FORENSIC ACCOUNTING

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• FORENSIC ACCOUNTING FRAUD EXAMINATION
• NECESSARY SKILLS TO FIGHT FRAUD CORRUPTION

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CORRUPTION PERCEPTION INDEX 2006
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WHAT IS CORRUPTION?

• In broad terms, corruption is the misuse by
  government officials of their governmental powers
  for illegitimate, usually secret, private gain.
• Forms of corruption vary, but include bribery,
  extortion, cronyism, nepotism, patronage, graft,
  and embezzlement. While corruption may facilitate
  criminal enterprise such as drug trafficking,
  money laundering, and trafficking, it is not
  restricted to these organized crime activities.
• The end-point of political corruption is a
  kleptocracy, literally "rule by thieves".

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What is Fraud?

• Fraud means any act, expression, omission, or
  concealment calculated to deceive another to his
  or her disadvantage specifically a
  misrepresentation or concealment with reference
  to some fact material to a transaction that is
  made with knowledge of its falsity or in reckless
  disregard of its truth or falsity and with the
  intent to deceive another and that is reasonably
  relied on by the other who is injured thereby.
  (Merriam-Webster Dictionary of Law)

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The new economic environment
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What Is Forensic Accounting?

• Integration of Accounting, Auditing and
  Investigative Skills
• An Analysis That Forms the Basis for Discussion,
  Debate and Ultimately Dispute Resolution in the
  Court Of Law
• Encompasses Both the Investigative Accounting
  and Litigation Support

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What is Forensic Accounting?

• The essential components of forensic accounting
  include an attempt to piece together or
  reconstruct a past event or events using
  financial information where that reconstruction
  is likely to be used in some judicial proceeding
  (e.g., criminal court, civil court, deposition,
  mediation, arbitration, settlement negotiation,
  plea bargaining).

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Forensic Accounting
Intellectual Property Infringement Damages
Intellectual Property Infringement Damages
Government Contract Claims
Estate/Family Valuation
Financial Contract Disputes
Government Contract Claims
Fraud Investigation
Construction Claims
Environmental Claims
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What is Fraud Examination?

• Examination means the act or art of examining
  i.e., to observe carefully or critically
  inspect or to study or analyze an issue
  (American Heritage Dictionary, 4th ed.)
• Fraud examination is the thorough study,
  inspection or analysis of an issue relating to
  fraud

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Fraud Examination
Fraud Prevention
Fraud Deterrence
Fraud Detection
Fraud Investigation
Fraud Loss Costs Recovery
Anti-fraud Controls Remediation
Anti-fraud Education Training
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Fraud Examination
Fraud Prevention
Fraud Deterrence
Forensic Accounting
Fraud Detection
Intellectual Property Infringement Damages
Estate/Family Valuation
Financial Contract Disputes
Government Contract Claims
Fraud Investigation
Construction Claims
Environmental Claims
Fraud Loss Costs Recovery
Anti-fraud Controls Remediation
Anti-fraud Education Training
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Forensic Accounting Fraud Examination

• A broad discipline applying accounting skills to
  legal matters in a wide range of issues
• Addresses a past event
• Uses financial information

• A focused discipline relating entirely to the
  issue of fraud
• Addresses past, present and future events
• Uses financial and nonfinancial information

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Forensic Accounting Fraud Examination

• Produces information about finances, people and
  their actions
• For use in business governments internal
  proceedings and private and judicial proceedings
• A large force fighting fraud in business and
  government

• Produces information about finances
• For use in judicial proceedings
• A relatively small group of practitioners

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FORENSIC ACCOUNTING ANALYSIS
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Forensic Accounting Analysis Five Components

• Planning
• Acquisition
• Management
• Investigation
• Analysis

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STEP 1 PLANNING

• A forensic accounting engagement should begin
  with the development of a clear operational plan
  which lists the primary goals of the engagement.
• The primary goals of the engagement are based
  upon the concerns of the client.
• In order to develop a proper plan it is necessary
  to acquire a detailed understanding of the
  business environment and the accounting
  transactions which are particular to that
  business.

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Goal Examples

• The 2 most important concerns to a client who is
  the victim of fraud or theft is likely to be
• How much was lost?
• Where are the assets?

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Understanding the Environment

• Identify the personnel and their roles
• Develop a general understanding of the business
  and a specific understanding of the accounting
  cycle
• Access industry expertise competitors or
  regulatory agencies

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STEP 2 ACQUISITION

• Evidence comes in 2 forms witness and record
  (document or electronic file)
• The statements of witnesses will have to be
  corroborated by records and
• Tendering records as evidence will require a
  witness to authenticate the record.

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Witnesses

• Client General overview and environment
• Key personnel Specific info but not arms length
• Suspect(s) Co-operation and reliability issues
• 3rd party Essential to corroboration
• Experts Opinion evidence vs. factual

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Records

• The primary concern is the potential of
  destruction or alteration
• Records in hard copy format (document) are less
  at risk to alteration but more difficult to
  search on for key information
• Records in electronic format (databases) are more
  at risk to alteration/deterioration and should be
  backed up. The ability to search on key terms is
  enhanced using investigative software.

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STEP 3 INFORMATION MANAGEMENT

• Managing the vast amounts of documents and
  electronic data is essential for two reasons
• Ensuring valuable evidence is located and acted
  upon and
• Ensuring the integrity of the Forensic Report by
  sourcing the conclusions and tables to specific
  records.

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Electronic Management

• Scanning creates a picture file
• OCR creates a text file
• Words are arranged into a comprehensive database
  which facilitates searching
• Massive volumes of data can be condensed onto
  CDs
• Court presentation is enhanced.

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STEP 4 INVESTIGATION

• The investigative phase of the engagement
  requires the forensic accountant to
• Review the statements
• Review the documents seized
• Create a list of follow-up tasks to clarify
  existing evidence and acquire new evidence which
  supports the goals of the investigation.

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Statement Types and Analysis

• Free form Allows the witness to recount events
  without interruption. Suspect/witness will often
  avoid detail surrounding sensitive topics.
• Q A Question and Answer format which allows
  investigator to direct course of the interview.
  Greater detail will be obtained but interviewer
  may miss what is motivating the suspect/witness
  to talk.

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Document Investigation

• Consider the following
• The source of the document (who created it)
• The context of the document (what is the
  purpose of the document)
• The reliability of the document (can the
  information be corroborated elsewhere).

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Investigative Considerations

• Evidence is not unidirectional you may start
  the trail at the end rather than the beginning
• Stay focused on the purpose of the
  investigation-ignore side trails
• Periodically review the evidence with others as
  it may allow you to see new avenues (brainstorm!)

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STEP 5 ACCOUNTING ANALYSIS

• Accounting analysis involves the review and
  summarizing of financial information consistent
  with normal accounting practices. The
  presentation of the analysis should clarify
  issues relevant to the forensic accounting
  engagement.
• Flow chart
• Net worth
• Time line

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FLOW CHART

• Summary of transactions
• Source and destination of funds
• Conversion of assets

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NET WORTH

• Basic Balance Sheet composition Assets,
  Liabilities against known income
• Acquisition of assets requires explanation
  through liabilities or legitimate income source
• Unexplained income is assumed to be proceeds of
  crime

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TIME LINE

• Organizes data in chronological fashion for
  better understanding of how events unfolded
• Provides corroboration between financial and
  non-financial evidence.

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REPORTS AND EXPERT EVIDENCE
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The Forensic Accounting Report

• The FAR is comprised primarily of 3 sections
• Introduction stating the purpose of the
  engagement
• Narrative summary which highlights findings
• Tables, Schedules from the accounting analysis

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Considerations in the FA Report

• The conclusions outlined in the summary must be
  sourced to the schedules
• The data within the schedules must be sourced to
  the accounting documents and with locators
• Conclusions offered by the forensic accountant
  must be based upon an understanding of the levels
  of proof accepted in the different courts of law.

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Levels of Legal Proof

• Reasonable grounds reasonable person could
  deduce that an event might have taken place
  (lt50)
• Balance of probability the event is more likely
  than not to have taken place (gt51)
• Beyond a reasonable doubt there is no doubt that
  the event took place (99)

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Expert Evidence

• Expert evidence operates as another exception to
  the rule that witnesses may only testify to facts
  within their own observation. Where a matter
  calls for special skill or knowledge, opinion
  evidence from a witness who is expert in such
  matters, is admissible to assist the court in
  drawing conclusions that could not be reasonably
  drawn by relying on common knowledge or skill.
• The expert witness has to inform the court as to
  the grounds on which he/she founds his/her
  opinion. This is because it has to be established
  whether there is a reasonable link between the
  grounds and the opinion expressed.

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Experts and Objectivity

• In most instances the expert witness is called by
  one of the parties. Under such circumstances it
  must be borne in mind that the witness is
  required to remain objective and neutral and that
  it is not his/her duty to assert the case of the
  party by whom he/she was called.

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WAY FARWARD

• STRONG FORENSIC ACCOUNTING EDUCATION FOR
  ACCOUNTANTS AND BUSINESS MANAGERS

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What is the study of fraud in the accounting
curriculum?

• For this presentation, it consists of the study
  of the types and methods of fraud schemes
  affecting individuals and business enterprises,
  the legal and financial/accounting aspects of
  fraud, as well as, the detection, prevention,
  audit, investigation or examination of fraud.

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Historically, accountants were successful if they

• Prepared accurate financial statements, including
  making journal entries, posting entries to
  ledgers and summarizing information in financial
  statements and other schedules
• Performed compliance-oriented work, including
  following detailed tax rules
• Memorized accounting rules and procedures
• Were numbers oriented
• Worked effectively alone

In this environment, content-oriented courses
were needed!
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But something happenedsomeone moved our cheese

• Four major developments that changed everything
• Developments in technology replaced much of what
  accountants do and the way information is
  prepared and can be analyzed and used
• The business world became much more complex with
  very complicated business transactions
• Business became much more global and competitive
• People developed more situational rather than
  absolute ethics

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The result was the following new set of skills
needed by accountants

• Better technology skills
• Better analytical skillsto understand complex
  transactions (derivatives, reserves, leverage,
  etc.)
• Better communication skills to participate in
  decision-making teams
• Better interviewing skills
• Better skills working in teams
• A better global understanding
• Better understanding of fraud

What gave accountants an advantage in the past
is no longer nearly as valuable!
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Why Have A Fraud Course in Your Curriculum?

• A fraud course (fraud examination) is one of the
  best electives you can have
• Students love the topic
• Fast growth industry
• Reinforces key skills and competencies of good
  accountants and consultants
• An exciting application of accounting
• National Cause

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Competencies Taught in Fraud Course

• Communication Skills
• Report Writing
• Interviewing
• Expert Witnessing
• Technology Skills
• Data Mining Internet Databases etc.
• Analytical SkillsDetecting Fraud involves
  Analytical/Critical Thinking

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Competencies/Skills to be Learned

• Risk analysis
• Controls and control environment
• Better auditing skills
• Knowledge of the legal system
• Availability of information (public, private,
  databases, etc.)
• Problem-solving ability

Todays winners are those who have access to the
best informationa fraud course teaches how to
access information
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Please Note the color of your Flag
Find Remove the red spots!
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Thank You