Worldwide: looters have a foothold: accounting fraud is the corporate criminals' weapon of choice.

CPAs are very aware of the rise in global securities fraud and are working hard to combat it. Terrorists and insurgents frequently use fraud to finance their operations and launder their funds. When fraud becomes endemic in a nation, it can produce radical political changes that bring to power leaders who are hostile to market economies and democracy and who often are strongly anti-American.

Executives who strip corporations of money for their own use (called "looting control frauds" in criminological circles) use accounting fraud as a weapon of choice to inflate income and net worth. They also use normal corporate mechanisms to convert corporate assets to their own personal benefit before the company collapses. Because of the vigilance of the American accounting profession and tough new regulations such as the Sarbanes-Oxley Act, the problem in the United States may pale in comparison to other comers of the world.

Looters are succeeding in various parts of the globe because of several factors. The expansion of privatization of state-owned enterprises (SOEs) over the last two decades has led to a dramatic global upsurge in commercial enterprises, which increases the potential for private-sector looting. The mishandling of privatization creates the incentives for looting. For example, many of the SOEs in the former Soviet Union were noncompetitive and likely to produce long-run losses. The plants were obsolete, environmental disasters. In China, SOEs received subsidies through bank "loans" from other SOEs. Of course, the state banks were insolvent, but they too were implicitly subsidized by the state. By virtually guaranteeing the noncompetitive SOEs would not be permitted to fail, the Communist Party created an incentive for the managers to loot "their" SOEs.

Regrettably, these waves of privatization were undertaken without providing regulations strong enough to make an advanced private-sector economy effective. The economists who designed the systems had no experience in fraud prevention and seem to have assumed that the necessary control mechanisms would develop spontaneously Instead, without a rule of law, honest courts, real banks or effective secured transactions, the result too often was endemic fraud.

In Latin America, privatization should have been more successful because those nations often had moderately effective institutions. Corruption was rife in the process, which frequently meant government officials sold valuable SOEs to cronies at a fraction of their true market value. Unfortunately, political cronies rarely are selected for business acumen, and many of the privatization efforts failed.

As the world has seen, fraud and corruption can endanger our very lives:

* A Chechen suicide bomber used a tiny bribe to escape arrest and bypass airport security and thus he was able to bring down an airliner.

* The former governor of Illinois recently was convicted of corruption. One part of that scandal involved bribes that led to the fraudulent award of commercial trucking licenses to hundreds of unqualified drivers--and, ultimately, the bribes led to fatal accidents that killed innocent people.

* Terrorists willing to pay under-the-table money could very well penetrate our national security.

We cannot "win" a decisive battle against fraud. We need to be eternally vigilant against fraud and work cooperatively with other nations. The Institute for Fraud Prevention (IFP) can help build those alliances--and CPAs and lawyers are vital to the effort. CPAs ensure the reliable accounting essential to any well-functioning enterprise; lawyers have taken the lead in helping to create a rule of law in emerging states.

The time-tested virtues of independence, professional skepticism and competence have never been so important. We have to take control fraud (that is, fraud perpetrated by management) seriously--that means recording it when we detect it (the Justice Department does not keep statistics on control frauds) and conducting research to learn how to spot it before it causes catastrophic damage. The results of the IFP's research will provide the guidance to expand the education of auditors, to improve the management of audits and to better regulate securities. The information gathered by the IFP will be a major factor in the global effort to detect and prevent fraud.

Mr. Black, the executive director of the Institute for Fraud Prevention, is an associate professor of economics and law at the University of Missouri at Kansas City. He began his career as an attorney, became a regulator during the savings-and-loan debacle in the 1980s and, after obtaining a doctorate in criminology, joined the academic community at the LBJ School of Public Affairs at the University of Texas at Austin. Mr. Black is a highly regarded expert in the area of management fraud and corruption.

RELATED ARTICLE: AICPA and ACFE join forces to prevent fraud.

The American Institute of CPAs (AICPA) and the Association of Certified Fraud Examiners (ACFE) have teamed up to create the Institute for Fraud Prevention (IFP)--the world's first entity dedicated to fight all forms of corporate fraud in the United States and abroad.

Fraud is as certain as death and taxes. The Enron, WorldCom, Tyco and Parmalat scandals sent global shock waves around the world. The AICPA named fraud prevention a top agenda concern for the accounting profession. The ACFE estimates that 5% of the U.S. gross domestic product (about $650 billion a year) is lost to fraud. Worldwide, the underground economy, including the growing problems of identity theft, money laundering, corruption and other economic crimes, may amount to trillions of dollars annually. The timing is critical for the two professional organizations to join forces to combat fraud.

The genesis of the IFP began when AICPA President and CEO Barry Melancon met with ACFE Chairman Joseph Wells to discuss the proliferation of widespread fraud. What are the roots of fraud, and how do we combat it? "Despite my four decades in the antifraud field," said Wells, "I didn't have the answers and together we concluded the accounting profession needed a united body to study those causes and to make recommendations for preventing fraud." The result is the IFP, a nonprofit organization dedicated to research projects that will fight fraud.

The mission of the IFP is to unite world-class universities and scholars in a coordinated effort to study the root causes of a wide variety of fraudulent conduct and make recommendations to the public and private sectors on how to ameliorate their losses. The significance of a consortium of universities is that, until the IFP, no such body existed. Research projects on fraud, until now. have been typically underfunded and isolated. Distribution of these studies to the public has usually been very limited.

In its first five years, the IFP hopes to attract funding for at least 15 research projects on fraud, the results of which will be widely distributed. The nature and extent of those studies will be determined by the IFP board. Moreover, individual organizations can commission proprietary and private research on any fraud-related topic. For example, a public accounting firm may wish to fund a study on the effectiveness of its audit techniques to better detect fraud. Those results will be provided only to that firm.

Even though it is not yet fully funded, the IFP already has awarded three grants:

* A study of control overrides by management in financial statement fraud cases. According to a 1999 COSO research project, at least 83% of 200 financial statement frauds were engineered by the CEO, CFO or both. These control frauds are most often accomplished by upper management by overriding existing internal controls. The IFP study hopes to provide answers that will reduce this problem.

* Research to prevent and detect procurement fraud. The ACFE's "2006 Report to the Nation on Occupational Fraud and Abuse" shows that fraud in the purchasing function is one of the most costly offenses, with a median loss of $1 million per incident. A current example of this comes from the GAO and the Pentagon's IGs, who have concluded that procurement fraud in Iraq has rendered the effort to rebuild its infrastructure ineffective and contributed to widespread hostility toward the United States among Iraqi citizens. The IFP study aims to provide better predictors that will uncover these frauds earlier.

* A study of the methods used to achieve identity fraud, which has become a bane to citizens worldwide. According to the Federal Trade Commission, U.S. complaints regarding identity theft have grown by nearly 20% in the past three years alone. Although this difficult problem will not be overcome easily, IFP research is targeted to determine which groups are most likely to commit these offenses. Those research results will be released to the profession, government agencies and the public late this year.

Coordinating the research is a consortium of U.S. and international universities with a strong reputation for white-collar crime research. Those invited so far include Brigham Young University in Utah, the University of Texas at Austin, North Carolina State University, the University of Missouri at Kansas City, the University of Tennessee, Santa Clara University in California, the University of California at Irvine, Northeastern University, the University of Maryland at College Park and the Australian National University in Chicago, the University of Basel (Switzerland), Cardiff University (U.K.), the University of National and World Economy (Bulgaria), Jawaharlal Nehru University (India) and Fudan University (Shanghai).

The AICPA has been instrumental in developing the new body by providing financial, intellectual and administrative support. With the AICPA's participation, the IFP has been able to build a strong foundation and attract respected members. "The CPA profession is committed to doing its part to control fraud. It takes a multiparty effort--and working with Joe Wells and the ACFE to seek information and solutions that will lead to success," said AICPA President and CEO Barry Melancon.

The first members on the board of directors are representatives of the AICPA, the ACFE, Grant Thornton and the Japanese consulting firm D-Quest. Board members must commit to a modest amount of tax-deductible funding ($120,000 over a minimum of three years). The board's diversity is important, because the IFP cannot be dominated by any group, profession or industry.

The IFP's intellectual partners--the FBI, the GAO, the Better Business Bureau, the National White Collar Crime Center and the U.S. Postal Inspection Service-will work with the financial supporters to ensure the IFP selects and funds worldclass scholars to undertake antifraud research of the highest quality.

Still in its infancy, the IFP has made astonishing strides for its short existence-for example, the World Bank's anti-corruption office has already chosen the IFP to be its expert consultant--but there also is much work yet to do. "We accountants typically look at fraud as an accounting problem, but there is much more involved; it is a plague on society. The IFP is committed to taking a more holistic approach in its research to determine better predictors of fraud risk," said Wells. The IFP will benefit every practicing CPA by yielding a broader understanding and in-depth knowledge of the causes of fraud. It welcomes the participation of all parties interested in funding fraud-related research. Details are available from William K. Black, IFP's executive director, at [e-mail].