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The Importance and Implications of Forensic Accounting in The Long Island University Digital Commons @ LIU Undergraduate Honors College Theses 2016- LIU Post 2018 The mpI ortance and Implications of Forensic Accounting in the Financial World Mackenzie Hitchcock Long Island University, [email protected] Follow this and additional works at: https://digitalcommons.liu.edu/post_honors_theses Recommended Citation Hitchcock, Mackenzie, "The mporI tance and Implications of Forensic Accounting in the Financial World" (2018). Undergraduate Honors College Theses 2016-. 35. https://digitalcommons.liu.edu/post_honors_theses/35 This Thesis is brought to you for free and open access by the LIU Post at Digital Commons @ LIU. It has been accepted for inclusion in Undergraduate Honors College Theses 2016- by an authorized administrator of Digital Commons @ LIU. For more information, please contact [email protected]. The Importance and Implications of Forensic Accounting in the Financial World An Honors Program Thesis by Mackenzie Hitchcock Spring 2018 School of Professional Accountancy Michael Abatemarco, advisor Carol Boyer, reader Table of Contents Introduction ................................................................................................................ 1 Forensic Accounting .................................................................................................. 3 What is it? ............................................................................................................... 3 What is Fraud? ........................................................................................................ 4 Why does Fraud Occur? The Fraud Triangle ......................................................... 4 The Forensic Accounting Process .......................................................................... 6 Differences Between Auditing and Forensic Accounting ...................................... 8 The Education and Training of Forensic Accountants .............................................. 9 Important Skills ....................................................................................................... 9 Education ..............................................................................................................10 Certificates ............................................................................................................11 Training .................................................................................................................11 Where and How Forensic Accountants Work ......................................................12 Ideas for Improvement ..........................................................................................13 Forensic Accounting Techniques .............................................................................14 Analytical Procedures and Ratio Analysis ...........................................................14 Direct/Transaction Method ...................................................................................18 Cash T Method ......................................................................................................18 Source and Application of Funds Method ............................................................19 Net Worth Method ................................................................................................20 Bank Deposit Method ...........................................................................................21 Benford’s Law ......................................................................................................21 Theory of Relative Size Factor (RSF) ..................................................................23 Types of Frauds ........................................................................................................23 Ponzi Scheme ........................................................................................................23 Affinity Scheme ....................................................................................................25 Advance Fee Fraud ...............................................................................................25 Pump and Dump Scheme ......................................................................................26 Internet and Social Media Fraud ...........................................................................26 Famous Frauds .........................................................................................................27 The Enron Scandal ................................................................................................27 WorldCom .............................................................................................................28 The Bernie Madoff Scandal ..................................................................................29 The 2008 Financial Crisis .....................................................................................31 Equifax ..................................................................................................................33 Internal Controls ......................................................................................................33 Types of Internal Controls ....................................................................................33 Steps for a Successful System of Internal Control ...............................................35 Cybersecurity ...........................................................................................................39 What is it? .............................................................................................................39 Common Types of Cybercrime ............................................................................40 Preventing Cybercrime .........................................................................................43 Steps Toward a Better Future ..................................................................................44 The Sarbanes-Oxley Act of 2002 and the Public Company Accounting Oversight Board .....................................................................................................................44 Generally Accepted Auditing Standards ..............................................................44 Prohibited Services ...............................................................................................45 Recent Changes to the Auditor’s Report ..............................................................47 The Importance of Forensic Accounting .................................................................48 Conclusion ...............................................................................................................49 Works Cited .............................................................................................................52 Abstract This thesis thoroughly explores fraud and the forensic accounting profession. It details the education, training, and careers of forensic accountants; and why demand for this profession has suddenly spiked. The necessary skills of forensic accountants and why these skills are valuable is explored; a need for better education and training is also proposed. It also details popular forensic accounting methods and how these may be used to detect fraud. This thesis explains several fraud schemes and famous frauds that were contributors to the growing demand of forensic accountants. The fraud triangle and other contributing factors are explored. This thesis also emphasizes the importance of strong internal controls and explains the COSO internal control framework; several important internal controls are listed and explained. Cybersecurity is also explained; including why it has become an absolute necessity and how businesses can better enforce cybersecurity measures. This thesis also explains the changes that were made following the Enron and WorldCom scandals and details the Sarbanes-Oxley Act of 2002. Explanations for the relevant changes and why they were necessary are included. The purpose of this thesis is to demonstrate the importance of forensic accounting and to thoroughly explain the facets of fraud and forensic accounting. Introduction Forensic accounting is a relatively new career field that has expanded rapidly since its inception. It is now widely demanded and is continuing to grow. But why? Several events and developments have prompted this change in the financial world. Forensic accountants are highly talented individuals who possess thorough knowledge in several areas. These areas include general accounting principles, the law, criminal behavior, frauds, and computerized systems. This once random combination of skills has been made necessary by several high-profile frauds and accounting scandals that led to billion-dollar losses—and even the loss of several lives. People take money seriously and personally; it is both our means of survival and our key to luxury. There are endless incentives for employees and managers to take advantage of a flawed system. And for years, they have. Before the financial world was so big—and before technology was so advanced—fraud was not such a big issue. But because corporations now control trillions of dollars and wield a great amount of power—it is. It is the responsibility of forensic accountants to detect frauds and to protect the assets of common people. There are many types of frauds, including Ponzi schemes and social media frauds, that affect normal people. These people
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