Forensic accounting

Early in the spring semester, students studying fraud investigation watch their instructors - guys who do not believe in traditional lecture class formats - play out an interrogation in an old classroom in North Dakota State University'`s Putnam Hall.

Herb Snyder tears into the role of investigator, acting hard-nosed and confident, while James Clifton is stuck playing the down-on-his-luck inventory manager in a warehouse.

The basic facts of the case:

• The inventory manager is suspected of inflating his write-offs, since his numbers are much higher than any of the other managers at the warehouse.
• His mother is in a long-term care facility and it costs much more than Social Security will cover.
• He doesn't earn enough money to be able to cover the difference.

There's no direct evidence of a crime, but the need and opportunity are present. An outright confession will go a long way toward proving the crime. Snyder wants to show students how the logic flows, even in this fast-forward demonstration:

Clifton squirms in a seat in the front of the room. Snyder paces menacingly, waving a manila folder of evidence and interrupting Clifton every time he tries to deny the charge. It's uncomfortable to watch such aggression, even if it is just a demonstration.

Snyder raises his voice:
"Jim, I know that you have stolen inventory and ..."
"No ..."
"Jim, stop."
Their voices overlap as each tries to control the conversation.
"I was never. No," Clifton says.
"Jim, you're not here to talk."

Clifton slumps in a chair and watches the floor as he tries to get a word into the interrogation. Snyder is having none of it. He continues to interrupt Clifton. All Snyder wants to hear is a confession.

Clifton stops trying to talk, crosses his arms and turns away. Snyder pulls up a chair and leans his head within inches of Clifton's ear.

"Look at me. Listen to me. I know you're not a lowlife. You've got a mother in the nursing home. You did this for your mother. I'm not wrong about you. You're a good guy. Or did you use this for drugs?"
"I'm no addict."

This is no ordinary accounting class. Snyder, an associate professor, and Clifton, an assistant professor of accounting practice, won the 2008 Innovations in Accounting Education Award by the American Accounting Association for their curriculum. Snyder also received the 2009 Peltier Award from NDSU for innovation in teaching.

Fraud investigation requires specific skills. It requires new methods to force students out of their comfort zones. It requires instructors willing to push students into a new way of thinking about the criminal mind.

Fraud is sneaky. When someone robs a bank or snatches a purse, someone else notices. People who commit fraud cover their tracks and may go undetected for years, costing businesses, organizations and taxpayers hundreds of thousands of dollars. Because of the concealed nature of the crime, hard numbers are impossible to calculate, but the cost of fraud in 2008 is estimated at $944 billion.

Snyder and Clifton use all kinds of methods to teach about fraud.

One morning in December, 11 students are divided into small groups to try to erase ink signatures from checks using acetone and various commercial ink and stain removing products. Snyder wants the students to experience the work of such criminals. It's one thing to lecture about check washing, quite another to try it yourself. The acetone-soaked cotton swabs pick up blue from the checks but do little to remove a signature. One student notes how difficult it would be to cash checks that obviously have been wet. Another says the check has been basically destroyed after a few minutes of rubbing in acetone.

The point is made. One of the students, Kevin, is astonished. Why would anyone do such a thing so easy to catch?

"Because people don't pay attention."

Pay attention. It's Snyder's mantra. He repeats this advice at least a dozen times during the class. If people would pay attention, most fraud would not be possible. But people hate accounting. They don't want to look at the numbers - an especially troubling attitude Snyder's students have to learn to combat. Even in cases like Enron, an energy company ultimately undone by accounting fraud, the prosecution didn't drown the jury in numbers. They got their convictions by proving that the men in charge lied.

As he walks around the front of the room talking about check tampering, Snyder wears a blue, button-down shirt with the sleeves rolled up and ready for business. His hair started turning gray when he was 15, and he now wears a neatly trimmed beard. He speaks energetically. He speaks from experience.

Snyder started working as an investigator for the New York State Insurance Fund in 1982. He also worked as an intelligence analyst for the U.S. Army Reserves from 1977 to 1998. He performed classified research to assess the development and manufacturing capabilities for the Soviet Union, Iran and Iraq. He dug through piles of documents to try to piece together meaning from unrelated materials.

Snyder's counterpart, Clifton, teaches the advanced fraud class. Like many investigators, Clifton started out as a regular accountant. While at a firm in 1992, he had a case dropped on his desk. A local non-profit soccer league thought they were missing around $30,000. They only realized something was going on when their checks started to bounce. Clifton did the footwork and discovered close to $80,000 in missing funds and a bookkeeper who made her living embezzling from non-profits.

Students learn basic investigative skills through each of the five assignments they must complete over the course of two semesters

One task is to perform a background check on either Snyder or Clifton. Their online resumes are full of lies, which exposes lazy students and forces the rest to dig up city records or locate far flung sources of information to determine Clifton's mother's maiden name, his current mortgage payments or his possible association with the Air National Guard.

In another exercise, students strike up conversations with strangers to see how much information they can get without the subjects being aware they are divulging. They use tactics like sharing family pictures, which puts pressure on the strangers to share as well, exposing their driver's license right next to their wallet photos. The point isn't to steal identities, but to see how little attention people pay to how much they reveal to someone they don't know. Students typically balk at the assignment at first, but come back amazed at just how much someone will share.

Snyder gives the students a bag of trash in their third assignment. It's filled with phony documents and unrelated material. Their task is to determine which person in the fake company is divulging information and how. This also forces the students to think like a criminal, to hypothesize ways to get around the company's system and to test those hypotheses.

Snyder and Clifton collaborated with NDSU theatre students to produce a video used in the fourth assignment, part of the advanced course. The video details the workings of a factory. The fraud students must determine exactly how inventory is stolen and how the crime is concealed.

Throughout these exercises, students build an investigator's mindset. While an accountant or auditor will look at the numbers to see if they match up, a fraud investigator digs deeper, sometimes even going undercover as a potential client or temporary employee. Their driving question with the numbers is, "does this sound reasonable?"

Students are ready to take on a real-world investigation near the end of the two semesters of class. Local churches and non-profits open their books for this valuable, free service. The students provide advice on ways to protect the organization from fraud. Sometimes, they catch someone dipping into profits. One electronics business knew it had a problem. The manager thought about $20,000 had been taken. The students discovered the number was closer to $50,000, and the business was able to more accurately recoup their losses.

-Joel Hagen