The Department of Accounting

1
The Department of Accounting Information
Systems at North Dakota State University
presents

• ACCT 410/610-- Forensic Accounting
• A course developed taught by
• Thomas Buckhoff, Ph.D., CFE, CPA
• EideBailly Professor of Forensic Accounting

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Wall Street Journal Quote

• They are the accounting professions new glamour
  kids, and their specialty is sleuthing. Formally
  known as forensic accountants, they are called in
  by companies to investigate financial
  shenanigans--and their ranks are swelling fast.

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Agenda for Today

• Definitions
• Case Study
• Preview Syllabus
• Prevalence of fraud
• Differentiate between
• Financial auditing
• Fraud auditing
• Fraud examination
• What is a CFE? video
• Types of financial crimes

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What is forensic accounting?

• The application of accounting principles,
  theories, and discipline to facts or hypotheses
  at issue in a legal dispute and encompasses every
  branch of accounting knowledge.
• Source AICPA

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Occupational Fraud and Abuse (hereafter referred
to as fraud)

• The use of ones occupation for personal
  enrichment through the deliberate misuse or
  misapplication of the employing organizations
  resources or assets.

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What is fraud examination?

• Fraud examination encompasses
• Fraud detection
• Fraud investigation
• Fraud prevention
• Skills required of forensic accountants
• Financial expertise
• Fraud knowledge
• Knowledge of legal system
• Ability to work with people

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Case study BHS

• Fraud perpetrator
• Bookkeeper for small health care facility
• Fraud methodology
• Theft of checks
• Fraud facilitator
• Inadequate controls
• Fraud loss 320,000

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Preview of Course

• Course Syllabus
• Read Course Policies
• Review Course Calendar
• IVN Considerations
• Before speaking, identify yourself and location.
• Keep microphones clear.

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Prevalence of Fraud
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2000 National Retail Security Survey

• Estimates that inventory shrinkage costs retail
  stores 1.74 of total sales.
• More shrink can be attributed to employee theft
  than to any other cause.

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Causes of Inventory Shrinkage
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Losses Due to Inventory Shrinkage
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Fraud Survey by KPMG, LLP

• The survey pool included 5,000 U.S. companies and
  organizations from a cross-section of publicly
  held companies, not-for-profit organizations, and
  governments.

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Fraud Survey Results

• Why did most of the frauds occur?
• Poor or non-existing internal controls
• 62 of respondents reported that they had
  suffered losses due to employee fraud during
  the past year.
• Median loss per incident 116,000.
• Only 4 of frauds were discovered during
  financial statement audits.

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Average Fraud Losses by Type of Scheme
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Why Dont Auditors Detect Asset-Theft Fraud?

• Asset-Theft Fraud
• Financial statements are fairly presented
• Financial Statement Fraud
• Financial statements are not fairly presented

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Lawsuits against the Big Five

• Lawsuits outstanding against the Big Five at the
  end of 1999
• 36 billion, or 60 of their total revenues
• Conclusion
• The failure to detect financial statement fraud
  is costing the profession billions of dollars.

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Fraud Survey by the ACFE

• In 1996, the ACFE conducted a survey of 2,608
  CFEs on fraud in the workplace.
• The results were published as the Report to the
  Nation on Occupational Fraud and Abuse.

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Results of the Study

• Fraud costs 400 billion annually
• Fraud costs businesses about 6 of total revenues

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Report Conclusions

• Fraud is a serious problem.
• Smaller organizations are most vulnerable to
  fraud.
• Few frauds are discovered during audits.
• Rate of fraud will likely rise.

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The Corporate Cop

• In 1986 Donald Cressey suggested to Joe Wells
  that the world needed a new kind of cop which
  combined criminal justice expertise with
  accounting expertise. Such was the genesis of
  the Association of Certified Fraud Examiners.

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Video The Certified Fraud Examiner (CFE)

• Discusses types of services offered by Certified
  Fraud Examiners
• Reviews the requirements for becoming a CFE.

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The Legal Elements of Common Financial Crimes

• Prosecuting financial crimes requires an
  understanding of the legal elements of common
  financial crimes.

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Financial Crimes

• Fraud Falsely representing a fact to get
  another person to surrender something of value.
• Tax evasion Fraud committed in conjunction with
  failure to file or pay taxes.

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Financial Crimes

• Bribery Something of value is used to influence
  the action of others.
• Embezzlement Conversion of an organizations
  assets/funds for personal use.

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Financial Crimes

• Larceny Person wrongfully takes anothers money
  or property with the intent of stealing.
• Forgery Person passes a false or worthless
  instrument with the intent to defraud the
  recipient.

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Financial Crimes

• Extortion Person illegally obtains property
  from another by threat or force.
• Kickback Person who sells an item pays back a
  portion of purchase price to the buyer.

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Financial Crimes

• Racketeering Running an illegal business for
  personal profit (e.g. drug trafficking).
• Money Laundering Transfer of money from illegal
  sources into legitimate channels.

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Exercise 1

• Read the six articles provided in the course
  materials and classify each according to the
  financial crime committed (I.e. fraud,
  kickbacks, embezzlement, etc.)

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Exercise 1
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Summary

• Fraud is a growing problem.
• Forensic accounting is a specialization of
  accounting currently in high demand.
• Forensic accountants need to know and understand
  the types of financial crimes commonly committed
  in business today.

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Fraudwise, LLC

• Specializing in fraud detection, investigation,
  and prevention consulting services
• Senior Investigators
• Thomas Buckhoff, Ph.D., CFE, CPA
• Thomas OHalloran, MBA, CFE, EA
• 2974 Southgate Drive
• Fargo, ND 58103-3524
• 701-282-8443
• www.fraud-wise.com