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 country’s 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 • Employee’s 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. 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 don’t take vacations SPEs Excessive insider sales of stock Unexplained resignations of upper management Excessive debt/equity ratio CPA switching Strange account titles Red Flags

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