Better, faster, smarter: developing a blueprint for creating forensic accountants

Author:Hendi Yogi Prabowo
Position:IsCentre for Forensic Accounting Studies, Islamic University of Indonesia, Yogyakarta, Indonesia

Purpose – The purpose of this article, which is based on author's study, is to highlight the essential attributes of forensic accountants and to construct the forensic accountant “blueprint” as a reference for forensic accounting education and training. Design/methodology/approach – This study uses primary and secondary data on forensic accounting profession in Indonesia and the USA. Such data were collected by means of literature reviews, in-depth... (see full summary)


A decade had passed since Enron collapsed and yet fraud remains a major international problem. Efforts have been made to fully identify the types of fraud for prevention and investigation purpose without success as there appears to be new kind of fraud emerging every day. This has created a high demand for forensic accounting skills globally ( Kranacher et al., 2008 ). Such demand has been responded widely by higher education institutions all around the globe in the form of forensic accounting programs or courses ( West Virginia University, 2007 ; Kranacher et al., 2008 ). Similarly in Indonesia, numerous universities have been trying to set up their own forensic accounting programs to cope with the rising demand. The lack of agreed upon standard has been among the major challenges particularly in academically developing forensic accounting discipline. This underscores the need for more studies on what a forensic accountant really is, what the profession demands, and how to fulfill such demand in particular through education and training. Funded by the US – Indonesia Society (USINDO) and the Directorate General of Higher Education of Indonesia (Dirjen Dikti), this study represents an effort to fulfill this need. Based on extensive literature review and in-depth interviews with forensic accounting practitioners in Indonesia and the USA, this study aims primarily at identifying the essential attributes of a forensic accountant as a reference for designing effective forensic accounting education and training. As will be discussed in this paper, due to its nature, forensic accounting has a wide coverage of areas. Therefore, for the sake of this study, the discussions will focus on fraud investigation as a service that can be performed by forensic accountants in public and private sectors.

The fraud problems

Fraud has been in existence for generations. For example, the so-called “financial scandals” have plagued the world's economy since before the Industrial Revolution ( Pearson and Singleton, 2008 ). Many of the scandals (such as that of the equity funding in 1970 where computers were used to as a means in perpetrating fraud) became milestones with historical importance in our journey in combating fraud ( Pearson and Singleton, 2008 ). According to the Black's Law Dictionary (2009) , fraud is:

A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment […] A misrepresentation made recklessly without belief in its truth to induce another person to act.

As argued by Ramamoorti (2008, p. 522) :

Fraud involves intentional acts and is perpetrated by human beings using deception, trickery, and cunning that can be broadly classified as comprising two types of misrepresentation: suggestio falsi (suggestion of falsehood) or suppressio veri (suppression of truth).

The essential part of any fraud is the use of deception to obtain benefits. As defined by Wells (2005, p. 8) , four general elements must be present for an offence to be called “fraud”:

  • a material false statement;
  • knowledge that the statement was false when it was uttered;
  • reliance on the false statement by the victim; and
  • damages resulting from the victim's reliance on the false statement.
  • There are many types of fraud in the society and so far as literatures are concerned, no single classification system in the world can comprehensively identify all of them. The Association of Certified Fraud Examiners (ACFE), for example, has been using the Fraud Triangle system in its biannual global studies on fraud ( Association of Certified Fraud Examiners, 2012b, a ). The system divides fraud into three major categories: corruption; asset misappropriation; and financial statement fraud ( Association of Certified Fraud Examiners, 2012b ). From the existing cases, there are many ways fraud can be perpetrated, from the simple misuses of trust to the sophisticated computer based offence. Also, by nature, fraud is an interdisciplinary issue requiring the understanding of a number of different areas of knowledge for prevention and investigation.

    Often mentioned as white collar crime, losses from fraud have been estimated by the ACFE's global study to be around $3.5 trillion in 2011 alone ( Association of Certified Fraud Examiners, 2012b, p. 4 ). In this study, asset misappropriation is considered as the most common fraud category with 87 percent of reported cases during the study period ( Association of Certified Fraud Examiners, 2012b, p. 4 ). According to the study, the most costly type of fraud is financial statement fraud which, despite making only 8 percent of the cases in the study, it caused median loss of $1 million ( Association of Certified Fraud Examiners, 2012b, p. 4 ).

    Over half a decade ago the term “white collar crime” was not largely known even among criminologists and sociologists. Edwin H. Sutherland was credited as the first and criminologist who integrated crimes of the upper white collar class with economics and business activity ( Dorminey et al., 2012, p. 557 ). During Sutherland's time, whereas economists were, naturally, very familiar with business issues but were much less so to crime, sociologists were well acquainted with crime but were not used to see it from business point of view ( Sutherland, 1940, p. 1 ). Sutherland (1940, p. 1) argued that the seemingly low crime incidents among member of the upper class was attributed to the inaccurate depiction by the crime statistics of the time. He was of the opinion that ( Sutherland, 1940, p. 1 ):

    The criminal statistics show unequivocally that crime, as popularly conceived and officially measured, has a high incidence in the lower class and a low incidence in the upper class; less than two percent of the persons committed to prisons in a year belong to the upper class […] The criminologists have used the case histories and criminal statistics derived from these agencies of criminal justice as their principal data. From them, they have derived general theories of criminal behavior. These theories are that, since crime is concentrated in the lower class, it is caused by poverty or by personal and social characteristics believed to be associated statistically with poverty, including feeblemindedness, psychopathic deviations, slum neighborhoods, and “deteriorated” families. This statement, of course, does not do justice to the qualifications and variations in the conventional theories of criminal behavior, but it presents correctly their central tendency.

    Sutherland's apprentice, Donald Cressey, later proposed, based on his PhD study, what is now known as the Fraud Triangle in which he believed that fraud is a convergence of three factors, pressure or motivation, opportunity, and rationalization ( Cressey, 1950 ). In his original work, Cressey used the term “trust violation” in describing the offence in question – embezzlements. For his PhD study, Cressey, in the late 1940s, interviewed nearly 200 incarcerated embezzlers, including convicted executives1. Despite formulated over a half-decade ago, Cressey's theory, currently known as the “Fraud Triangle”, remains highly regarded to date particularly in the discipline of forensic accounting. It provides explanations for many fraud related phenomenon.

    From the pressure or motivation point of view, as suggested by various studies, greed has always been thought as a driving factor behind many fraud cases ( Prabowo, 2011c ). This is often seen in what is known as the “living beyond means” phenomenon. The 2012 global study by the ACFE, for example, put one's desire to life beyond means as a the most observable behavioral symptoms from fraud offenders ( Association of Certified Fraud Examiners, 2012b, p. 57 ). The offenders' lavish lifestyle is evidenced mainly by their personal assets such as large houses, fancy apartments, luxurious cars, top of the line jewelries, etc. The possession of such assets is part of what is known as the “conversion” element of the Fraud Element Triangle ( Albrecht et al., 2012, p. 81 ). Whereas the Fraud Triangle explains about the “why” element of fraud, the Fraud Element Triangle focuses more on “how” it is perpetrated. According to the framework, three essential elements of a fraud are: act; concealment; and conversion ( Albrecht et al., 2012, p. 81 ). The “act” is where offenders stole the assets, “concealment” is concerning offender's efforts to hide fraud from others, and “conversion” is when offenders spends or convert the proceeds of their crime ( Albrecht et al., 2012, p. 42 ).

    Opportunity for committing fraud may come from one's position in his or her organization that can be misused for obtaining unlawful benefits ( Dorminey et al., 2012, p. 565 ). According to the ACFE's biannual study, generally, the higher a fraud perpetrator's position in his or her organization, the more damaging his or her fraud will be ( Association of Certified Fraud Examiners, 2012b ). To be able to misuse their positions successfully, fraud offenders need to know how to overcome the existing barrier such as his or her organization's internal control. In this case, a potential perpetrator must be sufficiently knowledgeable about the internal control weaknesses and be able to use position, function, or authorized access to his or her advantage (...

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