Forensic Accounting: Strategies for Detecting & Controlling Fraud D. Larry Crumbley, CPA, Cr.FA, CFFA, FCPA KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA 70803 225-578-6231 225-578-6201 Fax dcrumbl@lsu.edu - PowerPoint PPT Presentation

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Title: Forensic Accounting: Strategies for Detecting & Controlling Fraud D. Larry Crumbley, CPA, Cr.FA, CFFA, FCPA KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA 70803 225-578-6231 225-578-6201 Fax dcrumbl@lsu.edu


1
Forensic Accounting Strategies for
Detecting Controlling FraudD. Larry
Crumbley, CPA, Cr.FA, CFFA, FCPAKPMG Endowed
ProfessorDepartment of AccountingLouisiana
State UniversityBaton Rouge, LA
70803225-578-6231225-578-6201
Faxdcrumbl_at_lsu.edu
  • Dr. Crumbley is the
  • Editor of the Journal of Forensic Accounting
    Auditing, Fraud, and Risk,
  • Former chair of the Executive Board of
    Accounting Advisors of the American Board of
    Forensic Accountants,
  • Member of the NACVAs Fraud Deterrence Board,
    and
  • On the AICPAs Fraud Task Force (2003-2004).
  • A frequent contributor to the Forensic Examiner
    and Value Examiner, Professor Crumbley is a
    co-author of CCH Master Auditing Guide, along
    with more than 50 other books and 350 articles.
    His latest book entitled Forensic and
    Investigative Accounting is published by Commerce
    Clearing House (800-224-7477). Some of his 12
    educational novels have as the main character a
    forensic accountant. His goal is to create a
    television series based upon the exciting life of
    a forensic accountant and litigation consultant.

1
2
Forensic Report
2
3
TALLY STICKS
External auditors come down the hill after the
battle and bayonet the wounded. Forensic
accountants are the guys who follow behind them,
going through the soldiers pockets looking for
money.
3
4
Puff Adder
What the use of finger prints was to the 19th
century and DNA analysis was to the 20th,
forensic accounting will be to the 21st
century. - Gordon Brown, Chancellor of the
Exchequer, 10 October 2006.
4
5
Glimpse Forward
  • Introduction to Forensic Accounting
  • Risk Assessment and Fraudulent Financial
    Reporting
  • Misappropriation of Assets
  • Forensic Accounting Processes and Techniques
  • Computer Forensics
  • Problem-based learning case study
  • --------------------------------------------------
    ---------
  • Now John at the bar is a friend of mine.
  • He gets me my drinks for free.
  • Sing us a song, youre the piano man.
  • Piano ManBilly Joel

5
6
Some Fraud Figures
  • Australias annual fraud, 2003, 5.8 billion or
    1.147 of GDP.
  • Malaysias telecom operators lose 3 of revenue
    to fraud each year.
  • A KPMG Malaysian survey found that more than a
    third of the polled companies lost over RM 1
    million from fraud in 2 years.
  • Fraud and abuse in U.S. is 652 billion to 1
    trillion annually.
  • The quantity of corruption crimes has continued
    to rise in China after the market liberalizations
    in 1978 (because so much more money involved).
  • An employee at the Australian mint stole
    100,145 over ten months by hiding bills and
    coins in his lunch box and boots. He carried away
    on an average 150 coins in each boot every day.

6
7
Fannie Mae Forensic Probe
  • BOD hired investigators who cleared the current
    management of Fannie Mae of knowingly
    participating in any wrongdoing.
  • The report took 17 months 616 pages plus 2,000
    plus pages of supporting documents.
  • Cost of 60 million to 70 million.
  • The fraud was estimated to be 11 billion.
  • Former N.H. Senator Warren Rudman used The Huron
    Consulting Group.

7
8
Definition of Forensic Auditor
  • Someone who can look behind the facade--not
    accept the records at their face value--someone
    who has a suspicious mind that the documents he
    or she is looking at may not be what they purport
    to be and someone who has the expertise to go out
    and conduct very detailed interviews of
    individuals to develop the truth, especially if
    some are presumed to be lying.
  • Robert G. Roche, a retired chief of the IRS
    Criminal Investigation Division of the IRS

8
9
Narrow vs. Broad Definition
  • Narrow Fraud detection is major area.
  • Broad Employed to seek, interpret, and
    communicate transactional and reporting event
    evidence in an objective, legally sustainable
    fashion, not only in situations where there are
    specific allegations of wrongdoing, but also in
    situations where interested parties judge that
    the risk of loss from wrongdoing is such that
    proper prudence requires legally sustainable
    evidence to support the conclusion that no
    wrongdoing is occurring (James Edwards).

9
10
Narrow Approach
  • U.S. Dept. of Justice, Education and Training in
    Fraud and Forensic Accounting A Guide for
    Educational Institutions, Stakeholder
    Organizations, Faculty and Students, Draft Copy,
    December 23, 2005.

10
11
Broad Approach
I liken it to CSI or Law Order, but
instead of figuring out the trajectory of a
bullet, youre trying to find out how a
transaction occurred. Terry McCarthy
11
12
Definition of Forensic Accounting
  • Forensic accounting is the application of
    accounting, tax, auditing, finance, quantitative
    analysis, investigative and research skills, and
    an understanding of the legal process for the
    purpose of identifying, collecting, analyzing,
    and interpreting financial or other data or
    issues in connection with
  • Litigation services providing assistance for
    actual, pending or potential legal or regulatory
    proceedings before a trier of fact in connection
    with the resolution of disputes between parties,
    or
  • Non-litigation services performing analyses or
    investigations that may require the same skills
    used in 1, above, but may not involve the
    litigation process.

12
13
Definition of Forensic Accounting Litigation
Service
Forensic accounting litigation services are the
professional assistance accountants provide
related to the litigation process. These services
may involve accounting, financial, auditing, tax,
quantitative analysis, and investigative and
research skills, as well as an understanding of
the legal process to provide assistance for
actual, pending, or potential legal or regulatory
proceedings before a trier of fact in connection
with the resolution of a dispute between parties.
13
14
Definition of Forensic Accounting Non-Litigation
Services
Forensic accounting non-litigation services are
the professional assistance accountants provide
not related to the litigation process. These
services may involve accounting, financial,
auditing, tax, quantitative analysis, and
investigative and research skill as well as an
understanding of the legal process to provide
assistance in connection with matter or issues
not involving the litigation process.
Youre trying to piece together a puzzle where
you do not have the picture on the box to know
what its going to look like. The facts are not
settled, and actually its the facts that are in
dispute. Andrew Bernstein
14
15
Short History
  • Late 1800s Find fraud
  • 1930s- Puff Adder encyclopedia
  • 1933-1934-independent audits
  • 1950s-Eighth edition Montgomery auditing reduced
    formal stress on fraud detection.
  • January 1957- H.W. Bevis, AR, questioned the
    benefit of discovering minor employee thefts.
  • 1960s-auditors claimed no responsibility.
  • Financial audits Consistency.
  • Audit surveillance test of details
    (disappeared).
  • Stock market bubble
  • Panel on Audit Effectiveness (2000)
  • Enron/ WorldCom/ Parmalat/ HealthSouth
  • Sarbanes-Oxley/ PCAOB
  • SAS No. 99

15
16
Transparency International Corruption Perceptions
Index 2006
16
17
States Corruption Index
  • Most corrupt
  • Mississippi
  • North Dakota
  • Louisiana
  • Alaska
  • Illinois
  • Montana
  • South Dakota
  • Kentucky
  • Florida
  • New York
  • Least corrupt
  • Nebraska
  • Oregon
  • New Hampshire
  • Iowa
  • Colorado
  • Utah
  • Minnesota
  • Arizona
  • Arkansas
  • Wisconsin


17
18
Forensic Accounting Factors
  • Time Forensic accounting focuses on the past,
    although it may do so in order to look forward
    (e.g., damages, valuations).
  • Purpose Forensic accounting is performed for a
    specific legal forum or in anticipation of
    appearing before a legal forum.
  • Peremptory Forensic accountants may be employed
    in a wide variety of risk management engagements
    within business enterprises as a matter of right,
    without the necessity of allegations (e.g.,
    proactive).
  • -----------------------------------------------
  • With a single clue a forensic accountant can
    solve a fraudulent mystery.

18
19
One Small Clue
  • A former Scotland Yard scientist tried to create
    the worlds biggest fraud by authenticating 2.5
    trillion worth of fake U.S. Treasury bonds.
  • When two men tried to pass off 25 million worth
    of the bonds in Toronto in 2001, a Mountie
    noticed the bonds bore the word dollar rather
    dollars.
  • Police later raided a London bank vault and
    discovered that the bonds had been printed with
    an ink jet printer that had not been invented
    when the bonds were allegedly produced.
  • Zip codes were used even though they were not
    introduced until 1963.
  • Sue Clough, Bungling Scientist Is Jailed for
    Plotting World's Biggest Fraud,
    News.telegraph.co.uk, January 11, 2003.

19
20
Forensic Accounting Areas
  • Investigative Auditing
  • Litigation Support
  • Forensic Latin for forum, referring to a
    public place or court.
  • Blacks Law Dictionary Forensic, belonging to
    the courts of justice.
  • Note Corporate spooks are used to check on
    competitors.

20
21
Forensic Auditing
  • Forensic auditing is a type of auditing that
    specifically looks for financial misconduct, and
    abusive or wasteful activity.
  • It is most commonly associated with gathering
    evidence that will be presented in a court of law
    as part of a financial crime or a fraud
    investigation.
  • Source B.L. Derby, Data Mining for Improper
    Payments, Journal of Government Financial
    Management, Winter, 2003, pp. 10-13
  • --------------------------------------------------
    -------------
  • Forget the stuffed white shirt, forensic
    accountants are more parts Philip Marlowe than
    Casper Milquetoast. They open the books and crack
    the code, transforming a dull science of numbers
    into a suspenseful mystery with a logical, even
    riveting resolution.
  • Cory Johnson

21
22
Top Niche Services
22
23
Forensic Accounting vs. Fraud Auditing
  • Forensic Accountant A forensic accountant may
    take on fraud auditing engagements and may be a
    fraud auditor, but he or she will also use other
    accounting, consulting, and legal skills in
    broader engagements. In addition to accounting
    skills, he or she will need a working knowledge
    of the legal system and excellent communication
    skills to carry out expert testimony in the
    courtroom and to aid in other litigation support
    engagements.
  • Crumbley, Heitger, Smith, Forensic and
    Investigative Accounting (CCH)

23
24
AICPAs Position
  • Public accounting firms could use forensic
    accountants to help revise their approach to
    planning and fieldwork on all audits, while
    requiring forensic accountants only on high risk
    audit clients to aid in the interpretation of
    forensic testing results and preventive control
    enhancements.
  • Does not require auditors to carryout specific
    forensic procedures, but rather provide guidance
    on how to include forensic techniques within
    processes outlines in SAS 99. This combination
    will enhance the detection and prevention of
    fraudulent financial statement reporting and
    misappropriation of assets thus protect
    investors and financial statement users.
  • The inclusion of audit procedures focused
    towards detecting misappropriation of corporate
    assets may lead to the identification of
    weaknesses within corporate governance or control
    weaknesses. Frauds that are identified which
    represent a material misappropriation of assets
    could significantly impact public perception.

24
25
AICPAs Position (cont.)
  • Professional forensic accountants can best be
    used by ensuring such procedures are properly
    developed and executed in-line with internal
    audit and audit committee concerns. Forensic
    accountants could then be engaged in high-risk
    situations, or when a fraud is suspected.
  • Companies should not use the forensic services
    of their outside audit firm, unless it pertains
    to the annual audit.
  • Putting a price on a substantive test or
    forensic auditing procedure may be smart for
    business however, the inherent risk is that
    short-cuts geared towards reducing audit costs
    may eventually cause investors to question the
    companies true financial position.
  • AICPA Discussion Memo Question Responses

25
26
Big-Six's Position
  • A forensic audit is akin to a police
    investigation.
  • All public companies should have a forensic
    audit on a regular basis. Companies would be
    required to have such an audit every three or
    five years or face these audits on a random
    basis.
  • Forensic auditors scrutinize all records of
    companies, including emails, and would be able,
    if not required, to question all company
    employees, and to require statements under oath.
  • Might be necessary for an audit network or a
    specialized forensic auditor to complete a
    forensic audit with the aid of independent
    attorneys (not these who have represented the
    audit client in the other engagements).
  • Source Serving Global Markets and the Global
    Economy A View from the CEOs of the
    International Audit Networks, November 2006, p.
    13.

26
27
Forensic vs. Fraud Audit
  • Google result, February 11, 2007
  • Forensic Audit, 208,000 hits
  • Fraud Audit, 64,500 hits
  • Fraud Examination, 74,800 hits
  • Fraud Accounting, 45,200 hits
  • Forensic Accounting, 1,050,000 hits
  • Fraud Investigation, 932,000
  • Forensic Investigation, 512,000
  • Fraud Auditing, 83,500
  • ----------------------------------------------
  • I dont care what they say, but forensic
    accounting is here to stay.
  • Danny the Juniors
  • --------------------------------------------------
    ---------------------------------
  • I see skies of blue and clouds of white, and I
    think to myself, what a wonderful world.
  • Louis Armstrong

27
28
Specialties Within Forensic and Investigative
Accounting
  • Employee Crime Specialist.
  • Asset Tracing Specialist.
  • Litigation Services Specialist and Expert
    Witness.
  • Insurance Claims.
  • Valuation Analysis.
  • False Claims Act Violations.
  • Due diligence investigations.

28
29
Asset Tracing
  • Three Italian lawyers said in a filing to be
    presented to a bankruptcy court that they had
    traced 7.7 billion in missing Parmalat funds.
  • We are preparing a filing in which we are asking
    for the insolvency status to be revoked because
    the money was robbed and not lost, lawyer Carlo
    Zauli told Reuters.
  • But he said it would be an illusion to believe
    proof of electronic transfers of the funds could
    be found and the lawyers representing the
    Parmalat Creditors Committee did not say where
    the money was being held or if it was
    recoverable.
  • An Italian website, TGfin (www.tgfin.it), said a
    company linked to Parmalat founder Tanzi was
    holding the funds in the form of U.S. bonds in an
    account with Bank of America.
  • Source Emilio Parodi and Stefano Bernabei,
    Wrap-up 2 Paramalat Fraud Probe Widens to
    Auditors, Ex-Banker, forbes.com, January 8,
    2004.

29
30
Finding Unreported Income/Hidden Assets
  • Look at the lifestyles.
  • Look at the expenses.
  • Look at the cash flow.
  • Look at the business operations.
  • Look at the industry ratios.
  • Consider using private investigators.
  • Use the net worth method.
  • Mark Kohn, Unreported Income and Hidden Assets,
    Forensic Accounting in Matrimonial Divorce,
    Philadelphia R.T. Edwards, 2005, pp.49-57.

30
31
Fiction v. Reality
  • The main difference between fiction and reality
    is that instead of using mask and gun, todays
    villains use mouse and keyboard. Instead of
    hiding behind a lamppost in a trench coat and
    fedora, todays forensic accountants are more
    likely to be hiding behind their own computers,
    searching for clues amid mountains of data.
  • Source Book EM! Forensic Accounting in
    History and Literature, The Kessler Report,
    Vol.1, No. 2.
  • --------------------------------------------------
    ----------------------------------
  • Every investigation I did as a prosecutor, you
    have a particular target, but it always branches
    off because something else gets your attention.
    And thats what is going to happen with a
    forensic accountant.
  • Tom Carlucci
  • E-library Rueter Library September 20, 2002

31
32
Forensic Techniques Become Popular
  • In many of the large accounting blow-ups,
    auditors knew what was happening, says Charles
    Niemeir, but they were willing to look the other
    way.
  • There is a need to provide incentives for people
    finding problems, says Douglas Carmichael.
    Right now there are no incentives for finding
    problems, and one who does is treated as a
    trouble maker.
  • Source Cassell Bryan Low, Accounting Firms
    Attempts to Dispel the Cloud of Fraud, Wall
    Street J., May 27, 2003.
  • Doug Carmichael, Chief Auditor for Peek-uh-boo,
    faults auditors for not adopting forensic
    techniques.
  • Carmichael wishes more test of details, not
    relying on test of controls.
  • He wishes more shoe-leather work.
  • Shoe-leather work is what we do!
  • Kris Frieswick, How Audits Must Change, CFO
    July 2003, p.48

32
33
Popular (cont.)
  • EYs forensic accounting team is comprised of
    350 practitioners in the U.S. alone, and focuses
    on strategies to mitigate and manage conflict in
    bankruptcy disputes, financial and economic
    damages, fraud and investigations, government
    contracts and grants, insurance claims,
    intellectual assets, and legal technology.
  • Deloittes forensic accounting expertise includes
    anti-money laundering, the Foreign Corrupt
    Practices Act, purchase price disputes,
    arbitrations, construction fraud, health care
    fraud, construction oversight, intellectual
    property theft, and misdirected royalty revenues,
    to name just a few.
  • They have forensic labs in nine major cities
    across the U.S. and an additional 18 cities
    around the world, including Hong Kong, London,
    Amsterdam, Frankfurt, Cape Town and Melbourne.
    All FAS labs meet the FBIs chain of custody
    requirements. They are secure, state-of-the-art,
    and house advanced systems for storing and
    accessing data, including dedicated servers and
    fire-resistant safes.
  • Stuart Kahan, Sherlock Holmes Enters
    Accounting, WebCPA, February 11, 2007.

33
34
Forensic Accountants
  • Rather than combing torn clothing, forensic
    accountants comb through corporate books,
    looking for oddities that could signal swindles,
    says Bruce Dubinsky. Investigations can be
    extremely complex, with crates and crates of
    documents and thousands of computer files.
    Investigators look for flags or patterns that
    would not normally occur.
  • Source Mark Maremont, Tyco Is Likely to Report
    New Woes, Wall Street Journal, April 30, 2003,
    p. C-1.

34
35
Potpourri
  • Deutsche Bank is being sued for 1.3 billion by
    Bruce Winston (one of the heirs of Harry Winston
    diamond dynasty) for priceless gems disappearing
    from a trust under their control.
  • A Burlington, Kentucky city finance director is
    accused of embezzling more than 1.2 million to
    support his estranged wife and his girlfriend.
  • Martin Frankel vanished with between 200 million
    in cash and diamonds one day. He accomplished
    this insurance fraud by buying poorly capitalized
    insurance companies, cooking the books to show
    increased premium value, and by including
    non-existing real estate and leases on the
    balance sheet.
  • Bank of Chinas Mr. Wu allegedly embezzling up to
    18 million from a bank branch, using improper
    bills of exchange. BoC has a number of cases
    involving the embezzlement of 737 million from
    branches in the Southern Guangdong Province.
  • A U.S. Lime officer embezzled nearly 2.2 million
    by forging signatures of other company officers
    on checks, and falsifying the companys check
    register to create the impression that the
    amounts he received went to U.S. Lime creditors.

35
36
Potpourri (contd )
  • The Chairman of Hyundai Motor, Chung Mong-Koo,
    was sentenced in February 2007, to 3 years in
    prison for embezzlement (100 million) and breach
    of trust at South Koreas largest carmaker.
  • Spanish authorities shut down Afinsas Forum
    stamp-investing programs with several hundred
    thousand of small investors. Alleged investments
    in overvalued stamps and suspected pyramid
    scheme. Eight officials jailed.
  • In 2000, Rent Ways CAO artificially reduced the
    companys expenses by 127 million.
  • WorldComs external auditors missed about 11
    billion improperly booked items.
  • Ahold NV, a Dutch company, said a U.S. unit had
    overstated revenues by 880 million by booking
    more discounts from suppliers than actually
    received.
  • One Philippine peso coin has the same size as 1
    dirham, but worth only 7 fils. Thus, dispense
    machine fraud.

36
37
Auditors Blamed Deep Pockets
  • Trustee for United Companies (UC) said that
    Deloitte and Touche was guilty of negligence,
    malpractice, misrepresentation, breach of duty,
    and fraud.
  • D T failed to warn United Companies of all of
    the losses it would absorb if the people who took
    out the loans defaulted, because the accounting
    firm was making millions and millions of dollars
    in fees.
  • Loan practice called securitization or bundled
    high-interest loans.
  • 685 million in liability damages.
  • Plaintiffs Attorney Role of auditors is to act
    as watchdogs for companies. A good watchdog
    barks when somebody comes into the yard. D T is
    supposed to bark when there is a problem.
  • Defendants Attorney The problem was much
    larger than a watchdog could handle. Can a
    watchdog stop your house from getting hit by a
    hurricane? Of course not.
  • Source Adrian Angelette, Auditors Blamed,
    Baton Rouge Advocate, October 23, 2003, pp. A-1
    and a-8

37
38
Auditors Blamed (cont.)
  • As part of the securitization agreement, UC
    agreed to pay the principal and interest on
    defaulted loans.
  • Creditors contend that UC failed to account for
    the interest it was paying, and DT should have
    caught the mistake earlier.
  • After UC wrote off 605 million in debt, the
    company filed for bankruptcy.
  • Confidential mid-court settlement.
  • Source Adrian Angelette, United Companies
    Settlement Reached, Baton Rouge Advocate,
    October 31, 2003, pp. A-1 and A-12

38
39
Find It, or Ill Sue
  • Accountants must be attuned to detecting fraud
    at every level of service, including standard
    accounting services, compilations, reviews, and
    bank reconciliations. If there is fraud and you
    dont detect it, you are going to be sued, and
    you will likely lose, as the public perception is
    the accountant is the watchdog.
  • Robert J. DiPasquale, Parsippany, N.J.
  • Source H.W. Wolosky, Forensic Accounting to the
    Forefront, Practical Accountant, February 2004,
    pp. 23-28.

39
40
Forensic Accounting Knowledge Base
Silk, Silk, Silk
40
41
Threads of Forensic Accounting
  • Forensic accounting (or at least accounting
    expert witnessing) can be traced as far back as
    1817 to a court decision. Meyer v. Sefton
  • In 1824, a young accountant by the name of James
    McCleland started business in Glasgow, Scotland
    and issued a circular that advertised various
    classes of expert witness engagements he was
    prepared to undertake.
  • In 1856 in England, the audit of corporations
    became required.

41
42
Investigative Accountants
  • Initially called investigative accounting, many
    of the forensic techniques, such as the net worth
    method, were developed by IRS agents to detect
    tax evaders.
  • Infamous mobster, Al Capone, was caught when
    Special Agents of the IRS stepped in and charged
    him with tax evasion.
  • Accountants caused the crime czars career to
    come to an end.

42
43
Al Capone Caper
  • Perhaps the most celebrated case of an
    accountant nailing a famous criminal was the case
    of Al Capone. For all of Capones colorful
    history of violent crime, the FBI could never
    gather enough evidence to convict him until FBI
    agent Eliot Ness had an idea.
  • He gathered special agents of the IRS to track
    the flow of cash from Capones illicit
    activities. When the mobster failed to pay taxes
    on those earnings, the IRS nailed him for tax
    evasion.
  • Capone went to jail and was never a factor
    again. IRS recruitment posters boast till this
    day Only an accountant could catch Al Capone.
  • Source Book Em! Forensic Accounting History
    and Literature, The Kessler Report, Vol. 1, No.
    2.

43
44
Father of Forensic Accounting
  • Maurice E. Peloubet (1946)
  • Pretenders
  • Max Lourie (1953)
  • Robert Lindquist (1986)
  • Repeated, First sentence in N. Brennan and J.
    Hennessy, Forensic Accounting, 2001, p. 5.

44
45
The Essence of Forensic Accounting by Maurice
Peloubet (1946)
  • The preparation of data for and the appearance
    before government agencies as a witness to facts,
    to accounting principles, or to the application
    of accounting principles is essentially forensic
    accounting practice rather than advocacy.
  • Modern Version
  • Lets face it, we in the forensic profession
    labor in an obscure corner of the vineyard. We
    are the carefully selected, trusted, highly
    trained guardians of one of the last great
    secrets remaining on the face of the earth - -
    the 600 billion now 652, more or less annual
    problem nobody knows about.
  • Joseph W. Koletar, Fraud Exposed, John Wiley
    Sons, Inc 2003, p. 228.

45
46
Be like
46
47
Panel on Audit Effectiveness
  • In 1998, the Public Oversight Board appointed the
    Panel on Audit Effectiveness to review and
    evaluate how independent audits of the financial
    statements of public companies are performed and
    to assess whether recent trends in audit
    practices serve the public interest.
  • In 2000, the Panel issues a 200-page report,
    Report and Recommendations, which includes a
    recommendation that auditors should perform
    forensic-type procedures during every audit to
    enhance the prospects of detecting material
    financial statement fraud.
  • Did not believe a GAAS audit should become a
    fraud audit.
  • In all audits the degree of audit effort in
    forensic- type steps should be more than
    inconsequential p. 24.

47
48
Required Forensic Audits Coming?
  • The accounting profession may be making a
    strategic shift as they see that SAS No. 99 and
    the other rules are not protecting them from
    being the insurer of last resort.
  • The Big Four along with Grant Thornton and BDO
    International recently released a report entitled
    Serving Global Capital Markets and the Global
    Economy.
  • In the report, one of the things they are
    suggesting is for companies to have a forensic
    audit. Companies would be required to have such
    an audit every five years or face these audits on
    a random basis.
  • Auditing Firms Urge New Ways to Detect Fraud,
    NYSSCPA.org News Staff. Posted on November 11,
    2006.

48
49
Fraud Strategies Differ
  • Forensic Accountants
  • Internal Auditors
  • External Auditors
  • Fraud Examiners
  • Certified Fraud Deterrence Analysts (CFD) or
    CFFAs
  • Forensic CPA Society (FCPA)

49
50
Predication
  • The ACFE group indicates that in the private
    sector, a fraud investigation should not be
    conducted without proper predication.
  • Examples Anonymous tips, complaints, audit
    inquires, conflict of interest.
  • Thus, predication is the basis for undertaking a
    fraud investigation.
  • Without predication, the target might be able to
    sue for real or imaginary damages.

50
51
Who Do You Call?
  • Detection v.
  • Deterrence
  • Proactive v.
  • Reactive


51
52
Three Classes of Controls
  • Preventive controls These controls are first in
    line to prevent errors, omissions, or security
    incidents from occurring. Examples include
    controls that restrict access to systems to
    authorized persons such as intrusion prevention
    systems and firewalls, and integrity constraints
    that are embedded within a Database Management
    System. Most Efficient
  • Detective controls These controls detect errors
    or incidents that have eluded the preventative
    controls. Examples include controls that test
    whether authorization limits have been exceeded,
    or an analysis of activity in previously dormant
    accounts. Important when preventive controls
    weak. Examples include situations where the
    transactions are derived from third party reports
    such as sales reports from franchisees, warranty
    claims reported by auto dealers, baggage claims
    reported by passengers at airports, and reports
    of coupons or rebates redeemed by redemption
    processors.
  • Corrective controls These controls correct
    errors, omissions, or incidents after detection.
    They vary from simple correction of data-entry
    errors, to identifying and removing unauthorized
    users from systems or networks. Corrective
    controls are the actions taken to minimize
    further losses.
  • Sources IIA, 2005, Global Technology Audit
    Guide IT Controls, Altamonte Springs, Fl M. J.
    Nigrini, Monitoring Techniques Available to the
    Forensic Accountants, J. of Forensic Accounting,
    Vol. 7, 2006, p. 322.

52
53
Where Fraud Prevention and Security Meet
  • Source M.T. Biegelman and J. T. Bartow,
    Executive Roadmap to Fraud Prevention and
    Internal Controls, John Wiley, 2006, pp. 325-326.

53
54
Balancing Risks and Controls
  • Excessive Risks
  • Loss of Assets
  • Poor Business Decisions
  • Noncompliance
  • Public Scandals
  • Increased Regulations
  • Excessive Controls
  • Increased Bureaucracy
  • Reduced Productivity
  • Increased Complexity
  • Increased Cycle Time
  • Increase of no-value activities

54
55
Types of Controls
  • Preventive controls
  • Segregation of duties
  • Required approvals
  • Securing assets
  • Passwords
  • Using document control numbers
  • Drug testing
  • Job rotation
  • Computer backup
  • Detective controls
  • Reconciliations
  • Reviews
  • Event notifications
  • Surprise cash count
  • Counting inventory
  • Corrective controls
  • Training
  • Process redesign
  • Additional technology
  • Quality circle teams
  • Budget variance reports

55
56
Forensic-Type Organizations
  • American College of Forensic Examiners (2750 E.
    Sunshine, Springfield, MO 65804 800-423-9737
    www.acfei.com. DABFA and Cr.FA 2000)
  • Certified Fraud Examiners (Association of CFEs,
    The Gregor Bldg., 716 West Avenue Austin, TX
    78701 800-245-3321 www.cfenet.com).
  • Certified Insolvency and Reorganization
    Accountant (CIRAs). Accountants, lawyers,
    consultants included in insolvency and bankruptcy
    matters. 3-part exam. 4,000 hours. 541.858.1665.
    AIRA, 221Stewart Avenue, Suite 207, Medford, Or.
    97501. aira_at_airacira.org
  • Forensic CPA Society (FCPA) formed in July 2005,
    Spokane, WA. info_at_fcpa.org.
  • Certified Forensic Financial Analyst (NACVA, Salt
    Lake City, Utah 84106 801-486-0600). Also,
    Certified Fraud Deterrence (CFD) analyst. CFFA
    and CFD have merged.
  • National Litigation Support Services Association
    (NLSSA, III East Wacker Drive, Suite 990,
    Chicago, IL 60601 800-869-0491). Not-for-profit.
    About 20 firms. 1,825.
  • Canadian Institute of Chartered Accountants
    (CICA) CA.IFA Alliance for Excellence in
    Investigative Accounting.
  • Certified Forensic Investigator (CFI) Canada
    Early 1980s. www.homewoodave.com
  • Certified Fraud Specialist (CFS), not-for-profit,
    educational anti-fraud corporation located in
    Sacramento, Calif., for those dealing in
    white-collar crime, fraud, and abuse issues.
    Association of Certified Fraud Specialists.
    http//acfsnet.org.

56
57
Some accountants believe that ethics is a place
in England.
Fraud
  • Essex, U.K.
  • --------------------------------------------------
    ----

A statement made by Mark Twain about New England
weather applies to fraud and corruption Its
hard to predict, but everyone agrees theres
plenty of it. -----------------------------------
-------- As Sherlock Holmes said, the game is
afoot. ------------------------------------------
-------- Read My Lips Its The Fraud, Stupid.
57
58
Termites, Rust, and Fraud
  • Just as termites never sleep, fraud never
    sleeps.
  • Just like termites, fraud can destroy the
    foundation of an entity.
  • --------------------------------------------------
    -----------
  • Like rust, fraud never sleeps.
  • --------------------------------------------------
    -----------
  • "It is simply impossible to eliminate economic
    crime. It's like fighting the mythical Hydra,
    cutting off one form of fraud merely allows
    another to grow. Controls alone are not enough.
    The answer lies in establishing a culture that
    supports control efforts and whistle-blowing with
    clear ethical guidelines. Companies need to build
    loyalty to the organization which gives employees
    the confidence to do the right thing, and
    identify clear sanctions for those who commit
    fraud, regardless of their position in the
    company."
  • Steven Skalak

58
59
White-Collar Crime Rich People Steal
  • Edwin Sutherland coined the term white-collar
    crime. Indiana University sociology professor.
  • Sutherland believed that white-collar crime is a
    learned behavior, a consequence of corporate
    culture where regulations are regarded as
    harassment, and profit is the measure of the man.
  • White-collar crime violates trust and thus
    creates distrust, and this lowers social morale
    and produces social disorganization on a large
    scale.
  • Cynthia Crossen, A Thirties Revelation Rich
    People Who Steal are Criminals, Too, Wall Street
    Journal, October 15, 2003, p. B-1.

59
60
FBI Crime Classification Manual
  • Personal Cause Homicide.
  • Sexual Homicide.
  • Group Cause Homicide.
  • Criminal Enterprise Homicide
  • Contract killing.
  • Gang-motivated.
  • Criminal competition.
  • Kidnap murder.
  • Product tampering.
  • Drug murder.
  • Insurance/ inheritance.
  • Felony-murder.
  • Commercial profit.

60
61
Red-Collar Crime
  • A person who physically harms someone that may
    have, or is on the verge of detecting their
    fraudulent behavior.
  • Fraud-detection homicide.
  • Myth White-collar criminals not violent
    criminals.
  • Forensic accountants may be used in a homicide
    investigation when fraud detection may be the
    motive for the murder.
  • Fraud-detection motive may be important when a
    prosecutor has weak direct evidence.
  • Source F.S. Perri and T.G. Lichtenwald, A
    Proposed Addition to the FBI Criminal
    Classification Manual Fraud-Detection Homicide,
    The Forensic Examiner, Winter 2007, pp. 18-30.

61
62
Michael Comers Types of Fraud
  • Corruptions (e.g., kickbacks).
  • Conflicts of interest (e.g., drug/alcohol abuse,
    part-time work).
  • Theft of assets.
  • False reporting or falsifying performance (e.g.,
    false accounts, manipulating financial results).
  • Technological abuse (e.g., computer related
    fraud, unauthorized Internet browsing).
  • Comers Rule Fraud can happen to anyone at
    anytime.
  • Source M.J. Comer, Investigating Corporate
    Fraud, Burlington, Vt. Gower Publishing Co.,
    2003, pp. 4-5.

62
63
How Corruption Occurs
Source 2006 Wells Report, ACFE.
63
64
TRUTH
  • Given the right pressures, opportunities, and
    rationalizations, many employees are capable of
    committing fraud.
  • Bev Harris says that fraudsters and embezzlers
    are the nicest people in the world
  • Wide-eyed mothers of preschoolers. Your best
    friend. CPAs with impeccable resumes. People who
    profess deep religious commitments. Your partner.
    Loyal business managers who arrive early, stay
    late, and never take a vacation. And sometimes,
    even FAMILY MEMBERS. So if youre looking for a
    sinister waxed mustache and shifty eyes, youre
    in for a surprise scoundrels come in every
    description.
  • Source How to Unbezzle A Fortune,
    www.talion.com/embezzle.htm, p. 1.

64
65
Starwoods Hotels Poll of Executives
Starwoods Hotels interviewed 401 top executives
who golf. The results are surprising.
Source Del Jones, Many CEOs Bend The Rules (of
Golf), USA Today, June 26, 2002, p. A-1.
65
66
The Cost of Fraud
  • Organizations lose 5 percent of annual revenue to
    fraud and abuse.
  • Fraud and abuse costs U.S. organizations more
    than 652 billion annually (about 4,500 per
    employee).
  • The average organization loses more than 12 a
    day per employee due to fraud and abuse.

Source 2006 Wells Report
66
67
The Trillion Dollar Gorilla
  • (in Billions)
  • U.S. Business1 256.32
  • Federal Government2 239.75
  • State Government3 354.21
  • Tax-exempts4 134.5
  • Local Government5 68.4
  • Annual Fraud (trillion) 1.053
  • 2002 Statistics of Income, 1,281.6 trillion time
    20.
  • 2.3975 trillion budget times 10
  • 3,542.1 million times 10
  • 897 billion in revenue times 15.
  • 684.6 billion times 10.

67
68
Fraud Multiplier
  • Employee Fraud for reduction in net income
  • Suppose 100,000 bottom line reduction.
  • Suppose 20 profit margin
  • How much new revenue needed to offset the lost
    income?
  • 100,000 500,000
  • 20
  • So ACFE says 652 billion lost per year (2006).
  • 652 billion 3.26 trillion needed
  • 20 revenue
  • --------------------------------------------------
    ---
  • The FBI estimates that white collar crime is
    300 billion each year in the U.S.

68
69
The Cost of Fraud (cont.)
  • Over 90 of occupational frauds involve asset
    misappropriations.
  • Average length of a fraud scheme is 15 to 24
    months.
  • Most common way of detecting occupational fraud
    is by tips from employees, customers, vendors, or
    anonymous sources.
  • Second way, by accident.
  • Third most common detection internal audit (2nd
    in 2004).
  • The most targeted asset is cash.

Source 2006 Wells Report
69
70
Ernst Young 2002 Survey
  • More than 20 percent of the respondents were
    aware of fraud in their workplace.
  • Nearly 80 percent would be willing to turn in a
    colleague thought to be committing a fraudulent
    act.
  • Employers lose a staggering 20 percent of every
    dollar earned to some type of workplace fraud.
  • More frequently committed frauds are theft of
    office items, claiming extra hours worked,
    inflating expense accounts, and taking kickbacks
    from suppliers.
  • Women are more likely than men to report
    fraudulent activities.
  • Older employees were more likely to report
    fraudulent activities than younger employees.
  • Ernst Young. American Works Employers Lose 20
    Percent of Every Dollar to Work Place Fraud.
    (2002) Available at http//www.ey.com/global/Cont
    ent.nsf/US/Media_Release_-_08-05-02DC

70
71
Advantage of Compliance Spending
  • General Counsel Roundtable says that each 1 of
    compliance spending saves organizations, on the
    average, 5.21 in heightened avoidance of legal
    liabilities, harm to the organizations
    reputation, and lost productivity.
  • Source Jonny Frank, Fraud Risk Assessments,
    Internal Auditor, April 2004, p. 47.

71
72
Comparison of Selected Fraud Surveys
72
73
PWC 2007 Survey
  • Fraud's pervasiveness
  • Over 43 percent of the companies interviewed
    reported suffering one or more significant
    economic crimes.
  • The average loss from fraud per company increased
    nearly 40 percent in two years from roughly
    US1.7 million in 2005 to approximately US2.4
    million in 2007.
  • Over 80 percent of our respondents who suffered
    fraud also stated that this had caused damage
    or significant damage to their business.
  • No industry is immune from the threat posed by
    economic crime although different sectors are
    impacted by different types of fraud.
  • Management's impact
  • The level of collateral damage is directly
    proportional to the seniority of the perpetrator.
    In 29 percent of the occasions where senior
    managers were involved, the collateral damage to
    the brand was very significant.
  • Controls and culture
  • Internal controls are not enough. An ethical
    corporate culture plays an equally important role
    in deterring fraud.
  • Companies with both ethical guidelines and
    compliance programs report suffering fewer
    economic crimes.

73
74
PWC 2007 Survey (cont.)
  • .
  • Emerging markets
  • Over 43 percent of the companies interviewed
    reported suffering one or more significant
    economic crimes in the past two years.
  • Companies in which parent and subsidiaries
    employed different accounting systems where more
    susceptible to fraud (61 percent of cases) than
    those operating a unilateral system (52 percent).
  • E7 'experts' perceive significant risk associated
    with levels of corruption, staff integrity and
    legal environment in the emerging markets.
  • Actual levels of reported fraud in the E7
    countries are consistently high in the area of
    asset misappropriation.
  • 44 percent of IP infringement cases (worldwide)
    that involved a perpetrator overseas involved a
    perpetrator from China.
  • Source PWC Global Economic Crime Survey 2007

97
75
Scienter Necessary
  • To prove any type of fraud, prosecutors must show
    that scienter was present.
  • That is, the fraudster must have known that his
    or her actions were intended to deceive.
  • -------------------------------------------------
  • The allure of numbers to most of us, is like the
    excitement of settling sand--a narcoleptic
    surety. Crafty criminals prey on this boredom.
    They pile on the numbers, spewing meaningless
    records in the false books.
  • Cory Johnson

75
76
Fraud
  • Legally, Blacks Law Dictionary defines fraud as
  • All multifarious means which human ingenuity can
    devise, and which are resorted to by one
    individual to get an advantage over another by
    false suggestions or suppression of the truth,
    and includes all surprise, trick, cunning or
    dissembling, and any unfair way by which another
    is cheated.
  • The four legal elements to fraud are
  • A false representation or willful omission
    regarding a material fact.
  • The fraudster knew the representation was false.
  • The target relied on this misappropriation.
  • The victim suffered damages or incurred a loss.
  • --------------------------------------------------
    -------------------
  • Institute of Internal Auditors definition
  • Any illegal acts characterized by deceit,
    concealment, or violation of trust. These acts
    are not dependent upon the applications to obtain
    money, property, or services to avoid payment or
    loss of services or to secure personal or
    business advantage.

76
77
How Fraud Occurs
Source KPMG Fraud Study
77
78
Types of Fraud
Source KPMG Fraud Study
78
79
Certain Fraud is Increasing
Source KPMG Fraud Study
79
80
Occupational Fraud By Industry
Source 2006 Wells Report, ACFE.
80
81
One Piece at a Time
Johnny Cash (1976)
81
82
One Piece At A Time
  • Well, I left Kentucky back in '49An' went to
    Detroit workin' on a 'sembly lineThe first year
    they had me puttin' wheels on cadillacs
  • Every day I'd watch them beauties roll byAnd
    sometimes I'd hang my head and cry'Cause I
    always wanted me one that was long and
    black.One day I devised myself a planThat
    should be the envy of most any manI'd sneak it
    out of there in a lunchbox in my handNow gettin'
    caught meant gettin' firedBut I figured I'd have
    it all by the time I retiredI'd have me a car
    worth at least a hundred grand.
  • CHORUS I'd get it one piece at a timeAnd it
    wouldn't cost me a dimeYou'll know it's me when
    I come through your townI'm gonna ride around in
    styleI'm gonna drive everybody wild'Cause I'll
    have the only one there is a round.So the very
    next day when I punched inWith my big lunchbox
    and with help from my friendsI left that day
    with a lunch box full of gearsNow, I never
    considered myself a thiefGM wouldn't miss just
    one little pieceEspecially if I strung it out
    over several years.

82
83
One Piece At A Time
  • The first day I got me a fuel pumpAnd the next
    day I got me an engine and a trunkThen I got me
    a transmission and all of the chromeThe little
    things I could get in my big lunchboxLike nuts,
    an' bolts, and all four shocksBut the big stuff
    we snuck out in my buddy's mobile home.Now, up
    to now my plan went all right'Til we tried to
    put it all together one nightAnd that's when we
    noticed that something was definitely wrong.
  • The transmission was a '53And the motor turned
    out to be a '73And when we tried to put in the
    bolts all the holes were gone.
  • So we drilled it out so that it would fitAnd
    with a little bit of help with an A-daptor kitWe
    had that engine runnin' just like a songNow the
    headlight' was another sightWe had two on the
    left and one on the rightBut when we pulled out
    the switch all three of 'em come on.The back
    end looked kinda funny tooBut we put it together
    and when we got thruWell, that's when we noticed
    that we only had one tail-finAbout that time my
    wife walked outAnd I could see in her eyes that
    she had her doubtsBut she opened the door and
    said "Honey, take me for a spin."
  • .

83
84
One Piece At A Time
  • So we drove up town just to get the tagsAnd I
    headed her right on down main dragI could hear
    everybody laughin' for blocks aroundBut up there
    at the court house they didn't laugh'Cause to
    type it up it took the whole staffAnd when they
    got through the title weighed sixty pounds
  • CHORUS I got it one piece at a timeAnd it
    didn't cost me a dimeYou'll know it's me when I
    come through your townI'm gonna ride around in
    styleI'm gonna drive everybody wild'Cause I'll
    have the only one there is around.
  • (Spoken) Ugh! Yow, RED RYDER This is the COTTON
    MOUTHIn the PSYCHO-BILLY CADILLAC Come on
  • Huh, This is the COTTON MOUTHAnd negatory on the
    cost of this mow-chine there RED RYDERYou might
    say I went right up to the factoryAnd picked it
    up, it's cheaper that wayUgh!, what model is
    it?Well, It's a '49, '50, '51, '52, '53, '54,
    '55, '56'57, '58' 59' automobileIt's a '60,
    '61, '62, '63, '64, '65, '66, '67'68, '69, '70
    automobile.

84
85
Missing Fraud
Auditors will continue to miss fraud because much
of their work is predicted on the assumption that
separation of duties prevents fraud (i.e., one
person hold the money and another person keeps
track of it). The Equity Funding case shakes the
foundations of auditing in that so much is based
on the assumption that people dont collude very
long. These people work together as an efficient
team for a very long time 9 years. Lee
Seidler ------------------------------------------
- When the sun goes down, then the sneaks will
play at night. From Porter Wagoner Sneaks Crawl
at Night.
85
86
The Perpetrators
  • First-time offenders.
  • Losses from fraud caused by managers and
    executives were 3.5 times greater than those
    caused by non-managerial employees.
  • Losses caused by men were 3 times those caused by
    women. 53 males 47 females
  • Losses caused by perpetrators 60 and older were
    27 times those caused by perpetrators 25 or
    younger.
  • Losses caused by perpetrators with post-graduate
    degrees were more than 3.5 times greater than
    those caused by high school graduates.
  • Source 2002 ACFE Report

86
87
FBI Part 2 Offenses Female
  • Embezzlement 41
  • Fraud 39
  • Forgery 36
  • Larceny theft 33
  • Serial Killer (62) 20

88
White-collar criminals have these characteristics
  • Likely to be married.
  • Member of a church.
  • Educated beyond high school.
  • No arrest record.
  • Age range from teens to over 60.
  • Socially conforming.
  • Employment tenure from 1 to 20 years.
  • Acts alone 70 of the time.
  • Source Jack Robertson, Fraud Examination for
    Managers and Auditors (1997).

88
89
Other Characteristics of Occupational Fraudsters
  • Inquisitive
  • Rule breaker
  • Under stress
  • Financial need
  • Big spender
  • Close relationship with vendors / suppliers
  • Egotistical
  • Risk taker
  • Hard Worker
  • Greedy
  • Disgruntled or a complainer
  • Overwhelming desire for personal gain
  • Pressured to perform

Source Lisa Eversole, Profile of a Fraudster,
Some Fraud Stuff, http//www.bus.lsu.edu/accountin
g/faculty/lcrumbley/fraudster.html
89
90
Quotes
  • To be a forensic auditor, you have to have a
    knowledge of fraud, what fraud looks like, how it
    works, and how and why people steal.
  • - Robert J. Lindquist

"Finding fraud is like using a metal detector at
a city dump to find rare coins. You're going to
have a lot of false hits." - D. Larry
Crumbley Fraud can be best prevented by good
people asking the right questions at the right
time. - Michael J. Comer
90
91
Finding fraud is like trying to load frogs on to
a wheelbarrow. Larry Crumbley
Its easy to fall in love Its easy to commit
fraud Its hard to catch the fraud.
91
92
Fraud Catching
  • Finding fraud is like trying to herd cats and
    chickens.
  • There is a chicken catching machine (150 chickens
    per minute), but there is no perfect fraud
    catching machine.
  • D. Larry Crumbley
  • PH2000 mechanical chicken harvester. Scott
    Kilman, Poultry in Motion Chicken Catching Goes
    High Tech, Wall Street Journal, June 4, 2003, p.
    A-1. Human can catch about 1,000 an hour.
    200,000 cost.

92
93
How Fraud Is Detected
  • Source 2006/ 2004 Wells Reports, ACFE.

A British publication suggests that prosecutors
think that accountants have x-ray vision. It is
assumed that if an accountant stares really hard
at a set of accounts, then somehow, magically,
information will appear before his/ her eyes that
are invisible to lesser mortals. NIFA News,
Number 10, p.1.
93
94
Sources of Tips
  • Source 2006 Wells Report, ACFE.

94
95
Tips Are Important
  • Some of the biggest recent accounting scandals
    (e.g., HealthSouth, Xerox, Waste Management)
    involve situations where the auditors were tipped
    off or otherwise alerted to possible frauds but
    they failed to investigate them deeply enough.
  • In her book Power Failure, Sherron Watkins says
    she talked to Jim Hecker, at Arthur Andersen, on
    the phone about the dangers of the Raptors and
    Fastows inherent conflict. Hecker wrote a memo
    to the files and forwarded copies to David Duncan
    and Enrons audit partner, Debra Cash. His note
    Here is my draft memo, for your review, for
    smoking guns that you can not extinguish. p.
    285.

95
96
Finding Fraud In The Midst of a Conspiracy
  • When speaking about the fraud of HealthSouth, a
    spokesman for Ernst Young emphasized the
    difficulty of detecting accounting fraud in the
    midst of a conspiracy of senior executives and
    false documentation.
  • An accountant testified that HealthSouth
    employees would move expenses of 500 to 4,999
    from the income statement to the balance sheet
    throughout the year. Overall the SEC said about
    1 billion in fixed assets were falsely entered.
    The employees moved only those expenses less than
    5,000, because Ernst Young automatically
    looked at those expenses over 5,000.
  • An ex-bookkeeper even sent Ernst Young an
    e-mail flagging one area of the fraud, but E Y
    still did not catch it. Employees actually
    produced false invoices when the accounting firm
    asked for back-up.
  • Source Charles Mollenkamp, Accountant Tried in
    Vain to Expose HealthSouth Fraud, Wall Street
    Journal, May 20, 2003, pp. A-1 and A-13.

96
97
Quotes
  • You should attack fraud problems the way the
    fictional Sherlock Holmes approached murder cases
  • D. Larry Crumbley
  • --------------------------------------------
  • To be a good fraud auditor, you have to be a good
    detective.
  • Source Robert J. Lindquist
  • --------------------------------------------------
    -----
  • Many lap-dog internal and external auditors need
    to be replaced with junkyard dogs.
  • D. Larry Crumbley

97
98
Difficult Task
  • More forensic techniques should become a part of
    both external and internal auditing. But Stephen
    Seliskar says that in terms of the sheer labor,
    the magnitude of effort, time and expense
    required to do a single, very focused forensic
    investigation -- as contrasted to auditing a set
    of the financial statements -- the difference is
    incredible. It is physically impossible to
    conduct a generic fraud investigation of an
    entire business.
  • Source Eric Krell, Will Forensic Accounting Go
    Mainstream? Business Finance Journal, October
    2002, pp. 30-34. www.investigation.com/artilces/li
    brary/2002Articles/15.htm.

98
99
Kessler Survey (2001)
  • About 13 of employees are fundamentally
    dishonest.
  • Employees out-steal shoplifters.
  • About 21 of employees are honest.
  • But 66 are encouraged to steal if they see
    others doing it without repercussion.
  • Source Studies Show 13 of employees are
    fundamentally dishonest, KesslerNews, November
    1, 2001, www.investigation.com/articles/library/20
    01articles.
  • --------------------------------------------------
    -------------------------------------
  • 30 of people in U.S. are dishonest.
  • 30 situational dishonest.
  • 40 are honest all of the time.
  • Source R.C. Hollinger, Dishonesty in the
    Workplace, Park Rider, N.Y. London House Press,
    1989, pp. 1-5.

99
100
Little Has Changed CFO Survey
  • Nearly half of CFOs 47 percent report they
    still feel pressure from their superiors to use
    aggressive accounting to make results look
    better.
  • What is worrisome is that the pressure to make
    the numbers hasnt abated much. Of these who have
    felt pressure in the past, only 38 percent think
    there is less pressure today than there was three
    years ago, and 20 percent say there is more.
  • Few finance executives have much confidence in
    the numbers their colleagues are reporting. Only
    27 percent say that if they were investing their
    own money, they would feel very confident about
    the quality and completeness of information
    available about public companies.
  • Source Don Durfee, Its Better (and Worse) Than
    You Think, CFO Magazine, May 3, 2004.

100
101
Some Infamous Financial Statement Frauds
  • Tyco
  • Large interest-free loans to officers then
    forgiven (87.1 million).
  • Unauthorized bonuses (no approval of BOD).
  • Fake documents showing no loans outstanding.
  • SEC found that PwC had prior knowledge of fraud
    back to 1998.
  • Undisclosed real estate transaction with related
    parties.
  • False entries in books to cover-up bribes given
    to foreign officials.
  • If numbers did not meet expectations, Richard
    Scrushy told employees to fix them.
  • Adelphia Greek for brothers
  • Moved debt to subsidiaries which were not
    consolidated.
  • Personal loans to the Rigas family
    (self-dealing).
  • Falsified operations statistics and inflated
    earnings.
  • Xerox
  • Accelerated revenues from leasing equipment.
  • Cookie jar reserves.
  • Sunbeam

101
102
Some Infamous Financial Statement Frauds
  • Waste Management
  • Reduced depreciation expense by inflating salvage
    value and extending useful lives.
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