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INTERVIEWING AS A ‘FORENSIC-TYPE’ PROCEDURE

Introduction In 1996, the Association of Certified Fraud Examiners surveyed 2,608 companies concerning the prevalence of fraud within business today. The survey results indicated that organizations lose about 6% of their revenues or $400 billion annually to occupational fraud and abuse (Wells, 1997). In 1998, KPMG, LLP conducted a survey of 5,000 leading U.S. companies and organizations to determine the nature and extent of fraud as an ongoing business problem. According to the report, businesses lose an average of $116,000 per fraud incident and only 4% of such incidents were discovered during external auditor review. Consequently, the accounting profession has been under attack for failing to detect fraud during financial statement audits. For example, a “Big Five” accounting firm recently paid $335 million for failing to detect a $500 million revenue overstatement by one of its audit clients (Wells, 2000). Other massive audit “failures” involving companies such as ZZZZ-Best, Crazy Eddie, Phar Mor, Cendant Corporation, McKesson HBOC, Inc., and Hanover Sterling have eroded the perceived credibility of financial statement audits.

In 1998, the chairman of the Securities and Exchange Commission (SEC) instructed the Public Oversight Board to appoint a “Panel on Audit Effectiveness” to review and evaluate the effectiveness of financial statement audits of publicly-traded companies. Although the Panel concluded the quality of audits is fundamentally sound, it did make several recommendations for improvements in the effectiveness of audits. The report listed as the first of eight major recommendations that “auditors should perform some ‘forensic-type’ procedures on every audit to enhance the prospects of detecting material financial statement fraud” (O’Malley, 2000). One powerful forensic-type procedure available to those responsible for detecting fraudulent activity is interviewing. Those who have the skills to effectively conduct interviews will be more successful in uncovering fraud than those who do not. The purpose of this paper is to explain and illustrate--through actual case studies--the basic principles of effective interviewing.

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