By Cathy Lockman
Frank Nekrasz has more to teach his accounting students than what’s in a textbook. When he takes a seat in a Wohlers lecture hall the first day of class, students often assume he’s a student rather than the instructor. It could be the black leather jacket and the long goatee.or maybe it’s the bald head and the skull tattoos. But whatever it is, when he moves to the front of the class to introduce himself, one thing is certain.
“I’ve challenged their assumptions,” says Nekrasz, who is Dr. Frank to his students. “My shock value is their wake-up call that you can’t take things at face value-that you need to be ready to question, to challenge, to be curious. Things aren’t always what they seem.”
In today’s accounting environment, not taking things at face value has become especially good advice. Fallout from the Enron, WorldCom, Tyco, and other such scandals early in the decade has redefined auditing, setting new standards and creating new responsibilities for auditors in detecting fraud. According to Nekrasz, a healthy skepticism has always been an important attribute for auditors, but now it’s an absolute necessity.
“You can’t be afraid to ask challenging questions or to go toe-to-toe with someone when necessary,” he says. “You can’t settle for BS answers or ones that don’t match the figures. People will get angry with you, but it’s part of the job to have the personality to handle that and to not let it deter you. For this job, milquetoasts need not apply.”
Certainly, no one would ever accuse Nekrasz of being a milquetoast.
Like many auditors, Nekrasz developed an interest in forensic accounting after uncovering a fraud himself. Less than a year after graduating from the University of Rhode Island with his bachelor’s degree, Nekrasz was working for a public accounting firm when he discovered inconsistencies in a client’s inventory. “The CEO had a tirade when I brought it to his attention, exhibiting the classic defensive reaction that is true in most situations,” he says. “But, as I tell my students, you can’t let that get to you. You have to continue to investigate inconsistencies until you’re satisfied that they’re resolved. The evidence doesn’t lie-and it’s the evidence and the numbers that should tell the story, not the client.”
Truth or Consequences
Today, those numbers tell an interesting tale about fraud and its implications for businesses, both large and small, across the country. In their 2006 Report to the Nation on Occupational Fraud & Abuse, the Association of Certified Fraud Examiners (ACFE) estimates that fraud cost U.S. businesses more than $650 billion last year alone.
These losses stem from two general types of fraudulent behavior: the misappropriation of assets and fraudulent financial statements. Asset misappropriation, which essentially is theft, is the most common type of fraud, accounting for more than 90 percent of the cases in the ACFE 2006 study. Financial statement fraud, on the other hand, is far less common but far more costly. Where a business would lose an average of $150,000 in a theft scheme, the median loss for an instance of financial statement fraud is $2 million.
With such high costs, what can be done to better detect fraud? Call in the forensic accountants-people like Frank Nekasz and University of Illinois graduates Kim Richmond and Brian Goetsch.
Inquiring Minds Want to Know
Richmond, a 1993 accounting graduate, developed an interest in forensic accounting while working as an auditor with Arthur Andersen. She was assisting a client with an issue and became hooked on the challenge of the field and the ability to help a client in crisis. When the Enron scandal broke in 2002, she and 200 other Arthur Andersen consultants helped to form the Huron Consulting Group, a provider of independent financial and operational consulting services. In just five years, Huron now has nearly 1,000 employees assisting a wide variety of both financially sound and distressed organizations.
“The field has expanded exponentially since 2002,” says Richmond. “As a result of what happened with Enron, there is a greater need for forensic accounting services. The regulatory environment demands it, and companies have to respond. Businesses need the assistance of more professionals to do that.”
According to Richmond, preparing these professionals begins with a strong, well-balanced undergraduate business education. “Accounting majors who are interested in this field really benefit from taking finance courses as well. They are a good balance to the detailed accounting curriculum and help to provide skills in looking at the financials from a broader perspective,” she explains. “Then you need to get auditing experience. It’s invaluable if you’re focusing on financial statement fraud.”
Classes like ACCY 593, “Fraud Examination,” which Nekrasz developed and teaches each spring semester, are also important, says Richmond. Goetsch, who completed the B.S./M.S. in accountancy in 2004 and is now an associate at Huron, agrees. He says the introduction he received as a student in Nekrasz’s auditing class and Kentaro Koga’s ACCY 304 class on control systems is essential to understanding the opportunities available in the field and the mindset needed to pursue the profession.
“Both classes gave me insight into the control function and how important it is to be aware of the business as a whole,” says Goetsch. “In this field, you’re always going to have incomplete information, so what really matters are the assumptions you make and where they lead you. The ability to think critically, to challenge assumptions, and to think on your feet is especially important.”
And so is instinct, says Richmond. “As a forensic accountant, you’re often working in an environment where information doesn’t exist or it’s been destroyed, or the people you’re relying on for information may be the same people who are trying to hide a fraud. In those situations, even all the great technology and search tools we have at our disposal won’t be enough. You have to rely on your instincts.”
Don Rabon, the deputy director of the Justice Academy for the North Carolina Department of Justice and an instructor for the ACFE, also believes that instinct plays an important role. He has been teaching investigative training techniques to law enforcement and professional organizations for more than 30 years. He estimates that a forensic accountant’s job is one third personal style and instinct and two-thirds knowledge and experience.
“People can be taught the skills of accounting and the mechanical details of interviewing, building rapport, and detecting deception,” he says. “But to be successful in this field, you also have to have other innate qualities like persistence, an open mind, and an attention for detail.” It’s what Rabon says turns the mechanical into an art form.
Nekrasz agrees. “Intellectual curiosity is an especially important quality,” he says. “I tell my students that the natural tendency to ask questions, to dig deeper, to want to understand makes you extremely valuable in this profession-especially if you also have the personality to keep going until you’re satisfied that something is correct.”
The ability to recognize patterns is also important. “Fraud is about information that’s in view and it’s talking to you, but you don’t know what it’s saying unless you discover the pattern,” says Nekrasz. “There are certain patterns that become readily apparent, but often not until you have some experience behind you.”
Raising a Red Flag
That experience also comes in handy when developing other fraud detection techniques, namely, interviewing and discourse analysis skills. Rabon, who is the author of two books on the subject, says the ability to be nimble while conducting an interview and to spot linguistic indicators of deception comes with education-and practice. “For instance, say you’re interviewing a manager about how they handle night deposits, and she says ‘Normally, we do this.’ The qualifying word ‘normally’ indicates that that’s not always how they do it and should be a red flag that the auditor needs to go back and revisit this articulation to find out what the exceptions to ‘normally’ are.”
Richmond believes that another key to success in interviewing is the ability to refine your skills by watching others, by reading verbal and nonverbal cues, and by adapting your style depending upon whom you’re interviewing. “Some of your best information will come from people in the organization who are not at the top. They’ll tell you all kinds of things that can be relevant to an investigation.”
But you have to be listening carefully and skeptically and you have to be prepared to ask probing questions. As Goetsch says, “One thing I learned in Dr. Frank’s class was not to take anything at face value but to keep asking myself, ‘Does this pass the smell test?'”
That’s music to Nekrasz’s ears. “I want students to leave my classes taking that sense of curiosity with them,” he says. “And when they’re getting the run-around from management, I want my face to pop into their heads and I want them to think, ‘Dr. Frank wouldn’t want me to settle for that answer or to be intimidated.’ “
Frank Nekrasz – Faculty Profile
Perspectives, Spring 2007 Edition – College of Business Magazine