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Forensic Accounting MSA 220I

Forensic Accounting MSA 220I. Professor Bill O’Brien. Today’s Topics. Fraud Overview Why Fraud. Fraud Overview. Seriousness of fraud Definition of fraud Types of fraud Criminal versus civil statutes Fraud-related careers. Remember the “P” in CPA. The public trust is essential

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Forensic Accounting MSA 220I

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  1. Forensic AccountingMSA 220I Professor Bill O’Brien FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  2. Today’s Topics • Fraud Overview • Why Fraud FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  3. Fraud Overview • Seriousness of fraud • Definition of fraud • Types of fraud • Criminal versus civil statutes • Fraud-related careers FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  4. Remember the “P” in CPA • The public trust is essential • You have only one reputation FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  5. Cost of Fraud • Association of Certified Fraud Examiners (ACFE) • Close to $1.0 trillion annually in U.S.; close to $3.0 trillion worldwide • Over 7% of revenue…straight to the bottom line FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  6. How Does Fraud Impact You? • Financially • Reputation of your firm • Opportunity cost FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  7. Here’s What Happens... • It is a dollar for dollar impact on net income • Dollars that have a multiplier effect on revenue in order to generate new profits FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  8. Defining Fraud • A statement • Which is a lie, • And intentionally or recklessly so, • About a material point, • Which is believed • And acted upon by the victim • To the victim’s damage • Let examine each highlighted term SLIMBAD FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  9. What Drives Fraud • Consider the Ponzi Fraud of the early 20th Century • See www.mark-knutson.com • Primary age of fraudsters--36-45 yrs. • Key drivers • Confidence earned • Pressures • Greed FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  10. Classifications of Fraud • Fraud versus an organization • Occupational fraud • Fraud on behalf of an organization FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  11. Occupational Fraud • Clandestine • Violates fiduciary interest • Direct or indirect financial benefit • Damages the organization FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  12. Fraud on Behalf of an Organization • Most common…fraudulent financial reporting FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  13. A More Detailed Classification List • Occupational fraud…embezzlement • Management fraud • Investment scams • Vendor fraud • Customer fraud • Know the table on WSA pg. 10 FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  14. Examples... • Embezzlement: CVC • Management: World-com • Investment: see scams • Vendor: Halliburton; • Customer: Florida State football player and department store; bank case FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  15. Prosecution • Criminal law for public offenses • Bribery laws • Anti Kickback Act of 1986 • Mail Fraud statutes • Bank Fraud statutes • RICO and FCPA • IRS and tax evasion • Civil law for violations of private rights • Note the comparative table on p. 15 FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  16. Fraud Related Careers • ACFE and CFE requirements • Government • FBI, Postal Inspectors, IRS • Public accounting • Forensic accountants • Corporation • Internal auditors • Consulting • Lawyers • Expert witnesses FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  17. Critical Skills • Analytical • Communication • Technological • Accounting and law • Language • Behavioral • Common sense FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  18. Why Fraud? • Who commits fraud • The fraud triangle • Pressures • Opportunity and control issues • Rationalization • Power and influence…collusion FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  19. Who Commits Fraud? • In essence…you and I FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  20. Why Commit Fraud? • The fraud triangle • Situational pressures • Available opportunities • Personal integrity (rationalization) FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  21. Situational Pressures • Financial • Vice • Work related • Other pressures • The thrill or challenge • Extraordinary circumstances “Every man has his price, and he was getting close to mine.” Abraham Lincoln, on throwing a lobbyist out of his office FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  22. Available Opportunities • COSO’s elements of control • Control environment • Appropriate systems • Procedures and activities • Note the information in Albrecht FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  23. Control Environment • Management example • Management communication • Hiring practices • Organizational structure • Effective internal audit department or similar oversight FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  24. Procedures & Activities • Segregation of duties • System of authorizations • Independent checks • Physical safeguards • Documents and records FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  25. Factors That Promote Fraud • Outcomes that are difficult to evaluate • Failure to discipline • Complexity or lack of access to information • Apathy • Missing or non-existent audit trail FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  26. Rationalization • Pathological lying • “Everyone does it.” • See the list on page 50 FORENSIC ACCOUNTING - MSA 220I – Spring 2013

  27. Power and Influence • Different types…see pg. 53 • Influences co-conspirator • Knowledge may protect us and assist in investigation FORENSIC ACCOUNTING - MSA 220I – Spring 2013

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