dr haluk f gursel & dr richard riley fraud examination, preparing students for a global future...

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Fraud EDge

Defining ‘Global’ for Educators

Preparing Students for a Global Future

BY HALUK F. GURSEL, PH.D., CFE, CGFM, CPA, AND RICHARD “DICK” A. RILEY JR., PH.D., CFE, CPA

November/December 2010

What does “global” mean for educators? For those of us teaching tomorrow’s fraud fighters, it means that fraudsters ignore country boundaries, and therefore so should we when covering anti-fraud topics in our classrooms. “Fraud is becoming an international crime,” said Dr. Joseph T. Wells, CFE, CPA, founder and Chairman of the ACFE. “Most Fortune 1000 companies have international subsidiaries. Individual fraud schemes frequently involve the fraud occurring in one country and the proceeds of the crime being hidden in another.” (Dr. Wells was quoted in “An Interview with Eva Romatzeck,” Fraud Magazine, March/April 2005.) The ACFE, in its 2010 “Report to The Nations on Occupational Fraud and Abuse,” (RTN) recognizes the absence of country barriers by extending its coverage of the incidence and commonalities between countries, cultures, and behaviors. The fraud cases in the 2010 RTN came from 106 nations, with more than 40 percent of cases occurring in countries outside the United States, which provides evidence of the global fraud phenomenon. The scope of the research allowed the ACFE to more fully explore the global nature of occupational fraud and abuse, providing an enhanced view into the severity and impact of these crimes. Additionally, the ACFE was able to compare worldwide entities’ anti-fraud measures to give fraud fighters everywhere the most applicable and useful information to help them in their fraud prevention and detection efforts. The consistent patterns of fraud around the globe, as discussed in the report, were striking. Some regional differences exist, but occupational fraud and abuse seems to operate similarly whether it occurs in Europe,

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11/4/2010http://www.fraud-magazine.com/article.aspx?id=4294968787

Asia, South America, or the United States. To further illustrate the global nature of fraud, consider the Parmalat, Oil-for-Food, Siemens AG, and Satyam Computer Services Limited cases:

Parmalat, Europe’s biggest corporate failure – its Enron – collapsed in 2003 with debts of €14

billion (US$17 billion). Parmalat allegedly committed financial statement fraud in every conceivable

form: asset/revenue overstatements, timing differences, fictitious revenues, concealed liabilities and

expenses, improper disclosures, and improper asset valuations. The evidence suggests that the

Tanzi family created – out of thin air – billions of dollars of financial transactions because it

controlled the internal workings of the company.

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Oil-for-Food was a $64 billion program established by the United Nations in the wake of the 1991

U.S.-Iraq War to allow Iraq to sell oil on the world market in exchange for food, medicine, and other

humanitarian needs for its people, and to repay war reparations. The program was designed for the

benefit of ordinary Iraqi citizens who were unintended victims of the international economic

sanctions aimed at Saddam Hussein’s military. It’s alleged that Saddam Hussein siphoned off at

least $2 billion in illegal kickbacks. Subsequent investigations resulted in 14 persons being

indicted.1

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Siemens AG officials traveled the globe with suitcases full of cash to pay more than $1 billion in

bribes to win lucrative public works contracts in countries such as Argentina, Bangladesh, and

Venezuela.2

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Satyam Computer Services LTD, with 53,000 employees, was one of India’s largest outsource-

service providers, claiming one-third of Fortune 500 companies as customers. In early January

2009, founder and CEO Ramalinga Raju wrote a letter to the Satyam board of directors outlining a

massive fraud. According to blogger Lawrence Cunningham, cash was reported to exceed $1 billion

but less than $100 million existed in the Satyam bank accounts.3

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THE WORLD IS BECOMING SMALLER AND INTERRELATED

Imagine a professional practice located in Germany and led by a South African – staffed with auditors from the United States, Europe, and other countries – assigned to examine intellectual property rights issues in Asia. Consider another anti-fraud practice located in Western Europe, headed by a person of British nationality, that examines a broad range of frauds and corruption around the globe including asset misappropriation, tax evasion, and embezzlement. Both these groups are real examples of international anti-fraud organizations. Driving forces behind globalization are mobility, technology, and demographics. Integration of economies has benefited from efforts to lower barriers to the mobility of goods, services, financing, and labor. Mobility renders the world more connected, so distance seems to be minimized or even nonexistent. For example, in recent years, China and India have become more open to international business, trade, and cooperation. The New York Times foreign affairs columnist Thomas Friedman in his book, “The World is Flat,” highlights the role of technology in global integration. Technology permits access to high-growth markets while maintaining low costs by locating manufacturing and support services in low-labor-cost countries because technology facilitates real-time interactions, Friedman wrote. The impact on fraud examination is that bad actors, organized into small, temporary, dispersed groups, agree to work together for a common cause or purpose. The participants might or might not know each other, and most might have only “met” through cyberspace. Developing countries’ population growth is likely to outstrip that of already developed nations. According to the 2007 U.S. Economic Census, Asian and African countries accounted for 73 percent of the world’s population, while the United States and Western Europe accounted for about 11 percent. The rate of population growth in Asian and African countries is expected to outpace the rest of the world. Due to worldwide population and consequential economic growth, incidents of international fraud are expected to be more visible and pervasive.

GLOBALIZATION AND FRAUD EXAMINATION IN HIGHER EDUCATION

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The world is more integrated culturally and economically, yet significant differences remain. These differences have implications for undergraduate, graduate, executive, and professional anti-fraud education and related research and outreach efforts. As the world shrinks, the demand for anti-fraud higher education is expected to grow throughout the world but especially in emerging markets and high-growth economies such as India and China. The fraud problem will likely be exacerbated as change accelerates. Accounting, and information and operations systems – among others – become more complex. Crises – such as natural disasters, political unrest, and economic instability – tend to put more stress on complex systems, rather than simpler ones, because complex systems have more “moving parts,” which are subject to failure (and subsequent fraud possibilities) during challenging situations. Successful and converging anti-fraud educational efforts around the globe require five key ingredients:

Collaboration among anti-fraud stakeholders 1.

Cultural appreciation 2.

Incorporation of technology 3.

The right students and faculty 4.

Proper topical coverage 5.

Collaboration: Like all other business professionals, anti-fraud educators gain competence and acumen through real-world experiences and exposure to diverse fraud issues. To be successful, these educators around the world need to partner and interact with fraud examiners in local communities, jurisdictions, and cultures. (See the July/August Fraud EDge.) Educators must participate in – not just observe – local anti-fraud efforts to understand an area’s fraud and corruption hazards. Educators in institutions of higher learning must collaborate with such key players as business, government, and nongovernmental/nonprofit support organizations. The challenge is daunting because each locale requires a different kind of collaboration. Effective anti-fraud education efforts thus necessitate strong and deep relationships among the partners. Anti-fraud educators who immerse themselves in local issues can identify challenges and opportunities, form hypotheses and develop possible solutions, devise implementation strategies, and prepare students to be the next generation of anti-fraud leaders. Cultural appreciation: Not everyone around the globe shares the same views and reacts similarly to the same set of facts and circumstances. A few examples:

Historically, Dutch Generally Accepted Accounting Principles (GAAP) have required that some

transactions be posted directly to retained earnings. However, under U.S. GAAP, the same

transactions need to be reflected in the income statement. The facts and circumstances –

transactions, in this case – might be the same, but the two national systems operate under different

rules, choices, and outcomes.

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Often, an investigation requires a language interpreter not just for verbal communication but for

examination and analysis of written communications such as e-mails, contracts, and invoices.

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Laws aren’t always associated with just legal systems, but they are intertwined with religious beliefs,

customs, and norms. For example, in the United States, police often allow drivers to exceed posted

speed limits by 5 miles per hour, and even those persons pulled over might not receive a ticket.

Police officers’ discretion can be affected by any number of sociological or cultural reasons. In

Switzerland, the level of tolerance is zero, and you can be sure you’ll get a ticket if you’re caught

speeding.

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Cultural appreciation also means that educators need to understand business, management, employees, and challenges – including fraud and corruption – in the contexts of local his- tories, politics, languages, customs, and norms. Local case examples and data for exploration and research will help ensure that your curriculum is relevant. Global anti-fraud education works best with a give-and-take interaction between faculty and students. Visiting students and professors should have equal participation in the classroom to encourage mutual

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sharing and respect. What if an anti-fraud educational program has a diverse student base or students don’t know where they might work after graduation? Professors should then consider a broad cross-cultural approach and immerse students in various selected cultures. Technology: Global education tends to make extensive use of information technology and communications for online and distance-learning delivery and testing systems, research collaboration and databases, mobile connectivity, digital access, and personal interaction. The benefits of online education delivery include cross-border access and global educational partnerships. Yet, digital differences can exacerbate problems because access to digital technology and infrastructure isn’t homogenous within jurisdictions, let alone across jurisdictions. Fraud is also facilitated by technology. Of course, the Internet has allowed perpetrators to convert traditional scams into online versions of much greater reach. Cyber fraudsters have created new schemes such as fraudulent online auctions. Additionally, criminals from various countries can cooperate online for short periods to victimize banks and persons around the globe. Students and Faculty: Students will only have professional global success if they develop solid foundations of knowledge, skills, and abilities (KSAs) and the confidence to apply them. Those KSAs must include complex problem-solving and “judgment-based” decision making. (Judgment-based means there isn’t necessarily a “bright-line” right or wrong answer.) Likewise, faculty must take the time to understand and appreciate local fraud examination challenges such as resistance to external standards especially when practice is rooted in custom. For example, in some cultures, bribes and “facilitation payments” are the norm, even if they’re illegal. Educators must recognize and address the reality of practices, which might differ from proscribed policies, procedures, and regulations as well as norms in the professional’s country of origin. Finally, global anti-fraud students and faculty must embrace the ambiguity of operating in foreign spaces and be flexible and adventurous. Topical Coverage: Effective global anti-fraud education requires the proper coverage of international topics. Some issues might include: cross-jurisdictional challenges; differences in country-specific laws; international money movement and money laundering; the U.S. Foreign Corrupt Practices Act (for U.S. companies operating around the globe); and differences in crime and punishment, privacy, and individual-rights regimes around the globe.

TRAINING GLOBAL ANTI-FRAUD STUDENTS

The challenges for global fraud examination in higher education bring opportunities for effective anti-fraud and ethics programs. Some of the benefits of global higher education include more efficient – and less costly – uniform training patterns. The challenges require the dedication of faculty, students, and professionals. But when implemented, they can yield significant benefits to anti-fraud communities around the world.

Haluk F. Gursel, Ph.D., CFE, CGFM, CPA, is chief compliance officer of the United Nations AIDS Programme. He is president emeritus of the ACFE Switzerland Chapter and a member of the ACFE’s Higher Education Advisory Committee. He is a past recipient of the ACFE’s Hubbard Award and Outstanding Achievement in Anti-Fraud Education Award.

Richard “Dick” A. Riley Jr., Ph.D., CFE, CPA, is a Louis F. Tanner Distinguished Professor of Public Accounting in the College of Business and Economics at West Virginia University in Morgantown. He is chair of the ACFE Higher Education Advisory Committee and the vice president of operations and research for the Institute for Fraud Prevention and a past recipient of the ACFE’s Outstanding Achievement in Anti-Fraud Education Award.

1 “Former U.N. Oil-for-Food Chief Indicted.” Colum Lynch. The Washington Post. Jan. 17, 2007. “Park Sentenced to 5 Years in U.N. Oil-for-Food Bribery Scandal.” The Washington Post. Feb. 23, 2007. 2 “Siemens guilty of global fraud.” Ben Conery. The Washington Times. Dec. 16, 2008. 3 www.concurringopinions.com/archives/2009/01/satyam_frauds_s.html

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