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Forensic Accounting

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Forensic Accounting Dr. Lynn H. Clements CPA CFE Cr.FA CMA CFM What is Forensic Accounting? An orderly analysis, investigation, inquiry, test, inspection, or ... – PowerPoint PPT presentation

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Title: Forensic Accounting


1
Forensic Accounting
  • Dr. Lynn H. Clements
  • CPA CFE Cr.FA CMA CFM

2
What is Forensic Accounting?
  • An orderly analysis, investigation, inquiry,
    test, inspection, or examination along a paper
    trail in the search for fraud, embezzlement, or
    hidden assets
  • Two parts
  • Investigative accounting
  • Litigation support
  • Treats all figures as suspect until proven
    otherwise

3
The History of Forensic Accounting
  • 1931
  • World War II
  • 1980s Real estate bankruptcies, junk bond
    schemes, and lawsuits
  • 1988 ACFE was formed in Austin, Texas
  • Initially called investigative accounting
  • Increase in regulatory, tax and criminal statutes
    became law

4
The Need for Forensic Accountants
  • A 2001 survey found the following
  • 37 of the countrys top 100 accounting firms are
    increasing their forensic and fraud services
  • The average organization loses 6 of revenue to
    employee fraud and abuse
  • The typical perpetrator
  • Colleges and universities are responding
  • Many frauds are not reported
  • There are 13,000 CFEs in the ACFE, compared to
    2,300 just 10 years ago
  • Wells Report

5
What Does a Forensic Accountant Do?
  • Attempt to obtain the truth and develop an expert
    opinion
  • Sniff out corruption
  • Pore over financial documents, reconstruct
    records, interview people, and present report
    interpreting and explaining complicated financial
    information
  • Solve a large puzzle

6
The Services a Forensic Accountant Provides
  • Damages
  • Antitrust Analyses
  • Accounting
  • Valuation
  • General Consulting
  • Other Analyses

7
How to Become A Forensic Accountant
  • CFE (Certified Fraud Examiner)
  • Experience requirements (point system)
  • Educational requirements
  • Uniform CFE Examination (online quiz)
  • CPE
  • Code of Ethics
  • High moral character
  • www.cfenet.com
  • Fraud Check-Up

8
How to Become A Forensic Accountant
  • Cr.FA (Certified Forensic Accountant)
  • CPAs - one exam
  • Regional conferences
  • www.acfe.com
  • American College of Forensic Examiners

9
The Fraud Triangle
Motive
Rationalization
Opportunity
Source Michael Kurland, How to Solve A Murder
Macmillan, 1995, pp. 7-8
10
Proactive Fraud Auditing
  • Going fishing
  • Thinking like a fraud auditor
  • Choosing a fraud type
  • Procedures

11
Reactive Fraud Auditing
  • Symptoms
  • Cost Variances
  • Expected Costs
  • Employees Lifestyle

12
Fraud vs. White-Collar Crime
  • White collar crime is criminal conduct that does
    not involve violence or the threat of violence
    and usually takes place in a professional work
    place
  • Fraud happens anywhere, white-collar crime is in
    the workplace
  • Fraud is perpetrated by anyone, white-collar
    crime is by business people/professionals.
  • Fraud is not always criminal, white-collar crime
    is mostly criminal
  • Fraud does not always involve something of value,
    white- collar crime does.

13
Red Flags
  • No Company Policy Manual
  • Feeling of disorganized bookkeeping, purchasing,
    receiving, and/or warehousing departments
  • Missing documents
  • Unrecorded transactions
  • No bank reconciliations
  • Subsidiary ledgers out of balance
  • No physical inventory counts
  • Checks written to cash
  • Large related party loans
  • Excessive other revenue
  • Negative operating cash flow
  • Downward earnings trend
  • Handwritten checks
  • Extensive fund transfers
  • Unusual transactions (inconsistent)
  • Deficient hiring policies and procedures
  • Employees lifestyles inconsistent with salaries
  • Employees who dont take vacations
  • SPEs
  • Excessive insider sales of stock
  • Unexplained resignations of upper management
  • Excessive debt/equity ratio
  • CPA switching
  • Strange account titles

14
Forensic Accounting Pros and Cons
  • Why?
  • Innovation in the industry
  • Serve a cause, help to fight organized crime
  • Gratification
  • 175 to 300 per hour
  • Why not?
  • Verbal attacks by lawyers in depositions and on
    the witness stand
  • Dealing with lawyers on a regular basis
  • Attention to detail
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