Forensic Accounting

1. Forensic Accounting Eric J. Johnson, CPA, CIA & Lysa Park, CPA

2. What is Forensic Accounting • Ask Enron and WorldCom!! • Legally accurate accounting. • accounting that is sustainable in some adversarial legal proceeding, or within some judicial or administrative review. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

3. What is Forensic Accounting • Focus is: • the evidence of economic transactions and reporting • the legal framework which allows such evidence to be suitable to the purpose(s) of establishing accountability and/or valuation • In other words: • the identification, interpretation, and communication of the evidence of economic transaction and reporting events Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

4. What is Forensic Accounting • Department of Labor Statistics Job Description • Some public accountants specialize in forensic accounting—investigating and interpreting white collar crimes such as securities fraud and embezzlement, bankruptcies and contract disputes, and other complex and possibly criminal financial transactions, such as money laundering by organized criminals. Forensic accountants combine their knowledge of accounting and finance with law and investigative techniques in order to determine if illegal activity is going on. Many forensic accountants work closely with law enforcement personnel and lawyers during investigations and often appear as expert witnesses during trials. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

5. What is Forensic Accounting • often mistakenly assumed to be exclusively associated with "negative" applications, such as bankruptcy, fraud, business disputes, or matrimonial divorce. • may also be applied in "positive" assurance engagements such as due diligence reviews, business valuations, audit committee advisory services and enterprise risk management. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

6. What is Forensic Accounting • Forensic accounting is applied to the evidence of first order activities, not secondary systems of controls. • Analysis includes the crucial aspect of recognizing the implications of evidence that has been obtained. • Additional protocol extensions are employed to forecast or predict future conditions based on known past transactions or events. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

7. What makes a Forensic Accountant? • Background in accounting • Background in Information Systems • Preference to certifications: • CPA • CIA • CFE • Obtaining the credential involves passing a four-part, 10.5-hour exam that covers law, financial transactions, investigation, criminology and ethics Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

8. Opportunities • The forensic field of accounting, currently enjoying a plethora of opportunities, is on the hunt for technically proficient, intellectually curious, persistent, creative and discrete CPAs. • Fortune 500 Companies • FBI Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

9. Opportunities • Starting salaries, Svendson says, can range between $50,000 and $60,000. After that, “It depends on how well you’ve progressed. Six-figure salaries are not unusual, and they go much higher the higher up you get.” Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

10. Forensic Accounting – Applications and Consequences Adelphia • Interesting case involving father/son defendants. • Father John Rigas and son Timothy convicted on federal charges of conspiracy, bank fraud and securities fraud. • Consequences? • Father, John Rigas = 15 years in prison. • Son, Timothy Rigas = 20 years in prison. • Rigas family forfeits $1.2 Billion in assets to settle cases brought by federal regulators. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

11. Forensic Accounting – Applications and Consequences Adelphia, continued • Consequences? • Scheme resulted in tax fraud – failing to report and pay income taxes on funds the pair diverted. • Three of John Rigas’ other children are being charged as part of the tax fraud. • Adelphia has been sold to Time Warner and Comcast for more than $17 Billion. IRS Special Agent Peter Alvarado Quote: “They are not above the law.” Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

12. Forensic Accounting – Applications and Consequences Enron • Instigated much of the reporting legislation we know as Sarbanes-Oxley. • Trials pending January, 2006 on federal charges of fraud and conspiracy for: • Former Chairman and CEO Kenneth Lay • Former CEO Jeffrey Skilling • Chief Accounting Officer Richard Cousey • Consequences? • Finance Chief Andrew Fastow pleaded guilty to conspiracy charges (turned evidence), faces 10 years. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

13. Forensic Accounting – Applications and Consequences Enron, continued • Consequences? • Andrew Fastow reached his plea bargain only after working out a plea bargain for his wife. • Lea Fastow, wife of Andrew, served one year on tax charges – has been released. • Mrs. Fastow only person charged not employed by Enron at time scandal broke. • Mrs. Fastow’s attorney attempted reduced sentence when Martha Stewart received 5 months – unsuccessful. • Former treasurer Ben Glisan pleaded guilty – serving 5 years. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

14. Forensic Accounting – Applications and Consequences HealthSouth • Founder (and fired) Chief Executive Richard Scrushy charged with fraud, false corporate reporting and making false statements to regulators. • First CEO charged under Sarbanes-Oxley reporting law. • HealthSouth case was the law’s first court test. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

15. Forensic Accounting – Applications and Consequences HealthSouth, continued • Consequences? • Accounting scheme resulted in $2.7 Billion overstatement in earnings – company near bankruptcy. • Since 2003, 15 former HealthSouth executives have pleaded guilty to charges. • Scrushy blamed massive accounting scheme on subordinates. • “SOX” first court test failed – Scrushy acquitted on all charges. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

16. Forensic Accounting – Applications and Consequences Tidbits Martha Stewart Living Omnimedia • Founder Martha Stewart sentenced to 5 months in prison, 5 months house arrest. • Convicted of conspiracy, obstruction of justice, making false statements. • Former Merrill Lynch broker, Peter Bacanovic, was also sentenced to 5 months. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

17. Forensic Accounting – Applications and Consequences Tidbits, continued Tyco • Former Chief Executive Dennis Kozlowski and former CFO Mark Swartz were convicted on 22/23 counts of grand larceny, conspiracy, securities fraud, and falsifying business records. • Prosecutors accused the two of conspiring to defraud Tyco in order to fund extravagant lifestyles. • The two each face up to 30 years in prison. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

18. Forensic Accounting – Applications and Consequences Tidbits, continued WorldCom • Former CEO Bernard Ebbers was convicted in March 2005 of federal fraud and conspiracy charges. • Massive accounting fraud estimated at $11 Billion. • Ebbers was sentenced to 25 years in July 2005. • Finance Chief Scott Sullivan was sentenced to 5 years in prison. • Company now operating as MCI. Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA

19. Forensic Accounting • Questions? Francis Tuttle Advisory Committee for Computers and Accounting, Fall 2005 Eric Johnson, CPA, CIA & Lysa Park, CPA