larry crumbley presentation

Larry Crumbley, CPA, CFF, Cr.FA, MAFF, FCPA KPMG Endowed Professor Department of Accounting 2833 Business Education Complex Louisiana State University Baton Rouge, LA 70803 225-578-6231

© D.L Crumbley

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Forensic Accounting: Some Strategies

for Detecting & Preventing Fraud

D Larry Crumbley, CPA, CFF, Cr.FA, MAFF, FCPA

KPMG Endowed Professor Department of Accounting

2833 Business Education Complex Louisiana State University Baton Rouge, LA 70803

225-578-6231 225-578-6201 Fax

dcrumbl@lsu.edu

Editor of the Journal of Forensic and Investigative

Accounting, free online,

Former chair of the Executive Board of Accounting

Advisors of the American Board of Forensic Accountants,

Member of the NACVA’s Fraud Deterrence Board, and

On the AICPA’s Fraud Task Force (2003-2004)

A frequent contributor to the Forensic Examiner, Professor

Crumbley is a co-author of CCH Master Auditing Guide,

along with more than 50 other books and 350 articles His

book entitled Forensic and Investigative Accounting,5 th

edition, is published by Commerce Clearing House

(800-224-7477) Some of his 13 educational novels have as the

main character a forensic accountant His goal is to create a

television series based upon the exciting life of a forensic

accountant and litigation consultant.

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Forensic Report

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3TALLY STICKS

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Definition of Forensic Auditor

Someone who can look behind the facade not accept the records

at their face value someone who has a suspicious mind that the documents he or she is looking at may not be what they purport

to be and someone who has the expertise to go out and conduct

very detailed interviews of individuals to develop the truth,

especially if some are presumed to be lying.

Robert G Roche, a retired chief of the IRS Criminal Investigation

Division of the IRS

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Narrow vs Broad Definition

• Narrow: Fraud Detection Is Major

Area.

• Broad: Employed to seek, interpret, and

reporting event evidence in an objective, legally sustainable fashion, not only in situations where there are specific allegations of wrongdoing, but also in situations where interested parties judge that the risk of loss from wrongdoing is such that proper prudence requires legally sustainable evidence to support the conclusion that no wrongdoing is occurring (James Edwards).

Internal and External

Auditing

Planning Risk Assessment Internal controls Audit Evidence Reporting

Forensic Accounting

Accounting Litigation Matters and Investigations

Fraud

Prevention and Deterrence

Detection Investigation Remediation

Accounting

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Definition of Forensic Accounting

Forensic accounting is the application of accounting, tax, auditing, finance, quantitative analysis, investigative and research skills, and an understanding of the legal process for the purpose of identifying, collecting, analyzing, and interpreting financial or other data or issues in connection with:

1) Litigation services: providing assistance

for actual, pending or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of disputes between parties, or

analyses or investigations that may require the same skills used in 1, above, but may not involve the litigation process.

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Puff Adder

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Short History

1 Late 1800’s – Find fraud

2 1930’s- Puff Adder –encyclopedia

3 1933-1934-independent audits

4 1950’s-Eighth edition Montgomery auditing reduced

formal stress on fraud detection.

5 January 1957- H.W Bevis, AR, questioned the benefit

of discovering minor employee thefts.

6 1960s-auditors claimed no responsibility.

7 Financial audits: Consistency.

8 Audit surveillance: test of details (disappeared).

9 Stock market bubble

10.Panel on Audit Effectiveness (2000)

11.Enron/ WorldCom/ Parmalat/ HealthSouth

12.Sarbanes-Oxley/ PCAOB

13.SAS No 99

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Forensic Accounting Factors

• Time: Forensic accounting focuses on the

past, although it may do so in order to look

forward (e.g., damages, valuations).

• Purpose: Forensic accounting is performed

for a specific legal forum or in anticipation

of appearing before a legal forum.

• Peremptory: Forensic accountants may be

employed in a wide variety of risk

management engagements within business

enterprises as a matter of right, without the

necessity of allegations (e.g., proactive).

-With a single clue a forensic accountant

can solve a fraudulent mystery.

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One Small Clue

A former Scotland Yard scientist tried to create the world’s biggest fraud by authenticating

$2.5 trillion worth of fake U.S Treasury

bonds.

When two men tried to pass off $25 million

worth of the bonds in Toronto in 2001, a

Mountie noticed the bonds bore the word

“dollar” rather “dollars.”

Police later raided a London bank vault and

discovered that the bonds had been printed

with an ink jet printer that had not been

invented when the bonds were allegedly

Forensic: Latin for “forum,” referring to a public place or court.

Black’s Law Dictionary: Forensic,

belonging to the courts of justice.

Note: Corporate spooks are used to check on

competitors.

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Top Niche Services - 2013

Source: Accounting Today 2013

1 State and Local Taxes 80%

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15Top Niche Services - 2013

Source: Accounting Today 2013

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AICPA’s Position

• Does not require auditors to carryout specific

forensic procedures, but rather provide guidance on how to include forensic techniques within processes outlines in SAS 99 This combination will enhance

the detection and prevention of fraudulent financial statement reporting and misappropriation of assets; thus protect investors and financial statement users.

• Public accounting firms could use forensic

accountants to help revise their approach to

planning and fieldwork on all audits, while

requiring forensic accountants only on high risk

audit clients to aid in the interpretation of forensic

testing results and preventive control

enhancements.

• The inclusion of audit procedures focused towards detecting misappropriation of corporate assets may lead to the identification of weaknesses within

corporate governance or control weaknesses

Frauds that are identified which represent a

material misappropriation of assets could

significantly impact public perception.

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AICPA’s Position (cont.)

• Professional forensic accountants can best be

used by ensuring such procedures are properly

developed and executed in-line with internal audit

and audit committee concerns Forensic

accountants could then be engaged in high-risk

situations, or when a fraud is suspected.

• Companies should not use the forensic services of

their outside audit firm, unless it pertains to the

annual audit.

• Putting a price on a substantive test or forensic

auditing procedure may be smart for business;

however, the inherent risk is that short-cuts geared towards reducing audit costs may eventually cause investors to question the companies’ true financial position.

AICPA – Discussion Memo Question Responses

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Specialties Within

Forensic and Investigative Accounting

• Employee Crime Specialist.

• Asset Tracing Specialist.

• Litigation Services Specialist and

Expert Witness.

• Insurance Claims.

• Valuation Analysis.

• False Claims Act Violations.

• Due diligence investigations.

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Corruption on Steroids:

Bell, California

and ex-city manager

income of $24,800.

$976,771, topping $1 million two years later.

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• Used monies to finance 311 quarter

horses and lavish life style.

• Bank account City of Dixon and RSCDA.

• From 1990 to 2012, transferred funds

from city bank accounts.

• Created fictitious invoices purportedly

from state of Illinois.

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John Metcalfe, Rita Crundwell v Harriette Walters: Who Embezzled Better? The Atlantic Cities

© D.L CrumbleySome Forensic Audits

• Forensic audit of Geneseo, Illinois.

• Florida GOP chairman’s promised forensic audit.

• Forensic Audit needed at the National

• Walling ford Housing Authority Board of

Commissioners choose a forensic firm.

• Mayor-elect Rahm Emanuel to order

day-one forensic audit of all department.

• Forensic Investigation Report, Cheyenne,

and Arapaho Tribes.

• School District audit to dig deeper.

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Unclaimed Tax Refunds

Love for an ex-boyfriend caused a Colorado Department Revenue Supervisor to steal $11 million in unclaimed tax refunds from

Colorado state Michelle was in love with the married Hysear Randell.

Michelle Cawthra testified that she

deposited unclaimed tax refunds and other

money into Hysear Randell’s bank account over two years.

She forged documents and created fake

businesses Michelle used computer

passwords of other workers so she would not

be detected.

Source:

http://www.baltimoresun.com/news/sns-ap-us-odd-ta x-refund-scam,0,

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Number One: Harriette Walters

• Supervisor of the Real Property Tax

Adjustment Unit in Washington, D.C.,

Harriette Walters, used at least 92 payments

to dummy corporations in a scam to obtain

$31.7 million ($344,565 per refund).

• Fraud was never noticed by city officials,

internal, or external auditors Auditors never examined why the city’s property tax refunds were steadily rising.

• Sham companies ’ bank accounts were

controlled by Walters’ brother.

• Many applications for refund were identical

to prior ones.

• In a FBI raid of her house, 100 pieces of

jewelry, a mink coat, 90 designer purses, 68 pairs of shoes, designer luggage, Rolex watch, silver bar cart, and more were found She

had a $1.4 million in bills at Neiman Marcus

on a $81,000 yearly government salary.

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• A television station’s former accounting

director pleaded guilty to stealing more $1.8

million from her employees and spending it on jewelry, paintings, and fur coats.

• She would overpay the station’s travel bills and

divert the refunds to her own credit card bills

and personal accounts.

• She was sentenced to 7 ½ years in prison on a

single count of theft from CBS affiliate WBBM – TV

Source: AP, “Ex-Accountant at CBS Affiliate Sentenced,” Las

Vegas Sun, November 5, 2003.

Refund Schemes

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Governmental Fraud

Where Is $9 Trillion? The U.S Federal Reserve can not

account for $9 trillion in off-balance sheet transactions Also, no one at the Federal Reserve has any idea what are the losses on its $2 trillion portfolio.

On May 12, 2009, Inspector General Elizabeth Coleman

could not explain the $1 trillion plus expansion of the

Federal Reserve’s balance sheet since September 2008

While testifying before Congress, Coleman said the IG

does not have jurisdiction to audit the Federal Reserve.86

If a U.S business lost $9 trillion or created $9 trillion on their balance sheet, they would suffer severe penalties.

Source: Julie Crawshaw, “Federal Reserve Cannot

Account for $9 Trillion,” Newsmax.com May 12, 2009

http://moneynews.newsmax.com/financenews/feds_lost_nin e_trillion/2009/05/12/213463.html

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Finding Unreported Income/Hidden Assets

Mark Kohn, “Unreported Income and Hidden Assets,” Forensic

Accounting in Matrimonial Divorce, Philadelphia: R.T

Edwards, 2005, pp.49-57.

Source: Mark Maremont, “Tyco Is Likely to

Report New Woes,” Wall Street Journal, April 30,

2003, p C-1.

Forensic Accountants

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Accountants must be attuned to detecting fraud at every level of service, including standard accounting services,

compilations, reviews, and bank reconciliations If there is fraud

and you don’t detect it, you are going to be sued, and you will

likely lose, as the public perception is the accountant is the

watchdog.

Robert J DiPasquale, Parsippany, N.J.

Source: H.W Wolosky, “Forensic Accounting to the Forefront,”

Practical Accountant, February 2004, pp 23-28.

Find It, or I’ll Sue

Forensic Accountant

Silk, Silk, Silk

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Predication

• The ACFE group indicates that in

the private sector fraud

investigation should not be

conducted without proper

predication.

• Examples: Anonymous tips,

complaints, audit inquires,

conflict of interest.

• Thus, predication is the basis for

undertaking a fraud investigation.

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Forensic-Type Organizations

and Cr.FA; 2000)

Bldg., 716 West Avenue Austin, TX 78701; 800-245-3321;

www.cfenet.com ).

Accountants, lawyers, consultants included in insolvency and

bankruptcy matters 3-part exam 4,000 hours 541.858.1665

AIRA, 221Stewart Avenue, Suite 207, Medford, Or 97501

aira@airacira.org

WA info@fcpa.org.

Lake City, Utah 84106; 801-486-0600)

East Wacker Drive, Suite 990, Chicago, IL 60601; 800-869-0491) Not-for-profit About 20 firms $1,825.

Alliance for Excellence in Investigative Accounting.

www.homewoodave.com

anti-fraud corporation located in Sacramento, Calif., for those dealing

in white-collar crime, fraud, and abuse issues Association of

1 2002 Statistics of Income, $1,281.6 trillion time 20%.

2 $2.3975 trillion budget times 10%

3 $3,542.1 million times 10%

4 $897 billion in revenue times 15%

5 $684.6 billion times 10%

Suppose $100,000 bottom line reduction.

Suppose 20% profit margin

How much new revenue needed to offset

the lost income?

-This amount lost to fraud and abuses

is twice the size of the U.S military budget.

saves organizations, on the average,

$5.21 in heightened avoidance of legal

liabilities, harm to the organization’s

reputation, and lost productivity.

Source: Jonny Frank, “Fraud Risk Assessments,” Internal Auditor, April

2004, p 47.

Schemes Committed by Perpetrators in the

Accounting Department – 367 Cases

Source: 2012 Wells Report, ACFE.

Source: 2012 Wells Report, ACFE.

Frequency of Anti-Fraud Controls*

* ”External Audit of F/S” = independent external audits of the organization’s financial

statements

“Internal Audit / FE Department” = internal audit department or fraud examination

department

“External Audit of ICOFR” = independent audits of the organization’s internal controls

over financial reporting

“Management Certification of F/S” = management certification of the organization’s

financial statements

Source: 2010 Wells Report, ACFE.

Frequency of Occupational Fraud

Schemes

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Scienter Necessary

• To prove any type of fraud,

prosecutors must show that scienter

was present.

• That is, the fraudster must have

known that his or her actions were

intended to deceive.

-The allure of numbers to most of us, is

like the excitement of settling sand a

narcoleptic surety Crafty criminals

prey on this boredom They pile on

the numbers, spewing meaningless

records in the false books.

Cory Johnson

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Source: KPMG Fraud Study

Certain Fraud is Increasing

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Occupational Fraud Per Industry

Source: 2012 Wells Report, ACFE

experiencing fraud 74% reporting misconduct 34% (Global) Unclear

Highest fraud industry Public sector Communications Banking/ Financial

Services Second highest fraud

industry GlobalManufacturers Insurance Govt and Public Administration

Top – Fraud detection –

Tips Not given 18% 43.3%*

Fraud detection –

Internal audits Not given 14% 14.4%

Fraud detection – by

accident Not given 8% 7.0%

Some recover of fraud Not given Unknown 51.3% [2012]

Gender of perps - male Not given Not given 65.0%

Likely age Not given Not given 41-45

Fraud by senior mgt Not given 18% Not given