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FORENSIC ACCOUNTING

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Title: FORENSIC ACCOUNTING


1
  • FORENSIC ACCOUNTING FRAUD EXAMINATION
  • NECESSARY SKILLS TO FIGHT FRAUD CORRUPTION

2
CORRUPTION PERCEPTION INDEX 2006
3
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".

4
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)

5
The new economic environment
6
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

7
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).

8
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
9
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

10
Fraud Examination
Fraud Prevention
Fraud Deterrence
Fraud Detection
Fraud Investigation
Fraud Loss Costs Recovery
Anti-fraud Controls Remediation
Anti-fraud Education Training
11
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
12
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

13
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

14
FORENSIC ACCOUNTING ANALYSIS
15
Forensic Accounting Analysis Five Components
  • Planning
  • Acquisition
  • Management
  • Investigation
  • Analysis

16
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.

17
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?

18
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

19
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.

20
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

21
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.

22
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.

23
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.

24
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.

25
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.

26
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).

27
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!)

28
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

29
FLOW CHART
  • Summary of transactions
  • Source and destination of funds
  • Conversion of assets

30
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

31
TIME LINE
  • Organizes data in chronological fashion for
    better understanding of how events unfolded
  • Provides corroboration between financial and
    non-financial evidence.

32
REPORTS AND EXPERT EVIDENCE
33
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

34
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.

35
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)

36
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.

.
37
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.

38
WAY FARWARD
  • STRONG FORENSIC ACCOUNTING EDUCATION FOR
    ACCOUNTANTS AND BUSINESS MANAGERS

39
(No Transcript)
40
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.

41
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!
42
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

43
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!
44
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

45
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

46
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
47
Please Note the color of your Flag
Find Remove the red spots!
48
Thank You
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