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Forensic Accounting's Impact on the Modern Business World

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Forensic Accounting's Impact on the Modern Business World Forensic Accounting’s Impact on the Modern Business World Birmingham Small Firm Practitioners Monthly Meeting Group June 29, 2020 Do not be tricked into thinking that there are no crocodiles just because the water is still. Malaysian Proverb 2 What is ’Fraud’? fraud noun \ ˈfrȯd \ 1. Deceit, Trickery; specifically, an intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right was accused of credit card fraud. 2. An act of deceiving or misrepresenting (Trick). Automobile insurance frauds. 3. A person who is not what he or she pretends to be (Imposter). He claimed to be a licensed psychologist, but he turned out to be a fraud. One who defrauds (Cheat). One that is not what it seems or is represented to be. The UFO picture was proved to be a fraud. Retrieved May 26, 2020, from https://www.merriam-webster.com/dictionary/fraud 3 What is ’Forensic’? forensic adjective fo·ren·sic \ fə-ˈren(t)-sik , -ˈren-zik \ 1. Belonging to, used in, or suitable to courts of judicature or to public discussion and debate a lawyer's forensic skills. 2. Argumentative, rhetorical forensic eloquence. 3. Relating to or dealing with the application of scientific knowledge to legal problems forensic medicine. forensic science • forensic pathologist • forensic experts Retrieved May 16, 2020, from https://www.merriam-webster.com/dictionary/forensic 4 What is Forensic Accounting Fraud Investigations Business Valuations Forensic Accounting Bankruptcy is accounting work done for or in Forensic support of potential Accounting litigation. Damage Securities Calculations Insurance Claims 5 Forensic Accountant – Desired Traits Source – C. Davis, R. Farrell, and S. Ogilby, “Characteristics and Skills of the Forensic Accountant,” AICPA/FVS section, p. 11. 6 Forensic Accountant – Necessary Skills Source – C. Davis, R. Farrell, and S. Ogilby, “Characteristics and Skills of the Forensic Accountant,” AICPA/FVS section, p. 11. 7 Knowledge and Skills Pyramid 8 Audits: Financial, Fraud & Forensic Characteristic Fin. Audit Fraud Examination Forensic Accounting Time perspective: Historical Historical Future and historical Primary focus: Periodic Reactive (predication) Proactive and ongoing Investigation scope: Narrow Narrow Broad ranging Main work product is: Audit Opinion Fraud case report Forensic audit report Main responsibility to: Company and Defrauded party Concerned principal or public third party Guidelines are: Rules-based Principles-based; under Principles-based audit rules, it is rules- based Purpose of report: Ensure GAAP Identify perpetrator of Fraud risk assessment and is followed fraud strategic services Professional stance: Non- Adversarial Adversarial and Non- Adversarial Adversarial 9 Which Industries Hire Forensic Accountants? Accounting Financial Education Healthcare Corporations Legal Government 10 Certified Fraud Examiner (CFE) Statistics Source: 2020 Compensation Guide for Anti-Fraud Professionals. © 2020 by the Association of Certified Fraud Examiners, Inc. 11 Certified Fraud Examiner (CFE) Earnings Source: 2020 Compensation Guide for Anti-Fraud Professionals. © 2020 by the Association of Certified Fraud Examiners, Inc. 12 Financial Audits vs. Forensic Audits • Financial audits generally use sampling methodologies and do not review every transaction. • Forensic audits look at the details underlying specific transactions, attempting to determine why relevant amounts either do not or should not add up. • Forensic audits generally rely on additional tests of detail rather than relying on test of internal controls. • Forensic audits do not limit the scope of analysis based on materiality thresholds. • Forensic audits generally do not assume management/employees have integrity (heightened skepticism). • Forensic audits generally seek best legal evidence (rules of evidence). 13 Forensic Analysis vs. Fraud Investigation • While in some cases forensic accounting involves fraud – it could also involve valuations, damage calculations, securities, bankruptcy, etc. • Many fraud analyses could be considered forensic accounting - but not all forensic accounting involves fraud examination. • Because fraud examiners are taught to conduct their examinations with an eye towards litigation, most fraud examinations generally will fall under the category of forensic accounting. 14 Fraud in Action: Case Studies – Part I 15 The Motivations • Consider the human condition – The Seven Heavenly virtues – The Seven Deadly sins • An intentional act to do wrong to others – Financial in nature – In pursuit of a personal gain • Times change … human nature does not! 16 The South Sea Bubble • Robert Harley (1661-1724) – Earl Mortimer • John Blunt • Key issues – Circle of credible friends – Stock price manipulation 17 The Mississippi Bubble • John Law (1671-1729) • Born in Edinburgh • Key issues – Brilliant – Access to the French monarchy 18 Want to Buy the Eiffel Tower? • Victor Lustig (1890 -1947) • Born in Austro-Hungarian Empire • Referred to himself as a “Count” • Sold the Eiffel Tower • Major counterfeiter • Once scammed Al Capone 19 Want to Buy a Match? • Ivar Krueger (1880 -1932) • Swedish engineer and industrialist • Known as the “Match King” • Controlled ¾ of the world’s match production • Referred to as the “Leonardo of Larceny” 20 What is Occupational Fraud? • In general, Occupational Fraud represents the use of one’s position/job for personal gain through the deliberate misuse or misapplication of employer resources or assets. • Simply stated, occupational fraud occurs when a manager, executive, employee, etc. commits fraud against his or her employer. • Some forms of Occupational Fraud are referred to as Internal Fraud or Employee Fraud • Some forms of Occupational Frauds are referred to as Management Fraud 21 Occupational Fraud Type Statistics Source: Report to the Nations on Occupational Fraud and Abuse. © 2020 by the Association of Certified Fraud Examiners, Inc. 22 Other Types of Fraud • External Frauds Against Companies include a broad range of schemes committed by perpetrators that do not work for the victim organization. • Vendor fraud • Theft of proprietary information • Health care fraud • Insurance fraud • Hacking • Tax fraud • Frauds Against Individuals include a wide range of schemes that target individuals. • Identity theft • Telemarketing frauds • Ponzi schemes • 419 frauds • Phishing schemes • Strawman frauds 23 Largest Bankruptcies in US History n/a (PG&E) ? 24 Source: BankruptcyData.com, a division of New Generation Research, as of 2019. ‘Major’ Internal Control Fails 2003 2001 1998 2002 25 Sarbanes-Oxley Act (SOX) • Signed into law on July 30, 2002 • Major Provisions: • Created the Public Company Accounting Oversight Board (PCAOB) • Requires auditor independence • Strengthens corporate responsibility • Mandates enhanced financial disclosures • Prohibits certain analyst/consultant conflicts • Strengthens corporate and criminal fraud accountability • Requires CEO and CFO responsibility for financial statements and tax returns • Strengthens corporate fraud penalties 26 Did you know…… • The Association of Certified Fraud Examiners’ (ACFE) 2020 Report to the Nation on Occupational Fraud and Abuse estimates that the typical organization loses 5% of revenues each year to fraud. • Applying that estimated loss to the world’s 2019 estimated gross domestic product yields a fraud loss estimate of $4.3 trillion. • Private Companies suffer the most instances of occupational fraud (44% of all reported cases in the ACFE 2020 study) while Not-for-Profits had the lowest number of the reported frauds (about 9% of the reported cases in that same study). • Tips are consistently the most common fraud detection method. Over 40% of all frauds presented in the ACFE’s 2020 report were detected by a tip – almost three times the rate of next most common detection method. • The most common reason given by a victim organization for not involving law enforcement when fraud was discovered was that internal discipline was deemed sufficient (which surpassed fear of bad publicity). Source: Report to the Nations on Occupational Fraud and Abuse. © 2020 by the Association of Certified Fraud Examiners, Inc. 27 Motivations Underlying Fraud Rationalization Based on - Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973) p. 30. 28 Motivations Underlying Fraud - Diamond Capability/Capacity Possesses necessary Source: Wolfe, D.T. & Hermanson, D.R. (2004, December). The fraud diamond: Considering the four elements of fraud. The CPA Journal, 38-42. traits or abilities; can pull it off; has positional authority. 29 Motivations Underlying Fraud - Pentagon Source: Wolfe, D.T. & Hermanson, D.R. (2004, December). The fraud diamond: Considering the P.D. Goldmann, Fraud in the Markets, four elements of fraud. The CPA Journal, 38-42. John Wiley & Sons, 2010, pp. 24-25. Disenfranchisement 30 Behavioral Red Flags • Lives beyond means • Experiencing financial/family difficulties • Controlling behaviorisms – problems sharing duties • “Wheeler-Dealer” personae • Defensive nature • Substance abuse problems • Unusually close relationships w/ customers or vendors 31 Behavioral Red Flags Source: Report to the Nations on Occupational Fraud and Abuse. © 2020 by the Association of Certified Fraud Examiners, Inc. 32 Fraud in Action: Case Studies – Part II 33 The Ponzi Scheme • Charles Ponzi (1882-1949) • Lasted only a year • Ponzi moved in banking • A legitimate idea … – But never actually acted on – Volumes were not possible 34 Call
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