Accountants Need More Help Finding Fraud At Public Cos.

According to a leader in forensic accounting, more must be done to help accountants to find fraud at public companies.

Wells

“Accountants don’t currently learn what motivates fraudulent conduct, how to spot the signals, how to prevent fraud from occurring and much more,” said Joseph Wells, founder and chairman of the Association of Certified Fraud Examiners in a statement calling for more fraud detection education at the college level. “As it stands now, auditors are fighting a war without being taught how to recognize the enemy.”

Wells said it’s tough for accountants to spot fraud because it hides behind the veil of trust, which is still an essential element in business despite fraud discoveries. He said it’s a crime without unique clues, making it easy to miss, and it’s easily concealed off the books.

Sherman

“The majority of accounting education programs at universities do not have specific fraud-related courses about the specifics of fraud and fraud detection,” agreed Marc Sherman, accounting professor at Georgetown University. Real-life cases of recent fraud discoveries provide plenty of material for classroom dissection and analysis, he said, to teach students what fraud is and how to recognize it.

Ketz

Ed Ketz, accounting professor at Pennsylvania State University, also said he agrees that few schools teach full courses in fraud detection. He said he sees an even stronger need, however, for greater skills in analyzing financial statements. “You cannot detect an accounting fraud unless you are savvy enough to understand real-world financial statements,” Ketz said. “Students need to go beyond a mechanical knowledge of computing ratios to a knowledge of making analytical adjustments—reverse engineering—to obtain a better understanding of the economics of the business enterprise.”

Big Four firms did not respond to a request for comment on the extent to which fraud training is provided in the field.

More Companies Choose Accelerated Vesting Over Expensing

As the start date for stock option expensing approaches, an increasing number of companies are accelerating the vesting of already-granted options, according to research by R.G. Associates.

Ciesielski

Since last summer, 375 companies have accelerated the vesting of employee stock options, some of them vesting more than once, for a total of 408 accelerations, said Jack T. Ciesielski, owner of R.G. associates in his research report. He estimates that $2.7 billion in after-tax compensation has escaped reporting on income statements as a result of the accelerations.

New accounting rules requiring companies to show stock options as an expense charged to earnings take effect in January. Companies are accelerating vesting to avoid the expense, a move regulators are watching carefully. An SEC official said in late 2004 it expected companies to accelerate vesting, but wanted to see some explanation so investors would understand the decision.

Ciesielski said acceleration is strongest among small-cap companies. “Of the 375 companies, 164 of them are in the Russell 2000, while only 39 of them are in the S&P 500,” Ciesielski said. “Similarly, shares of 255 of the firms trade on the NASDAQ, while just 98 of them trade on the New York Stock Exchange.”

The complete analysis by Ciesielski's firm, as well as the related speech by SEC Accounting Fellow Chad Kokenge, are above, right.

FASB Finalizes Guidance On Setting Grant Date For Options

As expected, the Financial Accounting Standards Board has finalized its guidance on how companies can determine the grant date for share-based payments.

The final staff position says companies can treat the date an option grant is approved by its board of directors or other decision-making authority as the date the grant is issued, as long as employees are not permitted to negotiate the terms of the grant and they’re notified in short order.

The guidance is effective immediately, allowing companies to apply it in their current reporting period or as they begin costing options in compliance with new expensing rules. The guidance spares companies the administrative hurdles of valuing options individually per employee as each is notified of its option grant.

Compliance Week has covered this topic extensively over the past few weeks, and our coverage—as well as the FASB guidance—is in the box at right.