Forensic Auditing

1. Forensic Auditing Ted Stehney, Director Office of Forensic Auditing Office of Inspector General, GSA

2. What is forensic auditing Why do we need it Why does the government need it Why does GSA need it What are our approaches What do we need to succeed

3. What is forensic auditing

4. DISCUSSION MEMORANDUM While many definitions exist for the general term forensic1, the AICPAs Forensic and Litigation Services Committee (FLS) believes that forensic accounting consists of two major components: litigation services that recognize the role of the CPA as an expert, consultant, or other role; and investigative services that make use of the CPAs skills that may or may not lead to courtroom testimony. 1 According to the Random House Websters College Dictionary, forensic is defined as pertaining to, connected with, or used in courts of law or public discussion and debate.

5. Forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, certain areas of the law, and research, and investigative skills to collect, analyze, and evaluate evidential matter and to interpret and communicate findings.

6. Forensic Accounting Professor D. Larry Crumbley, the KPMG Endowed Professor in the Department of Accounting, LSU, and a renown authority, defines forensic accounting as: 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. D. Crumbley, L. Heitger and G. Smith, Forensic and Investigative Accounting, 3rd Edition, (Chicago, IL: CCH, 2007), p.1-5

7. Forensic Auditing “…a peremptory forensic accounting engagement, should not be confused with the more common review of internal controls or the like. Forensic accounting, whether peremptory or after-the-fact engagements, is applied to the evidence of first order activities, not secondary systems of controls.” D. Larry Crumbley, "Forensic Accounting: The Evidentiary Nature of Accounting Data,” Journal of Forensic Accounting (http://www.rtedwards.com/journals/JFA/evidentiary.html)

8. Why do we need it

9. ACFE Comments on Measuring Fraud Fraud, by its very nature, does not lend itself to being scientifically observed or measured in an accurate manner. One of the primary characteristics of fraud is that it is clandestine, or hidden; almost all fraud involves the attempted concealment of the crime.

10. 2008 ACFE Report to the Nation Survey Data • Estimated that U.S. organizations lose 7% of their annual revenues to fraud. • Applied to the projected 2008 US GDP, 7% translates to approximately $994 billion in fraud losses. • The median loss was $175,000. • More than one-quarter of the frauds involved losses of at least $1M.

11. 2008 ACFE Report to the Nation Survey Data • The most common fraud schemes were • corruption, 27% and • fraudulent billing schemes, 24%. • The government was victimized in 12% of these fraud cases. • The implementation of anti-fraud controls appears to have a measurable impact on an organization’s exposure to fraud.

12. Center for Academic Integrity at Duke University 2006 survey results of 5,331 students at 32 graduate schools across the USA and Canada • 56% of MBA students acknowledged cheating, • 54% in Engineering, • 45% in Law school • 48% of Education students • 39% of Social Science and Humanities students Academy of Management Learning & Education, 2006, Vol. 5, No. 3, 294–305.

13. Example of $2.6 Billion Undetected Fraud $2.6 Billion fraud over 9 years Year 1 $600K Year 3 $4 million Year 5 $80 million Year 7 $600 million Year 9 $2.6 billion In years 8 and 9, four of the world’s largest banks were involved and lost over $500 million Some of the organizations involved: Merrill Lynch, Chase, J.P. Morgan, Union Bank of Switzerland, Credit Lyonnaise, Sumitomo, and others. Source: Dr. Conan Albrecht, Six-Step Approach

14. Why does the government need it

15. Why Forensic Auditing Now • Substantial increases in contracted services and support by Federal agencies is raising the risk of procurement fraud. • The influx of $787 billion in stimulus funds to flow through the Federal Government presents unprecedented fraud opportunities • Acknowledging limitations of traditional approaches: • Heavy use of sampling - lack of detail • Lack of historical fraud detection instruction • Lack of fraud symptom expertise • Lack of fraud-specific tools • Lack of analysis skills • Lack of expertise in technology • Auditors do find 20-30 percent of fraud

16. Why does GSA need it

17. GSA’s Business If GSA were a public company, our $17.7 billion in revenues would place us at 141 on the Fortune 500, ahead of Google and Nike, among others. GSA “A Report to Our Citizens” http://www.gsa.gov/graphics/admin/Citizens_Report_011509_FINAL.pdf

18. GSA • GSA owns and leases over 352 million square feet of space in 8,600 buildings in more than 2,200 communities nationwide. • In addition to office buildings, GSA properties include land ports of entry, courthouses, laboratories, post offices, and data processing centers. • GSA Fleet provides 51 percent of Federal motor vehicles, excluding the United States Postal Service. Fleet’s total inventory consists of 225,000 vehicles; including almost 23,000 alternative fuel vehicles

19. Growth at GSA MAS sales increased from $5.6 billion in 1997 to $36.7 billion by the end of fiscal year 2008. GSA’s consolidated balance sheet assets over the same period of time have grown from $17,743 million to $29,791 million Direct appropriation of stimulus funds in the amount of $5.5 billion, over and above the current workload GSA is expecting $4 billion to $10 billion more in indirect stimulus money to flow through GSA

20. What are our approaches

21. Common Methods for Collecting Evidence • Traditional techniques are routine and recurring • Designed to assess material weaknesses • Provide reasonable assurance that financial statements are free from material misstatements, whether caused by errors or fraud • Statistical sampling • Estimates • Forensic techniques are aggressive and proactive • Specifically designed to increase the detection of fraud • Objectives developed on a case-by-case basis • Data mining • Software for comparisons • IDEA • Picolo • Access

22. GSA OIG Office of Forensic Auditing • Leading the way in taking a new approach to finding fraud. • Utilizes the forensic auditing approaches to better target the work of Inspectors General and to link powerful analytic techniques for pinpointing fraud to successful prosecutions of offenders. • Made up of auditors, management and program analysts, IT specialists, statistician, and investigators, the team is devoted to identifying, assessing, and aiding prosecution of crimes, especially procurement and contract fraud. • Employs complex, innovative strategies that enhance traditional audit and investigative practices to detect fraud, assess situations where fraud has occurred, and produce evidence meeting criminal court standards.

23. Forensic Auditing Approaches • Detect potential fraud by examining large populations of transactions within a certain scope, or • Determine if a fraud has occurred by examining records and conducting interviews based on a specific fraud allegation

24. What do we need to succeed

25. What Forensic Auditing Needs to Succeed • A commitment from our own management • Staffing • Equipment • Training • Management needs to have a realistic expectation of results

26. What Forensic Auditing Needs to Succeed • Partnership with Agency management • It is in the best interests of the OIG, the Agency, and its customers to maintain a cooperative relationship • Full and open access to all systems • Unrestricted access to employees and records

27. What Forensic Auditing Needs to Succeed • At GSA, Forensic Auditing is able to work behind the scenes because of: • The Agency’s willingness to work with Forensic Auditing, and • The unrestricted access they have provided • Kudos to GSA for embracing the concept of forensic auditing