Fraud 101: techniques and strategies for detection. (Book Reviews).

DAVIA, HOWARD R., Fraud 101: Techniques and Strategies for Detection (New York, NY: John Wiley & Sons, Inc., 2000, 242 pp.).

Howard Davia's new book can change the way we teach auditors to detect fraud. This book makes two major contributions: the first is to define a realistic

Defining a role for fraud auditors is not an easy task. While SAS No. 82 mentions two types of fraud--one that results in material misstatements on financial statements and another that results in the misappropriation of assets--it makes clear that auditors are responsible only for discovering the first kind (but even that responsibility is qualified). While auditors take responsibility only for detecting frauds that result in material misstatements, audit clients want accounting firms to detect both types of frauds. Further, audit clients often assume that an unqualified audit opinion guarantees that they are free from both types of fraud. This is the infamous "expectations gap."

There are sound reasons for the accounting profession to avoid taking responsibility for asset-theft fraud. First, the cost of giving a complete fraud audit would be prohibitive to any client. Second, the accounting profession has not yet outlined procedures that would guarantee that a fraud audit would detect all manner of fraud. Thus, offering asset-fraud audits could open up accounting firms to even more liability than they currently face.

Davia's response is that accounting firms should not have to guarantee a firm is completely free of all types of asset-theft fraud. Rather, the accounting firms should offer a menu of specific types of frauds for which they would provide audits. Clients could then choose the extent of a fraud audit based on the amount of money they were willing to spend. The benefits would be two-fold: firms could be assured they are free of specific frauds, and potential criminals would be deterred by seeing the fraud auditors at work, never knowing which types of fraud they were investigating. Given the character-profile of white-collar criminals, this deterrence effect could be very effective.

Davia's book is written as a text for audit practitioners or students who want an introduction into detecting frauds. The approach is to teach the reader how to conduct "proactive" audits: going into a firm with a specific mission to search for frauds where no symptoms yet exist. The book is organized by broad fraud category. Each type of fraud is defined, examples of that fraud are given, and then audit procedures are given that would detect that fraud. The frauds for which he provides detection techniques in this book are: duplicate payment fraud, multiple payee fraud, shell fraud, defective delivery fraud, shipment or pricing fraud, and finally contract-related frauds. The book also contains sections on gratuities, bribes, kickbacks, fraud symptoms, and a small section on evidence. Davia includes some case studies and solutions, as well as interesting excerpts from government fraud hearings.

Many universities have added a forensic auditing component to their curriculum as a separate course or a block within an auditing course, but the coverage is not nearly as widespread as might be expected considering the demand for forensic auditors. Some of the reluctance may be the lack of textbooks that teach specific detection techniques. Davia's book begins to fill that gap. His book can be considered the second generation of fraud-auditing books. The first generation generally came from practitioners who became fraud specialists, not by classroom training, but by on-the-job experiences. Thus, their books were generally a collection of personal experiences. These books are useful in the sense that they raise fraud awareness among students. However, they are not organized to teach specific fraud-detection techniques.

Davia's book is appropriate as the text for an undergraduate class or as a single block within a special-topics class for graduate students. It does not attempt to be a comprehensive training course for forensic auditing, merely an introduction to proactive detection techniques. For the types of fraud he targets, he fulfills the book's stated mission.

For readers who want to go beyond the mere detection of elementary frauds, I recommend The Accountant's Guide to Fraud Detection and Control (1) a book that Davia co-authored. While the case studies in Fraud 101 end at detection, after which students are counseled to turn the problem over to professional investigators, the Accountant's Guide cross-trains auditors in basic investigative techniques. The book includes instructions on interviewing skills, note taking, and dealing with prosecutors. The last section covers the rules of evidence and legal cases in fraud. In addition, there are sections on computer fraud, internal controls, and a large case study with solution.

While each book makes important contributions, the proactive techniques and the proposed role for forensic auditors given in Fraud 101 deserve serious consideration. We should not expect to know all the procedures for detecting fraud at this time, but we can start building a body of procedures. After all, auditing itself began in 1939 with two simple procedures: observe physical inventory counts and confirm receivables. We should hope that Davia's book is the first of many books and articles that start refining fraud audit procedures.

(1) Davia, H. R., P. C. Coggins, J. C. Wideman, and J. T. Kastantin 2000. Accountant's Guide to Fraud Detection and Control. 2nd edition. New York, NY: John Wiley & Sons, Inc.

CINDY DURTSCHI
Assistant Professor

Florida State University