AICPA and ACFE Join Forces to Prevent Fraud

The American Institute of CPAs (AICPA) and the Association of Certified Fraud Examiners (ACFE) have teamed up to create the Institute for Fraud Prevention (IFP)—the world’s first entity dedicated to fight all forms of corporate fraud in the United States and abroad.

Fraud is as certain as death and taxes. The Enron, WorldCom, Tyco and Parmalat scandals sent global shock waves around the world. The AICPA named fraud prevention a top agenda concern for the accounting profession. The ACFE estimates that 5% of the U.S. gross domestic product (about $650 billion a year) is lost to fraud. Worldwide, the underground economy, including the growing problems of identity theft, money laundering, corruption and other economic crimes, may amount to trillions of dollars annually. The timing is critical for the two professional organizations to join forces to combat fraud.

The genesis of the IFP began when AICPA President and CEO Barry Melancon met with ACFE Chairman Joseph Wells to discuss the proliferation of widespread fraud. What are the roots of fraud, and how do we combat it? “Despite my four decades in the antifraud field,” said Wells, “I didn’t have the answers and together we concluded the accounting profession needed a united body to study those causes and to make recommendations for preventing fraud.” The result is the IFP, a nonprofit organization dedicated to research projects that will fight fraud.

The mission of the IFP is to unite world-class universities and scholars in a coordinated effort to study the root causes of a wide variety of fraudulent conduct and make recommendations to the public and private sectors on how to ameliorate their losses. The significance of a consortium of universities is that, until the IFP, no such body existed. Research projects on fraud, until now, have been typically underfunded and isolated. Distribution of these studies to the public has usually been very limited.

In its first five years, the IFP hopes to attract funding for at least 15 research projects on fraud, the results of which will be widely distributed. The nature and extent of those studies will be determined by the IFP board. Moreover, individual organizations can commission proprietary and private research on any fraud-related topic. For example, a public accounting firm may wish to fund a study on the effectiveness of its audit techniques to better detect fraud. Those results will be provided only to that firm.

Even though it is not yet fully funded, the IFP already has awarded three grants:

A study of control overrides by management in financial statement fraud cases. According to a 1999 COSO research project, at least 83% of 200 financial statement frauds were engineered by the CEO, CFO or both. These control frauds are most often accomplished by upper management by overriding existing internal controls. The IFP study hopes to provide answers that will reduce this problem.

Research to prevent and detect procurement fraud. The ACFE’s “2006 Report to the Nation on Occupational Fraud and Abuse” shows that fraud in the purchasing function is one of the most costly offenses, with a median loss of $1 million per incident. A current example of this comes from the GAO and the Pentagon’s IGs, who have concluded that procurement fraud in Iraq has rendered the effort to rebuild its infrastructure ineffective and contributed to widespread hostility toward the United States among Iraqi citizens. The IFP study aims to provide better predictors that will uncover these frauds earlier.

A study of the methods used to achieve identity fraud, which has become a bane to citizens worldwide. According to the Federal Trade Commission, U.S. complaints regarding identity theft have grown by nearly 20% in the past three years alone. Although this difficult problem will not be overcome easily, IFP research is targeted to determine which groups are most likely to commit these offenses. Those research results will be released to the profession, government agencies and the public late this year.

Coordinating the research is a consortium of U.S. and international universities with a strong reputation for white-collar crime research. Those invited so far include Brigham Young University in Utah, the University of Texas at Austin, North Carolina State University, the University of Missouri at Kansas City, the University of Tennessee, Santa Clara University in California, the University of California at Irvine, Northeastern University, the University of Maryland at College Park and the Australian National University in Chicago, the University of Basel (Switzerland), Cardiff University (U.K.), the University of National and World Economy (Bulgaria), Jawaharlal Nehru University (India) and Fudan University (Shanghai).

The AICPA has been instrumental in developing the new body by providing financial, intellectual and administrative support. With the AICPA’s participation, the IFP has been able to build a strong foundation and attract respected members. “The CPA profession is committed to doing its part to control fraud. It takes a multiparty effort—and working with Joe Wells and the ACFE to seek information and solutions that will lead to success,” said AICPA President and CEO Barry Melancon.

The first members on the board of directors are representatives of the AICPA, the ACFE, Grant Thornton and the Japanese consulting firm D-Quest. Board members must commit to a modest amount of tax-deductible funding ($120,000 over a minimum of three years). The board’s diversity is important, because the IFP cannot be dominated by any group, profession or industry.

The IFP’s intellectual partners—the FBI, the GAO, the Better Business Bureau, the National White Collar Crime Center and the U.S. Postal Inspection Service—will work with the financial supporters to ensure the IFP selects and funds world-class scholars to undertake antifraud research of the highest quality.

Still in its infancy, the IFP has made astonishing strides for its short existence—for example, the World Bank’s anti-corruption office has already chosen the IFP to be its expert consultant—but there also is much work yet to do. “We accountants typically look at fraud as an accounting problem, but there is much more involved; it is a plague on society. The IFP is committed to taking a more holistic approach in its research to determine better predictors of fraud risk,” said Wells. The IFP will benefit every practicing CPA by yielding a broader understanding and in-depth knowledge of the causes of fraud. It welcomes the participation of all parties interested in funding fraud-related research. Details are available from William K. Black, IFP’s executive director, at blackw@umkc.edu.