Accountant’s Guide to Fraud Detection and Control, Second Edition

By Howard R. Davia, Patrick C. Coggins,
John C. Wideman, and Joseph T. Kastantin

Published by John Wiley & Sons, Inc.
(368 pp., $65, ISBN 0-471-35378-7)

Reviewed by Allan M. Rabinowitz, CPA, professor of accounting, Lubin School of Business, Pace University

This book, directed primarily at accountants and internal auditors, synthesizes the exceptional experience of four qualified professionals into an excellent guide focusing on asset-theft fraud. The book provides training in recognizing and detecting fraud, discusses the evidence required to legally support fraud allegations, presents investigative techniques for gathering such evidence, and furnishes a methodology for evaluating and designing internal controls. The need for such training is heightened by the authors’ finding that accountants do not suspect employees with whom they work or socialize to be sources of fraud.

In discussing the composition of the fraud universe, the authors estimate that 20% of fraud has been prosecuted, 40% has been discovered but not prosecuted, and 40% has not been discovered. Most fraud is discovered by accident because of inept and careless perpetrators. In the authors’ opinion, internal auditors and CPAs in public practice have had little success in finding fraud evidence; the best hope for spotting fraud lies in adequately trained and experienced auditors who have become sensitized to the characteristics of fraud.

The authors devote one chapter to classifying some common forms of fraud, such as kickbacks, purchase orders, defective deliveries or pricing, and assets not on the books. They define and illustrate each form of fraud and provide detection tips. Separately, they categorize, explain, and illustrate a series of fraud-specific internal controls. Active controls, which seek to prevent fraud, include personnel identification, physical restraints, and document safeguards. Passive controls, which look to deter fraud by increasing the risk of discovery, include audit trails, surveillance of key activities, and rotation of key personnel.

The book gives detailed steps for setting up a fraud-specific internal control system, beginning with the appointment of an internal control custodian. In a large entity having high fraud risk, this individual should report to the top financial officer and have as significant a profile as the chief internal auditor. Internal control would be a prime responsibility of this custodian, who would also have the proper training, experience, time, and staff resources to handle it effectively.

A brief chapter on computer fraud lists vulnerable areas, examples of computer fraud, and audit tests and common security measures. The authors devote two long chapters to 10 fictional fraud cases based on actual events, and they ask readers to consider the fraud possibilities in each case. They then furnish solutions to these cases by carefully indicating how auditors or accountants should have approached them and the pitfalls that face examiners. A separate chapter focuses on the 1980s savings and loan scandals and custodial fraud.

Principles and procedures used by professional investigators are provided, from assessing the case to interviewing techniques, interviewees and their personalities, arranging and conducting interviews, composing questions and using logic, taking careful notes and written statements, and contacting the prosecutor.

Proactive and reactive investigations are distinguished in a chapter on worker’s compensation fraud and improprieties committed by claimants, providers, and employers. The use of outside investigators in this specialized area is proposed and explained.

The book’s final segment discusses the prosecution of fraud. It starts by explaining the various forms of fraudulent conduct and the elements of crime along with the factors to be considered in fraud discovery procedures. The authors outline rules of evidence in nonlegal terms and include a case study. They also review an employer’s dealing with fraud by legal action, restitution, or sanctions.

A number of legal cases are summarized by their facts, the rule of law, the issues involved, the court’s decision, and the implications for fraud prevention. These cases apply to embezzlement and misuse of public funds, business owners with fiduciary responsibilities, fraud in government operations, RICO (Racketeer-Influenced and Corrupt Organizations) Act fraud, partnership fraud, and credit union fraud. The authors provide brief reviews of several bankruptcy fraud cases as well as their own recommendations of fraud prevention strategies. The last chapter covers ethical conduct and whistle-blowing.

The authors contend that principles and standards for a fraud-specific examination practice must be well written and that the AICPA is ideally equipped to undertake this responsibility. They believe that many entities are in jeopardy because they lack the ability to perform such examinations for themselves and cannot secure outside services.

In light of all the risks, threats, and vulnerabilities facing every entity, this book serves a valuable purpose in acquainting accountants, auditors, and managers at every level with approaches to preventing and detecting fraud. The book is clearly written, readily understandable, well organized; offers excellent examples throughout its content; and should prove of special value to those readers less experienced with fraud.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.