The Fraud Side of Forensic Accounting D. Larry Crumbley, CPA, Cr.FA, CFD KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA 70803 225-578-6231 225-578-6201 Fax - PowerPoint PPT Presentation

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The Fraud Side of Forensic Accounting D. Larry Crumbley, CPA, Cr.FA, CFD KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA 70803 225-578-6231 225-578-6201 Fax


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Title: The Fraud Side of Forensic Accounting D. Larry Crumbley, CPA, Cr.FA, CFD KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA 70803 225-578-6231 225-578-6201 Fax

The Fraud Side of Forensic AccountingD. Larry
Crumbley, CPA, Cr.FA, CFDKPMG Endowed
ProfessorDepartment of AccountingLouisiana
State UniversityBaton Rouge, LA
  • 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,
  • On the AICPAs Fraud Task Force (2003-2004).
  • A frequent contributor to the Forensic 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.

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

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,
  • Non-litigation services performing analyses or
    investigations that may require the same skills
    used in 1, above, but may not involve the
    litigation process.

Definition of Forensic Accounting Non-Litigation
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.
The Bubble Deception
  • There are 14,000 publicly traded companies in
    the United States. Expecting all of them to be
    honest is unrealistic. Like any town of 14,000,
    the market is bound to have its share of grifters
    and shoplifters. But the deception at Computer
    Associates was dangerous precisely because it
    wasnt an aberration.
  • By January 2001, all manner of companies were
    abusing accounting rules to mislead their
    investors, seemingly without fear of being
    caught. A strange madness had gripped the
    market. Even its most solid citizens were
    running red lights and breaking windows. And the
    police were nowhere in sight.

Alex Berenson, The Number, Random House, 2003, p.
Enriching Insiders
  • I know that sounds crazy, but the stock
    market has gone from a place where investors
    actually own part of a company and have a say in
    their management to a market designed to enrich
    insiders by allowing them to sell shares they buy
    cheaply through options.
  • Companies continuously issue new shares
    to their managers without asking their existing
    shareholders. Those managers then leak that
    stock to the market a little at a time. Its
    unlimited dilution of existing shareholders
    stakes, dilution by a thousand cuts. If that
    isnt a scam, I dont know what is.
  • Individual shareholders have nothing but the
    chance to sell their shares to the next sucker .
    A mutual fund buys one million shares of a
    company with your and your coworkers money. You
    own 1 percent of the company. Six weeks later
    you own less, and that money went to insiders,
    not to the company.

Alex Berenson, The Number, Random House, 2003, p.
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.,
  • -----------------------------------------------
  • With a single clue a forensic accountant can
    solve a fraudulent mystery.

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
  • 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,, January 11, 2003.

Forensic Accounting Defined
  • Forensic accounting is the action of
    identifying, recording, settling, extracting,
    sorting, reporting, and verifying past financial
    data or other accounting activities for settling
    current or prospective legal disputes or using
    such past financial data for projecting future
    financial data to settle legal disputes.
  • Source Forensic and Investigative Accounting
  • --------------------------------------------------
  • When the death of a company occurs under
    mysterious circumstances, forensic accountants
    are essential. Other accountants look at the
    charts but forensic accountants actually dig into
    the body.
  • Douglas Carmichael

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

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
  • 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

Top Niche Services
1. Business Valuation 89
2. SOX Compliance 77
3. Litigation Support 69
4. Attest Services 67
5. Estate/Trust/Gift 66
9. Forensic/Fraud 56

Source Accounting Today.
Forensic Accounting vs. Fraud Auditing
  • Fraud Auditor An accountant especially skilled
    in auditing who is generally engaged in auditing
    with a view toward fraud discovery,
    documentation, and prevention.
  • --------------------------------------------------
  • Economic crimes and fraud often do not involve
    obvious evidence like the smoking gun. Forensic
    accountants look behind the deals and handshakes
    and probe beyond the numbers to uncover the
    reality of financial situations.
  • Source D.W. Squires, Problems Solved with
    Forensic Accounting A Legal Perspective,
    Journal of Forensic Accounting., Vol. IV (2003),.
    P. 131.

Forensic vs. Fraud Audit
  • Google result, May 4, 2005
  • Forensic Audit, 19,800 hits
  • Fraud Audit, 4,470 hits
  • Fraud Examination, 11,400 hits
  • Fraud Accounting, 3,790 hits
  • Forensic Accounting, 225,000 hits
  • ----------------------------------------------
  • 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

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

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
  • An Italian website, TGfin (,
    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,, January 8,

Gross Profit Comparison
  • In a divorce situation, a business owner claimed
    only about 75,000 annual income.
  • He claimed he had borrowed and not paid back huge
  • Wife said he was spending about 400,000 per year
    more than his salary.
  • Four schedules for the courtroom
  • What was known and alleged about husbands
  • Schedule comparing income with expenditures.
  • Amounts husband claimed he had borrowed.

Gross Profit Comparison (cont.)
  • Companys income statements side-by-side
  • New Gross Profit
  • His Per Industry
  • ---- ------
  • ---- ------
  • 75,000 475,000
  • Husband had overstated COGS. Checks issued to
    vendors, into COGS.
  • Some of the vendors cashed the checks and
    returned the money to husband.
  • Mark Kohn, Unreported Income and Hidden Assets,
    Forensic Accounting in Matrimonial Divorce,
    Philadelphia R. T. Edwards, 2005, pp. 49-57.

Unreported Beer Sales
  • Business owner reports only 50,000 business
    income, but has expensive cars, private schools,
    buying significant real estate.
  • Subpoenaed records of local beer distributors.
    Then went to the club and ordered some drinks,
    noting the pricing of the beer, etc.
  • 1,000 cases of Millers
  • 24 bottles
  • 24,000
  • x 2
  • 48,000 per year
  • Found that reported sales were underreported by
  • Mark Kohn, Unreported Income and Hidden Assets,
    Forensic Accounting in Matrimonial Divorce,
    Philadelphia R.T. Edwards, 2005, pp. 49-57.

Home Improvements
  • Massive improvements to personal home, not paid
    for by personal funds.
  • Company showed many corporate payments to home
    remodeling contractors/landscapers.
  • But the industrial park not owned by company.
  • Only photocopies of invoices provided.
  • FC demanded original documents.
  • Finally, the original documents had white-outs of
    job locations and work descriptions.
  • Could turn over the originals and read the real
    data from the back side.
  • Mark Kohn, Unreported Income and Hidden Assets,
    Forensic Accounting in Matrimonial Divorce,
    Philadelphia R.T. Edwards, 2005, pp. 49-57.

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.

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

Carmichaels Position
  • Doug Carmichael, Chief Auditor for PCAOB, 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

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.

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

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

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.

Forensic Accounting Knowledge Base
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.

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.

Investigative Techniques
  • You know how it goes, I said. You get a case.
    You just keep poking around, see what scurries
    out. p. 144.
  • --------------------------------------------------
  • How, Susan said, on earth are you going to
    unravel all of that?
  • Same way you do therapy, I said.
  • Which is?
  • Find a thread, follow it where it leads, and
    keep on doing it.
  • Sometimes it leads to another thread.
  • Often, I said.
  • And then you follow that thread.
  • Yep.
  • Like a game, Susan said.
  • For both of us, I said.
  • Susan nodded. Yes, she said, tracking down of
    a person or an idea or an evasion.
  • pp. 270 271.
  • --------------------------------------------------
  • Source R.B. Parker, Widows Walk, Berkley Books,

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
  • 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.

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.

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 billionnow 660, more or less annual
    problem nobody knows about.
  • Joseph W. Koletar, Fraud Exposed, John Wiley
    Sons, Inc 2003, p. 228.

Fictional Hero
  • Forensic accounting is turning up more
    frequently in the world of fiction, too. The
    financial intrigue of fraud and the investigative
    process of forensic accounting are a natural fit
    with mystery of suspense novels. Add exotic
    locations, colorful characters and a murder or
    two, and you have all the elements of a classic
  • There is a selection of books featuring
    forensic accountants as the heroes of their own
    stories, as well. Lenny Cramer, perhaps the most
    prominent of this fictional group, is the star of
    a series of novels written by I.W. Collett and
    various co-authors.
  • In one of these novels, Cramer tracks forged
    receipts to uncover a plot to steal Burmese
    religion treasures. Another features Cramer,
    while conducting an audit at Coca-Coca,
    uncovering a scheme to steal the companys secret
    formula. In yet another, Cramer uses his forensic
    accounting skills to solve a series of murders in
    the New York art world.
  • Source Book em! Forensic Accounting in History
    and Literature,The Kessler Report, Vol. 1, No.

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.

Audit Tests
  • The Panel on Audit Effectiveness recommended that
    surprise or unpredictable elements should be
    incorporated into audit tests, including
  • Recounts of inventory and unannounced visits to
  • Interviews of financial and nonfinancial client
    personnel in different locations
  • Requests for written confirmations from client
    employees regarding matters about which they have
    made representations to the auditors
  • Tests of accounts not normally preformed annually
  • Tests of accounts traditionally or frequently
    deemed low risk

AICPA Fraud Task Force Report
  • In 2003, the AICPAs Litigation and Dispute
    Resolution Services Subcommittee issued a report
    of its Fraud Task Force entitled, Incorporating
    Forensic Procedures in an Audit Environment.
  • The report covers the professional standards that
    apply when forensic procedures are employed in an
    audit and explains the various means of gathering
    evidence through the use of forensic procedures
    and investigative techniques.

Forensic-Type Organizations
  • American College of Forensic Examiners (2750 E.
    Sunshine, Springfield, MO 65804 800-423-9737 DABFA and Cr.FA 2000)
  • Certified Fraud Examiners (Association of CFEs,
    The Gregor Bldg., 716 West Avenue Austin, TX
    78701 800-245-3321
  • 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.
  • Society of Financial Examiners. Financial
    examiners of insurance companies, banks, savings
    loans, and credit unions. About 1,600. 174
    Grace Blvd., Altamonte Springs, Fl. 32714.
  • Certified Forensic Financial Analyst (NACVA, Salt
    Lake City, Utah 84106 801-486-0600). Also,
    Certified Fraud Deterrence (CFD) analyst.
  • 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.
  • 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.

Ink Analysis
  • Martha Stewart was undone by a blue ballpoint
  • Stockbroker belatedly inserted a note to help
    cover up Ms. Stewarts improper stock trading.
    Blue ballpoint ink used is different from ink
    elsewhere on the trading worksheet.
  • Prosecutors used forensic ink analysis in Rite
    Aid case to show that certain documents were
    backdated (ink used to sign letter was not
    commercially available until 3 months after the
    letter was dated).
  • Xerox laser printers now encode the serial number
    of each machine in tiny yellow dots in every
    printout, nestled within the printed words and
    margins. It tracks back to you like a license
  • Advice for fraudsters use pencils.
  • Source Mark Maremont, In Corporate Crimes,
    Paper Trail Often Leads to Ink Analysts Door,
    Wall Street J., July 1, 2003, p. A-1.

Deductive vs. Inductive
  • Deductive one goes from general to specific
    fairly simple and economical.
  • Inductive one starts with specific experiences
    and then draws inferences.

Deductive Approach Inductive Approach
Generic data mining Custom data mining
Digital analysis Analysis of all data
Discovery sampling
Generic software Custom software
For smaller organizations For larger organizations
Basic features Sophisticated features
Easy to learn Requires advanced skills
Relatively inexpensive More expensive
Source W.S. Albrecht and C.C. Albrecht, Root
Out Financial Deception, Journal of Accountancy
(April 2002), p. 33.
Benfords Law
  • Distribution of initial digits in natural numbers
    is not random
  • Predictable patterns

0 ----- 1 30.1 2 17.6 3 12.5 4 9.7 5 7.9 6 6.7 7 5.8 8 5.1 9 4.6 12 10.2 11.4 10.1 10.9 10.1 10.4 10.1 10 10 9.7 10 9.3 9.9 9 9.9 8.8 9.9 8.5 9.8
Benfords Law Uses
  • Investments sales/purchases
  • Check register.
  • Sales history/Price history.
  • 401 contributions.
  • Inventory unit costs.
  • Expenses accounts.
  • Wire transfer information.
  • Life insurance policy values.
  • Bad debt expenses.
  • Asset/liability accounts.
  • Source Richard Lanza, Digital Analysis- Real
    World Example, IT Audit, July 1, 1999,pp. 1-9.

Federal Sentencing Guidelines Monitoring Mechanism
  • Systems reasonably designed to detect
    criminal conduct by its employees and other
    agents and by having in place and publicizing a
    reporting system whereby employees and other
    agents could report criminal conduct by others
    within the organization without fear of
  • FCPA
    Sec. 8A1.3(k)(5).
  • --------------------------------------------------
  • The U.S. Supreme Court has overturned some of
    these concepts. Look for Congress to take action.

Some accountants believe that ethics is a place
in England.
  • 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,
Termites, Rust, and Fraud
  • Just as termites never sleep, fraud never
  • Just like termites, fraud can destroy the
    foundation of an entity.
  • --------------------------------------------------
  • Like rust, fraud never sleeps.
  • --------------------------------------------------
  • Auditing without forensic techniques is like
    trying to live without water.

Sarbanes-Oxley Act (7-30-2002)
  • Most significant change since 1934 Securities
    Exchange Act
  • New five-member Public Company Accounting
    Oversight Board (PCAOB)
  • Authority to set and enforce auditing,
    attestation, quality control and ethics
    (including independencies) standards for auditors
    of public companies.
  • Empowered to inspect the auditing operations of
    public accounting firms that audit public
    companies as well as impose disciplinary and
    remedial sanctions for violations of the boards
    rules, securities laws and professional auditing
    and accounting standards.
  • Rotation of lead audit partner every five years.
  • For now no requirement to rotate auditing firm

Sarbanes-Oxley Act (7-30-2002)
  • Eight types of services outlawed
  • Bookkeeping.
  • Information systems design and implementation
  • Appraisals or valuation services, fairness
    opinions, or contribution-in-kind-reports.
  • Actuarial services
  • Internal audit outsourcing
  • Management and human resources services
  • Broker/dealer, investment adviser, and investment
    banking services
  • Legal or expert services related to audit
  • Applies to foreign accounting firms filing with
  • http//, to get free subscription to
    PCAOB Update.

Sarbanes-Oxley Act of 2002
  • If you are going to be an auditor, you have to be
    an auditor, not an auditor and a consultant
    Senator Jack Reed.
  • In order to be independent, an accounting firm
    should not
  • Audit ones own work.
  • Function as part of management or an employee.
  • Act as an advocate.
  • No limitations are placed upon accounting firms
    in providing non-audit services to public
    companies they do not audit or any private
  • Audit services and non-audit services (e.g., tax)
    must be pre-approved by the audit committee, if
    not prohibited by the Act (before the non-audit
    service commences).
  • Auditor must report to the audit committee on a
    timely basis.
  • Cooling off period of one year for hiring an
    auditor if CEO and other senior officers worked
    for the auditor.
  • There is no requirement to rotate the auditors.
  • There is discussion of requiring a forensic audit
    irregularly. Harvey Pitt suggested this proposal.

Sarbanes-Oxley (contd.)
  • Many of the Sarbanes-Oxleys provisions became
    effective July 30, 2002.
  • The Network
  • Thus, SEC will control the accounting standards,
    not the AICPA.
  • Auditors to report to audit committee, and audit
    committee must approve all services.
  • Crime to corruptly alter, destroy, mutilate, or
    conceal any document with the intent to impair
    the objects integrity or availability (up to 20
  • Statute of limitations for the discovery of fraud
    is now two years from the date of discovery and 5
    years after the act.
  • Maximum penalty for mail and wire fraud is
    increased from 5 to 10 years.
  • Financial statement filed with SEC certified by
    CEO and CFO. Maximum penalties for willful and
    knowingly violation fined not more than 5
    million and/or imprisonment of up to 20 years.
  • Sense of Congress CEO should sign the Federal
    income tax return.

Sarbanes-Oxley Act Creates Need For Forensic
  • To assist corporations in their quest to ensure
    compliance with the mandates of S-O.
  • Public accounting firms must introduce forensic
    techniques into audits, and they may request help
    from forensic experts.
  • -------------------------------------------------
  • Robbers do not need guns. Pencil and paper will
    do. Opportunity and greed are thieverys driving
    forces. Put enough zeroes behind a number, and
    its amazing how flexible morals become. How many
    years in prison would you do to accumulate a half
    a billion dollars in your bank account?
  • John H. Bolt

Section 404-Sarbanes-Oxley
  • Beginning June 2004, large companies must have in
    place tight internal controls, assess the
    effectiveness of these controls annually (and
    issue a report of their effectiveness), and pay
    for an independent assessment by external
  • Need an internal control framework (e.g., COSO or
  • Companies are paying steep fees to fund the
  • Audit fees have increased by as much as 30 since

Six-Legged Table of Financial Statements
  • External Auditors

Audit Committee
Top Management
Board of Directors
Internal Auditors
External Auditor
In a baseball analogy, think of the pitcher as
the auditee, the catcher as the internal auditor,
the manager as top management, the scorekeeper as
the external auditor, and the umpire would be
PCAOB(SEC). The scoreboard could be the general
ledger. The Big R
COSO CUBE(5 components of internal controls)
The COSO Model
  • Control environment managements attitude
    toward controls, or the tone at the top.
  • Risk assessment managements assessment of the
    factors that could prevent the organization from
    meeting its objectives.
  • Control activities specific policies and
    procedures that provide a reasonable assurance
    that the organization will meet its objectives.
    The control activities should address the risks
    identified by management in its risk assessment.
  • Information and communication system that
    allows management to evaluate progress toward
    meeting the organizations objectives.
  • Monitoring continuous monitoring of the
    internal control process with appropriate
    modification made as deemed necessary.

COSO New Cube Enterprise Risk Management
Source See Apostolou and Crumbley,
Sarbanes-Oxley Fall-out Leads to Auditing
Standards No. 2 Importance of Internal
Controls, The Value Examiner, November/December
2004, pp. 55-60.
Management Control Philosophy
  • Fraudulent Financial Reporting more likely to
    occur if
  • Firm has a poor management control philosophy.
  • Weak control structures.
  • Strong motive for engaging in financial statement
  • Poor management philosophy
  • Large numbers of related party transactions.
  • Continuing presence of the firms founder.
  • Absence of a long-term institutional investor.
  • Source Paul Dunn Aspect of Management Control
    Philosophy that contributes to fraudulent
    Financial Reporting, Journal of Forensic
    Accounting, Vol. IV (2003), pp. 35-60

Risk Assessment Benefits
  • A major step in a forensic audit is to conduct
    a risk assessment, which entails a comprehensive
    review and analysis of program operations in
    order to determine where risks exists and what
    those risks are.
  • Any operation developed during the risk
    assessment process provides the foundation or
    basis upon which management can determine the
    nature and type of corrective actions needed.
  • A risk assessment helps an auditor to target
    high-risk areas where the greatest
    vulnerabilities exist and develop recommendations
    to strength internal controls
  • Source B.l. Derby, Data Mining for Improper
    Payments, Journal of Government Management,
    Winter 2003, Vol.52, No. 4, pp. 10-13.

Fraud Risk-Assessment Process
  • 1. Organize the assessment integrate into
    organizations existing business cycle or
    establish a separate cycle.
  • 2. Determine areas to assess conduct at
    company wide, business-unit, and
    significant-account levels.
  • 3. Identify potential schemes and scenarios
    typically affecting the industry or locations.
  • Fraudulent financial reporting.
  • Misappropriation of assets.
  • Expenditures and liabilities for an improper
    purpose (cash kickbacks and corruption).
  • Organization commits a fraud against employees or
    third parties.
  • Tax fraud.
  • Financial misconduct by senior management.

Fraud Risk-Assessment Process
  • 4. Assess likelihood of fraud
  • Remote (1 out of 20)
  • Reasonably possible
  • Probable
  • 5. Assess significance of risk
  • Inconsequential
  • More than inconsequential
  • Material
  • 6. Link antifraud controls identify the control
    activities for fraud risks that are both more
    than likely to occur and more than
    inconsequential in amount.
  • 7. Apply assessment results to the audit plan
    consider and document the results of the fraud
    assessment when developing the audit plan.
  • Source Jonny Frank, Fraud Risk Assessments,
    Internal Auditor, April, 2004, pp. 43-47.

FEIs Costs of Compliance
  • Source Financial Executive Institute

Revenue First-Year Costs First-Year Hours
Less than 25 million .28 million 1,996
25 to 99 million .74 million 3,080
100 to 499 million .78 million 5,118
500 to 999 million 1.04 million 6,950
1 to 4.9 billion 1.83 million 13,355
Over 5 billion 4.67 million 41,201
Source Financial Executive Institute
  • Audit fees have increased about 50.
  • First year spending around 10 billion. Steve
    Watkins, For Some, SOX Is No Hassle at All,
    IBD, January 14, 2005, p. A6.
  • About 100,000 each year for insuring Board
  • Bob Ross Section 404 of SOX, which requires
    companies to document their controls, cost his
    company (Urban Outfitters) at least a penny per
    share in 2004, turning his job into a struggle
    to explain common sense.
  • Tim Reason, Feeling the Pain, CFO, May 2005,
    p. 51.

Using Work of Specialists (SAS No.73)
  • Specialist defined a professional service firm
    or individual who possesses special skills or
    knowledge in a particular field other than
    accounting and auditing
  • To reply on specialists findings, auditor
  • Must understand the objectives and scope of work
  • Assumptions used must be clear to auditor.
  • Auditor must consider the appropriateness of
    utilizing the specialists findings.
  • Auditor must test the data that client provides
    to the specialist.
  • Auditor must evaluate whether findings support
    the assertions in the financial statements.
  • If specialists findings inconsistent, SAS No.73
    provides additional procedures which auditor must
  • Auditor will need copies of work-papers of

Fraud is Possible
The motto of a fraudster Anything is possible.
The impossibility simply takes longer. -----------
---------------------------------- Bigglemans
Safe a safe builder wrote blueprints of a
unbreakable safe and locked the blueprints inside
the safe. ----------------------------------------
-------- Internal controls can be broken, often
by top executives. -------------------------------
-----------------Just as a pitcher tries to fool
batters, financial statements may be misleading
or wrong.
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
  • Source M.J. Comer, Investigating Corporate
    Fraud, Burlington, Vt. Gower Publishing Co.,
    2003, pp. 4-5.

The McKessons Massive Fraud
In 1938, police discovered a massive fraud
at McKesson Robbins, a big drug company traded
on the New York Stock Exchange and audited by
Price Waterhouse. Executives at McKesson
embezzled more than 18 million, hiding their
theft by creating a fake division. The
fictitious unit represented almost one-fifth of
McKessons total assets, but Price Waterhouse
somehow had managed to miss the fact that it
didnt exist. (Clues to the fraud included
a shipment that supposedly had been sent from
Canada to Australia by truck.) Alex Berenson,
The Number, Random House, 2003, p.33
Starwoods Hotels Poll of Executives
Starwoods Hotels interviewed 401 top executives
who golf. The results are surprising.
Consider themselves to be honest in business 99
Played with someone who cheats at golf 87
Cheated themselves at golf 82
Hated others who cheated at golf 82
Believe that business and golf behaviors are parallel 72
Source Del Jones, Many CEOs Bend The Rules (of
Golf), USA Today, June 26, 2002, p. A-1.
The Cost of Fraud
  • Organizations lose 6 percent of annual revenue to
    fraud and abuse.
  • Fraud and abuse costs U.S. organizations more
    than 660 billion annually (4,500 per employee).
  • The average organization loses more than 12 a
    day per employee due to fraud and abuse.

Source 2004 Wells Report
The Cost of Fraud (cont.)
  • Over 90 of occupational frauds involve asset
  • Average length of a fraud scheme is 18 months.
  • Most common way of detecting occupational fraud
    is by tips from employees, customers, vendors, or
    anonymous sources.
  • Second way, internal audit.
  • Third most common detection accident.
  • The most targeted asset is cash.

Source 2004 Wells Report
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
  • 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//

Undiscovered Fraud
  • Howard R. Davia believes there are three
    groups of fraud
  • Group 1 20 of fraud discovered.
  • Group 2 Fraud discovered, but not made public
  • Group 3 Fraud not yet detected (40).
  • Source H.R. Davia, Fraud 101, John Wiley, 2000,
    pp. 5-12.

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
  • 2.3975 trillion budget times 10
  • 3,542.1 million times 10
  • 897 billion in revenue times 15.
  • 684.6 billion times 10.

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 660 billion lost per year.
  • 660 billion 3.3 trillion needed revenue
  • 20.
  • --------------------------------------------------
  • This amount lost to fraud and abuses is
  • twice the size of the U.S. military budget.

Put Fraud In Perspective
  • The Iraq War may cost as much as 200 billion.
    Since fraud and abuse reduce the bottom lines of
    businesses as much as 660 billion per year
    (assuming a tax rate of 30), the federal
    government loses in taxes each year 198 billion.
  • So in less than 13 months, stopping fraud and
    abuse would pay for the Iraqi war.

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.

2003 PricewaterhouseCooper Survey
  • Survey to several hundred of the largest
    companies (with 91 responses).
  • Half of the detected economic crimes at
    responding companies were found by auditors, but
    it did not distinguish between internal audits.
    Another 36 percent of the frauds were reported by
  • Although 76 percent of the United States
    respondents were covered by insurance, fewer than
    half were able to recover from their insurers.
    And less than a third of insured companies
    affected by fraud collected more than 20 percent
    of the amount lost.
  • The average amount lost was 2.2 million, and the
    highest levels of economic crime were reported in
    Africa and North America (including Canada and
    the United States).
  • Source J.D. Glater, Survey Finds Frauds Reach
    in Big Business

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.
  • -------------------------------------------------
  • Important to know that fraud is not limited
    by amount but rather by intent. If someones
    intent was to defraud someone of 10 or 10
    million, it is still fraud.
  • Staff Accounting
    Bulletin No. 99
  • If someone makes an incorrect entity of
    10,000 (against GAAP) to give a company the one
    cent to meet its earnings target, such an entry
    is a material misrepresentation.

  • 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.

Superseded SAS No. 82Accounting Fraud Referred
To As Misstatement
  • Misstatements arising from fraudulent financial
    reporting are intentional misstatements or
    omissions of amounts or disclosures in financial
    statements to deceive financial statement users.
  • --------------------------------------------------
  • Three most important red flags according to
    external/internal auditors (total of 40.1)
  • Known history of securities law violations
  • Significant compensation tied to aggressive
    accounting practices (12.9)
  • Managements failure to display appropriate
    attitude about internal controls (12.6)
  • Source B.A Apostolou, The Relative
    Importance of Management Risk Factors,
    Behavioral Research in Accounting, January 1,
    2001, pp. 1-24.

Engagement Letters Are Important
  • For claims to Continental Casualty Company the
    national provider of CPA malpractice insurance,
    in 2003 Tax, 48 Compilation and
    bookkeeping, 15 Consulting, 11 Audit, 10
    Fiduciary, 6 All Others, 5
  • Most accounting malpractices claims involve
    inadequate documentation.
  • In claims re business tax, 54 of the time no
    engagement letter.
  • For individual tax claims, no engagement letters
    78 of the time.
  • Estate-related tax services, none, 63.
  • The most costly malpractice claims area is audit
  • Almost 40 of all audit claims allege that an
    auditor either failed to detect fraud or failed
    to inform the client of internal control weakness
    to reduce the risk of fraud.Source Joseph
    Wolfe, Accounting for Malpractice, AICPA,

COSOs Most Common Fraud Methods
  • Overstatement of earnings.
  • Fictitious earnings
  • Understatement of expenses.
  • Overstatement of assets.
  • Understatement of allowances for accounts
  • Overstatements of the value of inventories by not
    writing down the value of obsolete goods.
  • Overstatement of property values and creation of
    fictitious assets.

COSOs Major Motives for Fraud
  • Cover up assets misappropriated for personal
  • Increase the stock price to increase the benefits
    of insider traders and to receive higher cash
    proceeds when issuing new securities.
  • Obtain national stock exchange listing status or
    maintain minimum exchange listing requirements to
    avoid de-listing.
  • Avoiding a pretax loss and bolstering other
    financial results.

COSO Survey (1999)
  • Financial pressures were important contributory
    factors for the commitment of financial statement
    fraud (FSF).
  • Top executives (e.g., CEOs, CFOs) were commonly
    involved in FSF.
  • The majority of alleged FSF were committed by
    small companies.
  • Board of directors and audit committees of the
    fraud companies were weak and ineffective.
  • Adverse consequences for fraud companies were
    bankruptcy, significant changes in ownership, and
    delisting by national stock exchanges.
  • Cumulative amounts of FSF were relatively
    significant and large.
  • More than half of the alleged FSF involved
    overstatement of revenues.
  • Most FSF were not isolated to a single fiscal
  • Fifty-five percent of the audit reports issued
    in the last year of the fraud period contained
    unqualified opinions.
  • The majority of the sample fraud companies (56
    percent) were audited by Big Eight/Big Five
    auditing firms.

Business Fraud Survey (1999)
  1. Nearly 15 percent reported management
    misappropriation as the greatest fraud risk to
    their organization.
  2. Sixty percent of the respondent reported their
    departments fraud risk analysis process as being
    reactive in nature.
  3. The majority of respondents (72 percent) reported
    that their organization did not have fraud
    detection and deterrence programs in place.
  4. The majority of respondents (68 percent) reported
    that they never felt pressured to compromise the
    adherence to their organizations standard of
    ethical conduct.
  5. The majority of the respondents reported their
    organizations external auditors as being
    ineffective in preventing and detecting fraud.
  6. The majority of the respondents believed that
    more budgets should be devoted to fraud-related
    activities and training in department.The
    Institute of Management and Administration (IOMA)
    and the Institute of Internal Auditors(IIA).
    Business Fraud Survey. (1999). Available at

Fraudulent Disbursements
  • Fraudulent disbursements account for
    three-quarters of the losses, and the most
    expensive tend to be fraudulent disbursements
    through billing schemes (45).
  • Therefore, internal auditors seeking to get the
    biggest bang for their investigative bucks should
    begin by making sure company vendors are for
  • Check tampering (30).
  • Source J.T. Wells, An Unholy Trinity, Internal
    Auditor, April 1998, p. 33.

The Methods
  • Asset misappropriation accounted for more than
    four out of five offenses (92.7). 93,000
  • Bribery and corruption constituted about 30.1
    of offenses. (250,000)
  • Fraudulent statements were the smallest category
    of offense 7.9 (most costly). 1 million per
  • Source 2004 Wells Report

Restatements of Financial Statements
2004 414
2003 323
2002 270
2001 270
1999 216
1998 158
  • Reasons for 2004 restatements
  • Revenue recognition.
  • Equity accounting.
  • Revenues, accruals, contingencies.
  • 15 were repeat filers.
  • Arthur Andersen had averaged 11 restatements
    before 2002. In 2002, they had 40, with 26 after
    new auditors were retained.

Source An Analysis of Restatement Matters,
Huron Consulting Group, www.huronconsultinggroup.c
Triple Fraud Sting
  • A Michigan woman received an e-mail from a
    Nigerian asking her to set up a bank account in
    the U.S. in order to help him steal 18 million.
  • She set up the bank account (to help pay the
    so-called bribes and fees) by allegedly
    embezzling 2 million from her employer during
    seven months in 2002.
  • Guess what? She never received a penny. She was
    indicted on 13 counts of wire fraud.
  • Fraud schemes are much like derivatives. They
    spring up, die out, and new ones are started each
  • Source Kim Komando, Delete These Scams Now,
    MSN Business,
    9.asp. Reviewed June 15, 2003.

Rite Aid Fraud Case
  • Former CEO Martin Glass bragged that the computer
    used to generate backdated letters had
    disappeared at sea. They have no computer. The
    letters that were done on the computerthey do
    not have and never will have, unless they use a
    Trident submarine.
  • Wrong. President Timothy Noonan was wearing a
    wire. He recorded 6 meetings over 10 weeks.
    Federal investigators heard everything.
  • CFO Franklyn Bergonzi
  • Obtained 30 million in extra profits by dunning
    Rite Aids suppliers for merchandise that was
    supposedly outdated or damaged (but not so).
  • Another 75.6 million came from rebates from
    pharmaceutical firms that had yet to be earned.
  • Failed to report certain expenses properly.
  • Increased the useful life of some assets.
  • The financial restatements wiped out 1.6 billion
    in profits.
  • Martin L. Glass was sentenced to 8 years, and his
    CFO was sentenced to 2 years and 4 months.
  • Source Mark Maremont, Call To Account Rite Aid
    Case Gives Early View of Fraud on Trial, Wall
    Street J., June 11, 2003, p. A-6.

One Piece at a Time
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.

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 tim