Forensic Accounting & The Fraud Environment Main Line Association For Continuing Education 6-20-13...

transcript

Forensic Accounting & The Fraud

Environment

Main Line Association For Continuing Education6-20-13

North American Forensic Accounting LLC

901 Dawn Avenue, Suite A, Ephrata, PA 17522717-466-6800

dave@naforensics.com

NORTH AMERICAN

FORENSICACCOUNTING LLC

TODAY’S DISCUSSIONForensic Accounting – Increasing Demand

Fraud Theories

Case Studies

Check Preparation

NORTH AMERICAN

Forensic accountingFrom Wikipedia, the free encyclopedia

Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means “suitable for use in a court of law”, and it is to that standard and potential outcome that forensic accountants generally have to work.

NORTH AMERICAN

INCREASING DEMAND FOR FORENSIC ACCOUNTANTS

• Greed

• Opportunity

• Economic factors Layoffs Recession fueled bankruptcies Underemployment

NORTH AMERICAN

• Extensive travel: (2 to 3 weeks per month – 16 years) 49 of the 50 states Brazil Australia Canada England • Have been threatened – multiple locations• Items thrown at me• Endured physical hardships at various locations• Moved from hotel to hotel in the middle of the night• Wheel lugs loosened on rental car• Harassed by unmarked vehicle – Canada• Ticked / harassed by police – Canada• Individual who assisted me in one case – tires slashed / brake line

cut / serious accident • Protection order from suspect

NORTH AMERICAN

FRAUD TRIANGLE

NORTH AMERICAN

FRAUD TRIANGLE

• Opportunity – weaknesses in internal controls

• Pressure – personal financial problems, unrealistic performance goals

• Rationalization – justification for fraudulent activities

NORTH AMERICAN

The “Trust” Factor

“People are going to trust one another right up to the time they are caught.”

NORTH AMERICAN

REPORT TO THE NATIONS

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE (ACFE)

NORTH AMERICAN

ACFE 2012 Report• Estimated $3.5 Trillion in fraud losses (worldwide)

• 87% of occupational fraud incidents is through misappropriations

• 65% of frauds perpetrated by males and $ amount is significantly higher than females

• 39% of the fraud are perpetrated by accounting or operations personnel

• Frequently committed by perpetrators aged 36 to 45, dollar amount increases significantly for fraud committed by individuals over 60 (trust factor)

• #1 detection method – employee tips

NORTH AMERICAN

DIFFERENCES: AUDITS vs. FRAUD AUDITS

2008 ACFE Report to the Nation on Occupational Fraud & Abuse

NORTH AMERICAN

KEY ELEMENTS IN FRAUD SCHEMES

• All occupational fraud schemes have four key elements in common. The activity:

1. Is clandestine

2. Violates the perpetrator’s fiduciary duties to the victim organization

3. Is committed for the purpose of direct or indirect financial benefit to the perpetrator

4. Costs the employing organization assets, revenue or reserves

NORTH AMERICAN

OUTSIDE INFLUENCES

• An organization cannot control what affects an individual outside of the work environment

NORTH AMERICAN

EXTERNAL AUDITORS

• Long term analysis of frauds from 1998 through 2010 (Reuters):a) Auditors sometimes did not question

documents that appeared to be fabricatedb) Auditor trusted managements’ word that

no fraud had occurred

NORTH AMERICAN

EXTERNAL AUDITORS - continued

c) Most common auditor failings were lack of competence and diligence. Lack of

professional skepticism, and failure to assess and respond to fraud risks.

d) Time and budget constraints, fear of alienating clients

NORTH AMERICAN

BARRY WEBNE - STORY

Question – would you hire someone as your CFO who previously embezzled $1.0 million and spent time in prison?

NORTH AMERICAN

WHY DO THEY STEAL?

• Unspeakable problem (usually financial) that can be resolved by “borrowing” the money

• Economic distress

• Elaborate lifestyle

• Compulsive behavior – substance abuse/gambling problem

NORTH AMERICAN

ADDITIONAL CONSIDERATIONS

• Thefts by embezzlers are rarely detected

• If detected, the crimes are seldom prosecuted

• Sentences are usually light

NORTH AMERICAN

QUANTIFYING THE IMPACT OF FRAUD

Considerations:

• The effect of fraud on the management of the organization can be a devastating distraction from the normal operations of running the business

• Depending on the size of an organization, fraud can cripple the financial structure and jeopardize the future operations of a business

• Many companies carry inadequate levels of insurance coverage for employee dishonesty

NORTH AMERICAN

UNDERSTANDING THE FRAUD CYCLE

NORTH AMERICAN

CASE STUDIESFraud Case Studies

• Family Business

• Insurance Agency

• Construction Company

• Legal Association

• Community Bank

• Manufacturer

NORTH AMERICAN

FAMILY BUSINESS

NORTH AMERICAN

FAMILY BUSINESSBackground

- External accountant

- long term relationship

- family run business – 275 employees

- IRS issues / questions

Discovery

- Meeting with new CPA firm

-Start of the investigation

NORTH AMERICAN

FAMILY BUSINESS (continued…)

Discovery

- Meeting with new CPA firm

-Start of the investigation

- Offer by suspect

Investigation

- Transfers from business checking account

- Paper vs. electronic records

NORTH AMERICAN

Investigation

- Checks drawn to pay “payroll taxes”

Credit card companies

US Treasury

PA Dept. Revenue

Encoding

NORTH AMERICAN

Investigation

- Quantification

- Insurance claim

Outcome

- Sentencing

- Restitution

NORTH AMERICAN

BANK ELECTRONIC TRANSFER

XYZ BANK HISTORY CHECKING

DATE DEPOSITS CHECKS BALANCE DESCRIPTION

65,760.13$ 4/16/2006 4,150.00$ 69,910.13$ VENDOR PAY4/16/2006 47,969.02$ 117,879.15$ SWEEP LOAN ADVANCE4/16/2006 (28,290.42)$ 89,588.73$ XYZ BANK LOAN TRANSACTION4/16/2006 (11,084.99)$ 78,503.74$ XYZ BANK LOAN TRANSACTION

4/17/2006 (9,312.33)$ 69,191.41$ AMERICAN EXPRESS ELEC REMIT 061108061025841

4/18/2006 (3,500.00)$ 65,691.41$ CHECK NUMBER 4968014/19/2006 (135.00)$ 65,556.41$ CHECK NUMBER 5268014/19/2006 (65.18)$ 65,491.23$ CHECK NUMBER 5610814/21/2004 (723.60)$ 64,767.63$ TRANSFER DR FROM 16731313634/21/2006 10,717.83$ 75,485.46$ DEPOSIT4/22/2006 99,713.52$ 175,198.98$ SWEEP LOAN ADVANCE

NORTH AMERICAN

CHECK - MEMO LINE

NORTH AMERICAN

INSURANCE AGENCY

NORTH AMERICAN

INSURANCE AGENCYBackground

- Insurance agency

- Sole shareholder

- 10 to 15 employees

- Bookkeeper tenure 7 months

Discovery

- Income tracking

- Meeting with the bookkeeper

NORTH AMERICAN

REMITTANCE REPORT

NORTH AMERICAN

AUDIT TRAIL

NORTH AMERICAN

VOIDED/DELETED TRANSACTIONS

NORTH AMERICAN

INSURANCE AGENCY (continued…)

Investigation

- Fraud theory

- Insurance receipts/income

- Software tracking

- Documents

- Chain of custody

- Quantification

- Insurance claim

NORTH AMERICAN

INSURANCE AGENCY (continued…)

Status

- Civil complaints

- Sale of business lines

- Loss of business

- Sale of building

- IRS issues

Outcome

- Did justice prevail?

NORTH AMERICAN

CONSTRUCTION COMPANY

NORTH AMERICAN

CONSTRUCTION COMPANYBackground

- Electrical contractor

- Vice President

Discovery

- Red flags

- Compelling evidence or sloppy recordkeeping?

- Cost accounting records – journal entries

NORTH AMERICAN

CONSTRUCTION COMPANY (continued…)

Investigation

- Fraud theory

- Inventory

- Outside vendor

- Invoice template

- Dumpster diving

- Interviews

- Quantification

NORTH AMERICAN

CONSTRUCTION COMPANY (continued…)

Investigation continued

- Personal bank records

Motive

- Greed / girlfriend

Outcome

- FBI – DOJ report

- Sentencing

- Full restitution

NORTH AMERICAN

LEGAL ASSOCIATION

NORTH AMERICAN

LEGAL ASSOCIATIONBackground

- 600+ attorneys

- Bookkeeper

- Audited financial statements

Discovery

- Red flags – bank statement

- Forgery – checks and notary signature

NORTH AMERICAN

LEGAL ASSOCIATION (continued…)

Opportunity

- Trust and “Family”

- Lunch breaks

- Position

Investigation

- Fraud theory

- Bank statements

- Bank reconciliation

NORTH AMERICAN

BANK STATEMENT

NORTH AMERICAN

ALTERED TRANSACTIONS

NORTH AMERICAN

ACTUAL BANK STATEMENT

NORTH AMERICAN

ACTUAL BANK STATEMENT

NORTH AMERICAN

- Interview

- Quantification

- Theft duration – 4 years

Motive

- Financial pressures

NORTH AMERICAN

Outcome

- Full restitution

- No prosecution

- Subsequent events

NORTH AMERICAN

Outcome

- Full restitution

- No prosecution

- Subsequent events

NORTH AMERICAN

COMMUNITY BANK

NORTH AMERICAN

COMMUNITY BANKBackground

- Small town

- VP Bookkeeping / IT – 25 year employee

- Audited financial statements

- FDIC audits

Discovery

- FDIC audit – sample selection

- Confession

NORTH AMERICAN

COMMUNITY BANK (continued…)

Opportunity

- Position and Trust

- Knowledge of internal controls

- FDIC bank examiner 2003

Investigation

- Fraud theory

- Audit trail documentation

- Quantification

NORTH AMERICAN

- Credit card cash advances

- Theft – 4 years

- Credit history checks

Motive

- Financial pressures

NORTH AMERICAN

Outcome

- FBI prosecution

- Federal prison sentence

- Full restitution

NORTH AMERICAN

MANUFACTURER

NORTH AMERICAN

MANUFACTURERBackground

- Blackmail scheme

- Outside trucking firm

- Inside transportation supervisor

Discovery

- Excel spreadsheets

- “The bookcase”

NORTH AMERICAN

MANUFACTURER (continued…)

- Trucking invoices

- Imbedded kickbacks

Motive

- Financial pressures ?

NORTH AMERICAN

- Trucking invoices

- Imbedded kickbacks

Motive

- Financial pressures ?

NORTH AMERICAN

Outcome

- $2.7 million

- Insurance claim

- Death

NORTH AMERICAN

FRAUD TRIANGLE

NORTH AMERICAN

TO BE CONTINUED

NORTH AMERICAN

CHECK PREPARATION

NORTH AMERICAN

Main Line Association For Continuing Education 6-20-13

North American Forensic Accounting LLC

901 Dawn Avenue, Suite A, Ephrata, PA 17522717-466-6800

dave@naforensics.com

www.naforensics.com

www.facebook.com/northamericanforensicaccountingllc