Outwitting the Fraudsters
Enron. WorldCom. Tyco. Adelphia. The growing list of corporations accused of cooking the books goes on. In its wake lay thousands of defrauded investors and employees, and public companies scrambling to comply with new federal law. But it's also, for some, a time ripe for opportunity.
Toby Bishop: There's certainly never been a better time to be in the anti-fraud business than today because the need for certified fraud examiners is greater than ever.
That's Toby Bishop, the president of the Association of Certified Fraud Examiners, or the ACFE, the largest anti-fraud association in the world. ACFE reports that U.S. companies lost close to $600 billion from white collar fraud last year alone.
What is fast becoming recession proof during this uncertain economic time is the job of an anti-fraud investigator. It's a profession that draws its talent from the likes of the FBI, the CIA and the IRS. The association's membership stands at close to 30,000. Last year saw a 40% jump in the number of applicants taking the certified fraud examiner test.
George P. Farragher works as a managing partner in charge of global investigations at the Cleveland office of Ernst and Young. Farragher says there's an art to outwitting what he calls the bad guys.
George P. Farragher: You gotta think like a fraudster. And as funny as that sounds, you have to put yourself in a position where if I had this opportunity I could rationalize what I'm doing and I have the need - real or perceived - I'm going to do something.
Bidding wars have broken out recently for the highly-skilled in the anti-fraud business, who command annual six-figure salaries. Stephen Seliskar is also one of Ernst and Young's lead partners in the area of fraud, forensic and investigative services.
Stephen Seliskar: The criminal element never seems to sleep. They are incredibly enabled with technology, and they have taken in much more of a global operation. So we might be continually shooting at a moving target.
Two key growth areas for fraud investigators are computer forensics and forensic analysis. Both involve combing through large volumes of information on computers or on paper and explaining complicated financial transactions to corporate boards or juries.
In this post-Enron era, nervous executives are policing their finances like never before. The 2002 Sarbanes-Oxley Corporate Accountability Act is partly responsible for that. The legislation affects how public organizations and accounting firms deal with corporate governance, financial reporting and public accounting. Sarbanes-Oxley has been far-reaching, leading to voluntary changes in private companies and mandatory changes in publicly traded companies.
Peggy Peterson is a spokeswoman for the House Committee on Financial Services chaired by U.S. Representative Michael Oxley, an Ohio Republican. Peterson says corporate scandals have cost the public close to $7 trillion in market capitalization. Under Sarbanes-Oxley, public companies are now being asked to pay to assure investors.
Peggy Peterson: Certainly while the compliance costs are significant, in many cases those are going to decrease over time, you know, once companies put in place those structures and the software and everything that they need to comply. I would imagine that that's going to get easier with time.
The business of fraud detection and prevention has spread beyond the boardroom and the Big Four accounting firms. Taking stock are more than 150 business schools nationwide. At the Weatherhead School of Management at Case Western Reserve University, a pilot class on fraud will be launched in the spring for MBA and executive education students, who lobbied for its inclusion in the curriculum.
Julia Grant says, for students, accounting has become sexy. Grant is an associate professor of accountancy at the Weatherhead School of Management. Grant says her research on U.S economic history across the twentieth century shows a pattern, where excessive fraud activity is followed by increased regulatory scrutiny.
Julia Grant: The step we're in now, which is the visible trials and we hope punishment. We haven't gotten to see a few of these executives be led off in handcuffs and that' s actually an important piece of it because until other players see that happening, it's all too easy to believe, 'Well, I won't get caught.'
But getting caught is playing out in court. Across the country, the public has been following the trial of Martha Stewart. This week in Ohio, the federal Securities and Exchange Commission began investigating alleged accounting irregularities at the Goodyear Tire and Rubber Company of Akron. The hope is the pursuit and punishment of corporate wrong-doers continues to help restore investor confidence. And that kind of accountability will keep financial sleuths in demand and on the prowl. In Cleveland, Tasha Cook, 90.3.