Forensic Accounting BA 124

1. Forensic AccountingBA 124 Professor Bill O’Brien FORENSIC ACCOUNTING – BA 124 - Spring 2014

2. Today’s Topics • Seriousness of fraud • Definition of fraud • Types of fraud • Criminal versus civil statutes • Fraud-related careers FORENSIC ACCOUNTING – BA 124 - Spring 2014

3. Remember the “P” in CPA • The public trust is essential • You have only one reputation FORENSIC ACCOUNTING – BA 124 - Spring 2014

4. 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 – BA 124 - Spring 2014

5. How Does Fraud Impact You? • Financially • Reputation of your firm • Opportunity cost FORENSIC ACCOUNTING – BA 124 - Spring 2014

6. 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 – BA 124 - Spring 2014

7. 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 – BA 124 - Spring 2014

8. 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 – BA 124 - Spring 2014

9. Classifications of Fraud • Fraud versus an organization • Occupational fraud • Fraud on behalf of an organization FORENSIC ACCOUNTING – BA 124 - Spring 2014

10. Occupational Fraud • Clandestine • Violates fiduciary interest • Direct or indirect financial benefit • Damages the organization FORENSIC ACCOUNTING – BA 124 - Spring 2014

11. Fraud on Behalf of an Organization • Most common…fraudulent financial reporting FORENSIC ACCOUNTING – BA 124 - Spring 2014

12. 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 – BA 124 - Spring 2014

13. Examples... • Embezzlement: CVC • Management: World-com • Investment: see scams • Vendor: Halliburton; • Customer: Florida State football player and department store; bank case FORENSIC ACCOUNTING – BA 124 - Spring 2014

14. 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 – BA 124 - Spring 2014

15. 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 – BA 124 - Spring 2014

16. Critical Skills • Analytical • Communication • Technological • Accounting and law • Language • Behavioral • Common sense FORENSIC ACCOUNTING – BA 124 - Spring 2014

17. Today’s Topics • Why Fraud? • Who commits fraud • The fraud triangle • Pressures • Opportunity and control issues • Rationalization • Power and influence…collusion FORENSIC ACCOUNTING - BA124 – Spring 2013

18. Who Commits Fraud? • In essence…you and I FORENSIC ACCOUNTING - BA124 – Spring 2013

19. Why Commit Fraud? • The fraud triangle • Situational pressures • Available opportunities • Personal integrity (rationalization) FORENSIC ACCOUNTING - BA124 – Spring 2013

20. 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 - BA124 – Spring 2013

21. Available Opportunities • COSO’s elements of control • Control environment • Appropriate systems • Procedures and activities • Note the information in Albrecht FORENSIC ACCOUNTING - BA124 – Spring 2013

22. Control Environment • Management example • Management communication • Hiring practices • Organizational structure • Effective internal audit department or similar oversight FORENSIC ACCOUNTING - BA124 – Spring 2013

23. Procedures & Activities • Segregation of duties • System of authorizations • Independent checks • Physical safeguards • Documents and records FORENSIC ACCOUNTING - BA124 – Spring 2013

24. 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 - BA124 – Spring 2013

25. Rationalization • Pathological lying • “Everyone does it.” • See the list on page 50 FORENSIC ACCOUNTING - BA124 – Spring 2013

26. Power and Influence • Different types…see pg. 53 • Influences co-conspirator • Knowledge may protect us and assist in investigation FORENSIC ACCOUNTING - BA124 – Spring 2013