(taken from the Jan/Feb 2006 issue of On Balance magazine)

Fraud busters

By Robert A. Gruber, CPA, CMA, Ph.D. and Carol J. Normand, CPA, Ph.D.

Enron. WorldCom. Arthur Andersen. Tyco. Jeffrey Skilling. PCAOB. Sarbanes-Oxley. Isn’t it amazing how quickly these names and phrases have become part of our lexicon? Yet, it was only a few decades ago that insider trading and people like Ivan Boesky and Michael Milken scathed the business world and challenged the accounting profession to “catch them.”

Academia has always recognized the importance of ethical behavior in accounting and the role accounting plays in deterring fraudulent behavior. We have always incorporated discussions of ethical behavior into our lectures and presented the consequences of violating moral principles. What is new is the amplified emphasis, with a certain degree of urgency, on teaching students to proactively prevent and detect fraud.

Philosophy
In 2003, the University of Wisconsin-Whitewater started to explicitly incorporate the principles of fraud auditing in Advanced Auditing, a required course in our master’s in professional accountancy program. Prior to 2003, the course was a standard second course in auditing that took a closer look at internal control structures, offered exposure to internal and operational auditing, and provided an investigation of more advanced auditing methods and procedures such as statistical sampling.

Numerous corporate scandals and the rapid demise of Arthur Andersen prompted our Accounting Advisory Board to recommend a more direct and visible approach. First, we changed the course title to Forensic Accounting and Professional Ethics to emphasize the relationship between these topics. Second, we overhauled the course content, shifting the emphasis from traditional auditing to forensic accounting, including fraud auditing. Finally, led by Dr. Carol Normand, we spent more than six months redesigning the pedagogical aspects of the course.

Our premise is that students need a solid understanding of the ethical issues involved in accounting before studying the details of fraud auditing or forensic accounting. Thus, we spend about one-third of the course (a) exploring personal ethics and moral development and (b) studying theoretical frameworks and useful practical approaches when faced with an ethical dilemma. The remaining two-thirds of the course is used (a) to examine the techniques used by accountants to prevent, detect and investigate both the misappropriation of assets and fraudulent financial statement reporting and (b) to develop a thorough understanding of the auditor’s responsibilities to detect fraud under SAS 99 and the PCAOB standards.

Pedagogy
In the revised course, we do not use a required textbook. Instead, we rely on chapters from several books, current articles and outside speakers. In addition, we make extensive use of small group activities and case materials, particularly those based on real-life circumstances.

Our study of ethics begins with a module called “Accounting, Fraud and Society.” Students thoroughly investigate why proper ethical behavior is critical in reestablishing and maintaining high levels of trust in the accounting profession. In the second module, “Ethical Decision-Making Models,” students explore several decision-making frameworks, including codes of conduct and Kohlberg’s theory of moral development. At the end of this module, students make a personal ethical action plan based on what they have studied.

The study of forensic accounting focuses on the difference between GAAS audits and fraud audits, legal issues surrounding fraud, and inductive/deductive methods of fraud detection. Practitioner speakers give presentations on organizing a fraud investigation, handling evidence and using interviewing skills.

Students are receptive to these topics. Class discussions are often lively as different points of view are presented and defended. Students quickly learn that there seldom is one right answer or even a wrong answer, and that supporting an answer is as important as the answer itself.

Conclusion
Pearl Buck said, “If you want to understand today, you have to search yesterday.” The accounting faculty at UW-Whitewater agrees. By providing our graduates with an understanding of where accounting has been, we are preparing them to navigate today’s sometimes ethically challenging business environment.

Robert A. Gruber, CPA, CMA, Ph.D. is a professor and accounting department chairperson at the University of Wisconsin-Whitewater. Carol J. Normand, CPA, Ph.D. is an accounting professor at UW-Whitewater.

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