The Department of Accounting

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

• ACCT 410/610-- Forensic Accounting
• Class 6 October 3, 2001
• A course developed taught by
• Thomas Buckhoff, Ph.D., CFE, CPA
• EideBailly Professor of Forensic Accounting

2
Agenda for Today

• Fraud investigations Legal considerations
• Exercise 7
• Sources of information
• Exercise 8
• Criminal of the Day video
• Other sources

3
Quote for the Day

• The key is to be professional.An investigator
  must conduct every investigation in a fair and
  impartial manner. Cooperation from witnesses and
  the suspect can be obtained much easier and more
  quickly with a fair and professional approach.
• Source IRS text, p. 66.

4
Quote for the Day 2

• Bank records are probably the single most
  important source of information available to the
  financial investigator. An investigator must be
  aware of what information exists and must be able
  to interpret the information contained in the
  records.
• Source IRS text, p. 83.

5
Fraud Investigations Legal Considerations
6
Misrepresentation of material facts

• Legal elements of this commonly used fraud
  statute
• Misrepresentation of a material fact
• Made with the intent to defraud
• Reliance on the misrepresentation by the victim
• Resulting in injury from such
  reliance

7
Proving Intent

• Can be difficult to prove
• A mistake is not fraud
• Proof of intent must...
• Establish that suspect knowingly committed a
  wrongful act.
• Make any other conclusions seem improbable.

8
Proving Intent Methods

• The suspect could not have had a legitimate
  motive for his/her actions.
• The suspect repeatedly engaged in activity of an
  apparent wrongful nature.
• The suspect took steps to conceal his actions by
  destroying evidence or altering documents.

9
Proving Intent Methods

• The suspect gave conflicting statements during
  the investigation.
• The suspect acted to hinder the investigation.
• The suspect knowingly made false
  statements.
• The suspect personally gained from the
  fraudulent act.

10
Types of Evidence

• Direct Evidence
• Precise to the point at issue, nothing needs to
  be inferred.
• Circumstantial Evidence
• Proves the fact indirectly--by inference it
  proves the point at issue.

11
Admissibility of Evidence

• In order to be admissible in court, evidence
  must be
• Relevant
• Relates to the issue
  being litigated.
• Material
• Significant enough to influence the
  outcome of the litigation.

12
Relevant Evidence

• Items considered relevant include
• Motive for an offense
• Ability of the defendant
  to commit the offense
• Opportunity
• Threats

13
Relevant Evidence

• Means of committing the offense
• Physical evidence linking the suspect
• Attempts to conceal or destroy evidence

14
Material Evidence

• Evidence is material if its inclusion would
  affect either the clients or the courts
  decisions concerning the matter under review.

15
Documenting Cases

• Documents can either help of hurt a case,
  depending on which ones are presented and how
  they are presented.

16
Obtaining Documentary Evidence

• Voluntary consent--preferred method
• Consent can be either written or oral.
• Subpoenas issued by the courts
• Subpoena duces tecum requires the production of
  documents/records.
• Forthwith subpoena requires that the records be
  produced immediately.
• Garbage search

17
Video IBC Dumpster Diving

• In April 1998, we received a tip that someone was
  emptying boxes of documents into the dumpster in
  front of IBC. The video captures our follow up
  on this tip.

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Document Collection Rules

• Make working copies for review, and keep the
  originals segregated.
• Avoid touching the originals they might later
  undergo forensic analysis.
• Maintain a good filing system for the documents.
  Losing a document may mortally damage the case.

19
Organizing Documentary Evidence

• By date, witness, or transaction.
• Create a key document file
• Develop a database
• Date of document and date obtained
• Description and source of document

20
Chain of Custody

• Evidence obtained to prove an offense should be
• Marked
• Identified
• Inventoried
• Preserved in its original condition

21
Chain of Custody Memo

• The memo documents
• Items received
• When received
• From whom received
• Where maintained

22
Other Legal Considerations

• Employees involved in fraud investigations have
  certain duties and rights
• Employees duty to cooperate
• Required if request is reasonable
• Employees rights during the investigation

23
Employees Rights

• Contractual rights
• e.g. follow union or company policy
• Whistleblowers
• Protects employee from adverse
  employment action
• Constitutional rights
• Fourth Amendment prohibits unreasonable searches
  and seizures

24
Workplace Searches

• Factors affecting an employees reasonable
  expectation of privacy
• Exclusive control
• Reasonable grounds
• Company policy regarding searches

25
In-Class Exercise 7

• Identifying Evidence Exercise, p. 3-2 of the
  Student Workbook.
• Take 10 minutes to complete the exercise.

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Identifying Evidence

• Copy of dealer file on auto in question
• Authenticates auto in question
• All receipts for purchase of auto
• Will show from whom funds were received
• Vehicle registration request
• Establishes in whose name auto is registered

27
Identifying Evidence

• Invoices
• Will show who ordered
  or negotiated the deal
• Interviews with personnel who transacted the
  deal
• Jones may have negotiated the deal and requested
  that the auto be placed in his girlfriends name.

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Sources of Information

• Information is the key to a successful financial
  investigation.

29
Sources of Information

• Where should I look for information?
• What should I be looking for?
• (See p. 4-2 of the Student
  Workbook for a good outline of
  this topic.)

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Public Records

• Can be used to
• Establish leads
• e.g. identify property that the suspect owns.
• Corroborate or dispute the testimony of the
  suspect or other
  witnesses.

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Types of Public Records

• Real Estate
• Corporate Records
• Partnership Agreements
• Trusts
• Assumed Name Indexes
• Better Business Bureau

32
Types of Public Records

• Chamber of Commerce
• Uniform Commercial Code Filings (UCC)
• Court Records
• Business Records
• Real estate purchases
• Vehicle purchases

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Exercise 8 George Chapman Embezzlement Case

• The purpose of this exercise is to familiarize
  you with real estate documents.
• Read the scenario on p. 4-4 of the Student
  Workbook

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Exercise 8, Part 1

• Read Part 1 George Chapman Interview
• Take 5 minutes to complete Part 1 with a partner.

35
Part 1 Interview

• The main item that needs to be verified is--
• Was the money from the sale of the old residence
  used to purchase the cottage and the boat?
• Knowing this information will determine whether
  or not the suspect lied.

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Exercise 8, Part 2

• Take 20 minutes to complete Parts 2 and 3 with a
  partner.
• This is a test of your investigative skills.
  Dont give up!

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Part 2 Search of Public Records
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Document 1528537

• Information from document
• Warranty Deed for purchase of former residence
• No purchase price listed
• Transfer fee paid - 44.00
• Selling price 44,000

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Document 1528538

• Information from document
• Mortgage for Chapmans former residence
• Chapmans borrowed 41,100 to purchase the
  residence
• Downpayment must have been 2,900
  (44,000-41,100)

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Document 2057172

• Warranty Deed for purchase of lot for new
  residence
• Transfer fee paid - 92.70
• Deed is for lot because
• This is not homestead property
• Price - Cost of lot determined by dividing
  transfer fee by fee rate
• (92.70 / 3.00 x 1,000 30,900)

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Document 2057173

• Mortgage for Chapmans new residence
• New mortgage amount 122,000

42
Document 2057174

• Accepted proposal to construct the new residence
• Building contract price 149,000

43
Document 2068393

• Warranty Deed for sale of Chapmans old residence
• Selling price 73,000
• (219.00 / 3.00 x 1,000 73,000)

44
Document 2071138

• Satisfaction of Chapmans old mortgage
• Original mortgage 41,100
• Principal paid 10,275
• Balance of mortgage 30,825
• Assumes about one-fourth of the principal was
  paid off during the first 10 years of the
  30-year mortgage.

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Part 3 Evaluate Findings
46
Step 1

• Determine net proceeds from sale of old
  residence
• Selling price 73,000
• Balance of mortgage 30,825
• Net proceeds from sale 42,175

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Step 2

• Determine cost of new residence
• Cost of lot 30,900
• Building contract price 149,000
• Total cost 179,900

48
Step 3

• Determine cash invested in new residence
• Total cost 179,900
• New mortgage amount 122,000
• Cash invested 57,900

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Step 4 Summarize Findings

• Cottage down payment 12,500
• Powerboat purchase 29,500
• Cash invested in residence 57,900
• Total cash paid out 99,900
• Cash from old house 42,175
• Unknown sources of funds 57,725
• Conclusion Chapman lied about where the money
  for the cottage and powerboat came from.

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Step 5 Develop fraud theory

• Based on your findings thus far, develop a fraud
  theory with respect to the funds from unknown
  sources.
• Do not proceed until you have a theory!

51
Fraud Theory

• Suspected sources of unknown funds
• Unknown sources of funds 57,725
• Theft from Widow Jones 30,000
• Theft from other victim(s)? 27,725

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Criminal of the Day

• In-Class Video Michael Fulton, Bank President
• Embezzled 3 million in 3 years by charging the
  embezzled funds to fixed asset accounts

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The Internet

• The Internet contains a broad range of public
  information which can be of value to the
  financial investigator.

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The Internet

• KnowX Public Records Search Software
• knowx.com
• USSearch.com
• 1800ussearch.com

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Banks as Sources of Information

• Banks help investigators trace the flow of money

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Bank Transactions Account

• Directly related to money flow
• Withdrawals
• Deposits
• Credit/debit memos
• Bank statements are gold mines for financial
  investigators!

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Bank Transactions Non-Account

• Not directly related to money flow
• Currency transactions
• Bank checks
• Loans
• Wire transfers
• Safe deposit boxes
• Bank credit cards

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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