FORENSIC ACCOUNTING

“Half the work that is done in this world is to make things appear what they are not.”

Beadle, E.R.

FRAUD

• The crime of using dishonest methods to take something valuable from another person

• The use of one’s occupation for personal gain through the deliberate misuse or theft of the employing organization’s resources or assets (ACFE)

The Fraud Triangle

OPPORTU

NITYATTITUDE

FINANCIAL PRESSURE

The Fraud TrianglePRESSURE OPPORTUNITY ATTITUDE

• Habitual criminal who steals for the sake of

stealing• Personal prestige, goal

achievement• Morally superior,

justified in making others

victims• Desperate need for

money• Vices such as

gambling/drugs

• Weak internal controls

• Circumvention of internal controls

• The greater the position, the greater the

trust and exposure to unprotected assets

• “Most Trusted Employee”

Top Ten Rationalizations for Committing Fraud:1. I need it more than the other person.2. I’m borrowing and will pay it back later.3. Everybody does it.4. The University is so big that it won’t even be missed.5. Nobody will get hurt6. I deserve it.7. It’s for the greater good.8. I’m not paid enough.9. It’s just part of the job.10. I’m not gaining personally.

Conditions that Contribute to Fraud

• Poor internal control• Inadequate

staff/resources• Inadequate pay• Low Loyalty• Rigid rules• Poor promotion

opportunities

• Pressure to perform• Lack of recognition• Budget pressure• Poor work

environment• Inadequate training

Red Flags!!!

• 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

Red Flags!!!• 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

FORENSIC ACCOUNTING

• Comprehensive view of fraud investigation and includes audit of accounting records in search for the evidence of fraud.

• May also include gathering of nonfinancial investigation such as interviews of all related parties to a fraud

Accounting Fraud

• Accounting fraud is a deliberate manipulation of accounting records in order to make a company's financial performance or condition seem better than it actually is.

• Misappropriation of assets, corruption

FORENSIC ACCOUNTANTS

• Have expertise in accounting, auditing and criminal investigation

• Have the capacity in translating complex financial transactions and numerical data into ordinary laypersons can understand

Forensic Accountant’s Required Knowledge, Skills and Abilities

1. Ability to identify frauds with minimal initial information

2. Interviewing3. Mind-set4. Knowledge of Evidence

Forensic Accountant’s Required Knowledge, Skills and Abilities

5. Presentation of Findings 6. Knowledge of Investigative Techniques7. Investigative Skills8. Investigative Mentality9. Identification of Financial Issues10. Interpretation of Financial Information

FRAUD AUDITORS

• Experts at detecting and documenting frauds in the records of accounting and financial transactions and events

• Have the knowledge to gather evidence of and document fraud losses for criminal, civil, contractual and insurance purposes

FINANCIAL (External) AUDITORS

• Have expertise in knowledge of accounting and financial reporting (GAAP, IFRS,)

• Done in accordance with Generally Accepting Audit Standards

• Focuses on material misstatements• 4 Kinds of Opinion: Unqualified, Qualified,

Adverse, Disclaimer

Certified Forensic Accountant (CrFA)

• A program which is designed for fraud examiners, forensic accountants, and other corporate professionals with appropriate experience

• www.crfaphilippines.org

“The world will not be destroyed by those who do evil, but by those who watch them without doing anything.”

Albert Einstein