements (19%). The least valuable skills were statistical sampling, intermediate accounting, public records search, and risk assessment. Evaluating the skills using the average rating (the second column in Table 7) yields similar results. There are some differences, such as ethics receiving a ranking of 5 using the mean and a ranking of 1 using the percent reporting as critical ranking. However, the rankings were generally similar between the two methods. CURRICULUM IMPLICATIONS: SUGGESTIONS FOR STUDENTS AND EDUCATORS The survey asked questions that not only help us better understand who CFEs are and what they do, but also how educators can more effectively prepare students to pursue careers in fraud examination. About half of the respondents recommended obtaining a degree in accounting. Other strong recommendations included criminal justice, general business, and finance. Except for information systems and/or computers, the recommended degrees reflect heavily the background of the respondents. Four times as many CFEs recommended obtaining a degree in information systems and/or computers than had a degree in one of those fields. The position a student accepts when graduating from college can be very important in shaping their career. CFEs were asked which entry-level position was best for someone wanting to become a CFE. As mentioned previously, 74% of all respondents recommend a starting position in public service (32.2%) or some form of auditing (41.8%). Based on this information, educators should encourage students who are interested in fraud examination work to pursue entry-level positions in public service or auditing. As previously mentioned, 59% of CFEs majored in accounting and almost half of the CFEs either started in or are currently in an accounting related job, with most of them working in

16 16 R.D. Meservy, M. Romney and M.F. Zimbelman auditing. To get more information about the type of training auditors are deficient in, we also asked the CFEs to specify the three most important skills and characteristics that they believed financial statement auditors are weak in and could benefit from enhanced training in. As shown in Table 8, it is not surprising that many of the skills that are typically not taught in an accounting program are ranked high on the deficiency list. For example, CFEs believed the most critical deficiency of financial statement auditors is interrogation and interviewing skills, with 34% reporting this skill in their top three deficiencies and 13% listing it as the number one deficiency. The second most significant deficiency was evidence sources, collection, evaluation, and documentation (27% and 7%). The fourth most significant deficiency was criminology/criminal justice/ legal/regulatory elements of fraud (22% and 10%). Tied for the fifth most significant deficiency was computer/internet fraud techniques or skills (21% and 10%). None of these topics are routinely taught in most accounting programs. This indicates that these topics should be covered more extensively in accounting programs that want to prepare students for careers in fraud investigation. Our survey listed 19 skills, all of which appear in Table 7. One of those 19 skills, intermediate accounting, was not mentioned as a deficiency by any of the CFEs and as a result does not appear in Table 8. This is not surprising, as most financial statement auditors get heavy training in intermediate accounting. LIMITATIONS OF THE STUDY As with any study of this kind, there are limitations with respect to our findings. While we sent questionnaires to a random sample of 2000 of the 16,000 CFEs and got useable responses from 725 of them (32% response rate and 4.5% of all CFEs), there could be a sampling and/or non-response bias that could affect our findings. Care also needs to be exercised in generalizing our results beyond the population of CFEs. Care should also be exercised with respect to what skills and characteristics the CFEs perceived that financial statement auditors were weak in or could benefit from enhanced training in. While some of our respondents have been financial statement auditors, many have not. Those who have not may not have a sufficient understanding of financial statement auditing to understand what skills and knowledge bases auditors need or lack. Furthermore, those who have been financial statement auditor may not have spent enough time in auditing to rise far enough up the ranks to understand the fraud-related educational and training needs of financial statement auditors.

17 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 17 Table 8 Critical Skills Perceived by CFEs as Educational Deficiencies in Financial Statement Auditors Percent (Rank) Reporting in Top- Three Auditor Deficiencies Percent (Rank) Reporting as Most Important Deficiency Interrogation and interviewing skills 34% (1) 13% (1) Evidence sources, collection, evaluation and documentation 27 (2) 7 (5-8) Fraudulent financial statement schemes 25 (3) 8 (4) Criminology/criminal justice/legal/regulatory elements of fraud 22 (4) 10 (2-3) Computer/internet fraud techniques or skills 21 (5-6) 10 (2-3) People and human relations skills 21 (5-6) 4 (11) Writing skills and methods 19 (7) 6 (9-10) Financial statement analysis 18 (8-9) 7 (5-8) Internal control knowledge 18 (8-9) 6 (9-10) Business strategy and industry knowledge 16 (10) 7 (5-8) Misappropriation of asset schemes 13 (11) 3 (12-14) Ethics 12 (12-14) 7 (5-8) Oral communication skills 12 (12-14) 3 (12-14) Psychology of criminal decision making and behavior 12 (12-14) 2 (15-16) Skill at analytical techniques/procedures 11 (15) 3 (12-14) Risk assessment 10 (16) 2 (15-16) Public record searches 4 (17) 1 (17-18) Sampling techniques 3 (18-19) 1 (17-18) SUMMARY AND CONCLUSIONS Several insights can be gleaned from our survey. First, the profile of a CFE is likely to be one who began his or her career in either public service or as an auditor. However, after this initial position many other opportunities arise in areas such as litigation / forensic accounting, consulting and private investigation. CFEs generally believe that the best starting positions for individuals interested in fighting fraud involve public service or some form of auditing.

18 18 R.D. Meservy, M. Romney and M.F. Zimbelman Interestingly, while a higher frequency of CFEs recommend public service, external and internal auditing, and litigation/forensics as starting positions than are currently employed in these positions, the opposite is true for other positions. For example, CFEs who currently work in areas such as banking/financial institutions, public accounting other than auditing, management accounting/controller, and governmental auditing often do not recommend these positions as starting positions. This information can help guide students interested in fraud examination to jobs offering the best opportunities and preparation. Our survey also shows that individuals interested in fighting fraud should not only acquire technical skills but should also acquire non-technical skills. In general, non-technical skills are deemed critical to fraud detection by more CFEs than are technical skills. These skills include ethics, written and oral communication, evidence sources, collection, evaluation and documentation, and interviewing. This analysis does not imply that non-technical skills or skills where auditors are weak are the most important skills potential employers look at when hiring new applicants, or that these skills and attributes should be the skills employers look for. It merely suggests that these are skills that should not be neglected by either a potential employee or by a hiring firm, and that educators can benefit practice by developing curriculum aimed at teaching these topics. Our results also suggest that educators should focus on helping students learn both technical and non-technical skills. Both sets of skills are viewed as necessary for performing successful financial statement audits. This creates multiple opportunities to strengthen the education that accounting and other students are receiving. By improving curriculum in this manner, teachers can help students gain skills that will enable their future success in careers fighting fraud. We also provide evidence on the frequency and magnitude of frauds that CFEs encounter. Each fraud that occurs has the potential to seriously injure both the company where the fraud is committed and the company auditing the financial statements. Therefore, the more expertise an auditor possesses in the critical skill sets, the lower the chance a perpetrator will successfully conceal a fraud from the auditor. CFEs believe financial statement auditors are weak in some skills that are not routinely taught in accounting programs. These skills include interrogation and interviewing, evidence sources, collection, evaluation, and documentation, criminology/criminal justice/ legal/regulatory elements of fraud, and computer/internet fraud techniques or skills If universities want to better prepare students for careers in fraud investigation, these topics

19 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 19 should be covered more extensively in accounting programs. Future research could contribute by comparing CFEs perceptions over time. Comparisons may reveal trends in areas such as the positions in which CFEs begin their careers and the positions in which they work over the course of their careers. Also, educators may be able to gauge their progress in designing curriculum deemed critical by professionals involved in fighting fraud. Knowledge of these types of trends should be very valuable to educators in directing students interested in working in fraud examination, prevention or detection. REFERENCES Association of Certified Fraud Examiners. (2004) Report to the Nation on Occupational Fraud and Abuse. Beasley, M.S., Carcello, J.V. and Hermanson, D.R. (1999) Fraudulent Financial Reporting: , An Analysis of U.S. Public Companies, COSO. Bonner, S.E., Palmrose, Z. and Young, S.M. (1998) Fraud Type and Auditor Litigation: An Analysis of SEC Accounting and Auditing Enforcement Releases. The Accounting Review 73 (October): KPMG Fraud Survey (2003). Retrieved March 12, 2004, from Report Pursuant to Section 704 of the Sarbanes-Oxley Act of (2002). Retrieved May 9, 2005, from Rezaee, Z., Crumbley, D. L., Elmore, R. C., (2004). Forensic Accounting Education: A Survey of Academicians and Practitioners. Advances in Accounting Education,

20 20 R.D. Meservy, M. Romney and M.F. Zimbelman APPENDIX Certified Fraud Examiner Survey 1. Do you hold the designation of Certified Fraud Examiner? Yes No (if no quit here!) 2. How many years have you held the Certified Fraud Examiner title (CFE)? yrs 3. In the table below, please describe y our education and the education you would recommend for a student who is interested in becoming a CFE. College Degree(s): College Major(s): College Minor(s): Other Significant Education: (please describe) Education obtained by you: Recommended education: 4. Please describe your employment history by listing the number of years in each position described below: Position # Yrs Position # Yrs 1. Public Service (e.g., IRS, FBI, law enforcement, military investigator) 7. Public Accounting Services other than audit (e.g., tax, write -up work) 2. External (Financial Statement) Auditor 8. Litigation Support / Forensic Accountant 3. Internal Auditor Private Sector 9. Government (Internal) Auditor 4. Insurance (investigator/ad juster/underwriter) 10. Consultant / Private Investigator 5. Bank / Financial Institution (officer/ examiner) 6. Management Accountant / Controller 11. Other (please describe): 5. Which one of the positions listed above (#1-11) best describes y our first and current (or most recent if retired) professional position after college graduation? A. First Position : # B. Current Position: # 6. If you were asked to recommend an ideal entry -level position for individuals interested in CFE work, which of the above positions (listed in #4) would you recommend after obtaining a college education? Position # for at least yrs 7. For the years reported in your current position (#5 B), please approximate the percent (%) of time you have spent performing the following activities. ( Note: the percentage should total 100%) All Non CFE -related activities CFE-related activities: Percent (%) % Fraud Consultant % Fraud Educator / Trainer (e.g., CPE pr ovider, Professor) % Fraud Detection / Investigation / Audit % Fraud Prevention % Litigation Support (including serving as an expert witness) % Bankruptcy / Divorce Related Support % Other (please desc ribe): % Other (please describe): % Total 100%

21 CERTIFIED FRAUD EXAMINERS: EXPERIENCE AND CURRICULUM RECOMMENDATIONS 21 Certified Fraud Examiner Survey (continued) 1. Which one of the following best describes the main industry that you are currently employed in? Professional Services (e.g., CPA or law firm) Wholesale / Retail Energy and Natural resources Chemicals Health Care / Pharmaceutical Manufacturing Utilities Public Service / Government Education Financial Services (e.g., Insurance or Banking) Real Estate Entertainment / Media Technology, Communications and Electronics Transportation Other (please describe): 2. Which of the following best describes the main reason you became a CFE ( check only one box )? I believed that the training leading to the CFE certification would help me be successful in my job. I believed th e CFE designation would provide status and respect that would help me in my career. I believed the CFE designation would provide challenging and exciting job opportunities. I wanted the knowledge and skills gained by going through the CFE certification pro cess. Other (please describe): 3. Please indicate the importance of each of the following skills or knowledge bases in performing your work as a CFE by circling a number between 1 (unimpor tant) and 7 (critical). (unimportant) (critical) 1. Business strategy and industry knowledge Computer/internet fraud techniques or skills Criminology/criminal justice/legal/regulatory elements of fraud Ethics Evidence sources, collection, evaluation and documentation Financial statement analysis Fraudulent financial statement schemes Intermediate accounting Internal control knowledge Interrogation and interviewing skills Misappropriation of asset schemes Oral communication skills People and human relations skills Psychology of criminal decision making and behavior Public record searches Risk assessment Sampling techniques Skill at analytical techniques/procedures Writing skills and methods Please describe anything not listed above that has proved critical in your work: 4. Of the items listed in question #10 above, list the three most important skills that you believe financial statement auditors currently are weak in and could benefit from enhanced training in: 1 st # ; 2 nd # ; 3 rd #

22 22 R.D. Meservy, M. Romney and M.F. Zimbelman Certified Fraud Examiner Survey (continued) 1. In your opinion, has fraud Increased, Decreased or stayed the Same over the past five years? I D S If you noted a change, please describe why the change occurred by selecting one of the following reasons. 1. A shift in economic pressures 2. Technology has led to more opportunity for fraud 3. New tools for detecting fraud 4. Different attitude s, values and morals 5. A change in fraud laws 6. Different incentives for fraud 7. New directions in public policy 8. A change in auditor vigilance 9. Other (please describe): 2. Do you believe fraud will Increase, Decrease or stay the Same over the next five years? I D S If you have believe the fra ud rate will change, which of the above reasons best explains why? # 3. Which of the following types of fraud schemes have you investigated? Scheme: # of Times Avg Damages Max Damages Cash receipts fraud (e.g., understated sales, stealing mail receip ts) $ $ Cash Theft $ $ Check tampering $ $ Corruption (e.g., bribery, kickback or bid -rigging) $ $ Disbursement fraud (e.g., false claims or billing, register disbursement, payroll or expense reimbursement) $ $ Fraudulent financial repo rting (i.e., management fraud) $ $ Tax fraud $ $ Theft of assets other than cash (e.g., inventory or equipment) $ $ Theft of organizational information or knowledge $ $ Insurance fraud $ $ Health care fraud $ $ Other (please describ e): $ $ 4. Please provide the following additional information: a. Current Job Title: Current Employer: b. Other designations/certifications besides CFE: c. Gender: male female d. Average annual compensation for CFE work: $ e. Average annual compensation for non -CFE work: $