Forensic accounting and fraud examination

FOREWORD . NOTE TO STUDENTS. PREFACE. ABOUT THE AUTHORS. SECTION I. INTRODUCTION TO FRAUD EXAMINATION AND FINANCIAL FORENSICS. CHAPTER 1 CORE FOUNDATION RELATED TO FRAUD EXAMINATION AND FINANCIAL FORENSICS. Learning Objectives. What Is Fraud? Legal Elements of Fraud. Major Categories of Fraud. Common Fraud Schemes. What Is the Difference between Fraud and Abuse? What Is Financial Forensics? The Financial Forensic Professional s Skill Set. The Role of Auditing, Fraud Examination, and Financial Forensics. The Basics of Fraud. Who Commits Fraud and Why. The Fraud Triangle: Opportunity, Perceived Pressure, and Rationalization. M.I.C.E. The Cost of Fraud and Other Litigation. ACFE 2008 Report to the Nation on Occupational Fraud and Abuse. Non-Fraud Forensic and Litigation Advisory Engagements. The Investigation. The Mindset: Critical Thinking and Professional Skepticism. Fraud Risk Factors and "Red Flags". Evidence-Based Decision Making. The Problem of Intent: Investigations Centered on the Elements of Fraud. The Analysis of Competing Hypotheses (The Hypothesis-Evidence Matrix). Methodologies Used in Fraud and Financial Forensic Engagements. The Importance of Nonfinancial Data. Graphical Tools. The Importance of the Story Line: Who, What, Where, When, How, and Why. Teamwork and Leadership. Fraud Examination Methodology. Predication. Fraud Prevention and Deterrence. Fraud Detection and Investigation. Remediation: Criminal and Civil Litigation and Internal Controls. Review Questions. Endnotes. CHAPTER 2 CAREERS IN FRAUD EXAMINATION AND FINANCIAL FORENSICS. Learning Objectives. Background. Places Where Fraud Examiners and Financial Forensic Specialists Work. Professional Services Firms. Public and Private Companies. Regulatory Agencies. Government and Nonprofits. Law Enforcement Agencies. Law Firms. Related Professions. Law. Psychology. Sociology. Criminology. Intelligence. Information Systems and Computer Forensics. Other Forensic Science Fields. Business Administration, Management, and Corporate Governance. Boards of Directors. Audit Committees. Senior/Executive Management. Internal Audit. External (Independent) Audit. Regulators and Governing Bodies. Professional Organizations and their Related Certifications. Association of Certified Fraud Examiners (ACFE). American Institute of Certified Public Accountants (AICPA). Forensic CPA Society (FCPAS). Information Systems Audit and Control Association (ISACA). Institute of Internal Auditors (IIA). National Association of Certified Valuation Analysts (NACVA). Society of Financial Examiners (SOFE). International Fraud Examination and Financial Forensics. Education: Building Knowledge, Skills, and Abilities in Fraud Examination and Financial Forensics. Prerequisite Knowledge and Skills. Exposure Material/Course. In-Depth Course Material. The Role of Research in a Profession. The Institute for Fraud Prevention (IFP). Where Are the Knowledge Frontiers? Review Questions. Endnotes. SECTION II. CRIMINOLOGY, ETHICS, AND THE LEGAL, REGULATORY, AND PROFESSIONAL ENVIRONMENTS. CHAPTER 3 WHO COMMITS FRAUD AND WHY: CRIMINOLOGY AND ETHICS. Learning Objectives. Criminology. Occupational Fraud and Abuse. White-Collar Crime. Organizational Crime. Organized Crime. Torts, Breach of Duty, and Civil Litigation. Research in Occupational Fraud and Abuse. Edwin H. Sutherland. Donald R. Cressey. Dr. Steve Albrecht. Richard C. Hollinger and John P. Clark. Ethics. Approaches to Ethical Problem Solving. Ethical Principles. Ethics, Trust, and Responsibility. Ethics in Practice. Ethics and Values as Drivers of Personal Behavior. Professional Conduct. Ethics at Client Entities: The Foundation for Fraud Prevention and Deterrence. Five-Step Approach to Fraud Prevention, Deterrence, and Detection. Review Questions. Endnotes. CHAPTER 4 COMPLEX FRAUDS AND FINANCIAL CRIMES. Learning Objectives. "Predators" versus the "Accidental Fraudster". Collusion: Multiple Individuals, Organizations, and Jurisdictions. Legitimate Activities Mixed with Illegal Activities and the Need to Isolate Illegal Activities. Dismantling Organizations: Asset Forfeiture and Seizure. Schemes and Illegal Acts Associated with Complex Frauds and Financial Crimes. Organized Crime. Drug Trafficking. Terrorism Financing. Money Laundering. Racketeering Influence and Corrupt Organizations Act (RICO). Conspiracy. USA Patriot Act. The Bank Secrecy Act. Mail Fraud. Wire Fraud. The U.S. Banking System. Moving Money Internationally. Other Complex Frauds and Financial Crimes. Tax Evasion and Fraud. Bankruptcy Fraud. Securities Fraud. Review Questions. Endnotes. CHAPTER 5 CYBERCRIME: COMPUTER AND INTERNET FRAUD. Learning Objectives. Overview of Cybercrime. The Role of the Computer in Cybercrime. Computer Fraud versus Computer Crime. Losses or Other Damages Related to Computer Crimes. International Aspects of Computer Crime. Frauds And Other Threats in the Digital World of Computers. Insider Threats. Computer Hacking. Computer Viruses. Hardware, Software, and Data Security. Internet Fraud. Electronic Commerce (E-Commerce). Typical Internet Schemes. Combating Internet Fraud. Complex Frauds and Financial Crimes in Cyberspace. Money Laundering in Cyberspace. Reporting Cybercrime: Computer and Internet Crime. Review Questions. Endnotes. CHAPTER 6 LEGAL, REGULATORY, AND PROFESSIONAL ENVIRONMENT. Learning Objectives. Introduction. The Rights of Individuals. Interviews. Searches. Surveillance. Discharging a Suspected Wrongdoer from Employment. Privileges. Probable Cause. Rules of Evidence. Criminal Justice System. Civil Justice System. Complaints and Pre-trial Activity. Negotiated Settlements. Pre-trial Motions and the Civil Trial. Regulatory System. Basic Accounting Principles A Survivor s Guide to Accounting. The AICPA and Statement on Auditing Standards No. 99. The Sarbanes Oxley Act of 2002. Enhanced Financial Disclosure Requirements. Protections for Corporate Whistle-Blowers under Sarbanes Oxley. Enhanced Penalties for White-Collar Crime. The Public Company Accounting Oversight Board (PCAOB). Committee of Sponsoring Organizations (COSO) Enterprise Risk Management Framework (ERM). PCAOB s Auditing Standards Nos. 3 and 5. IIA Practice Advisories 1210.A2-1 and 1210.A2-2. The Role of Corporate Governance. Review Questions. Endnotes. SECTION III. DETECTION AND INVESTIGATIVE TOOLS AND TECHNIQUES. CHAPTER 7 FRAUD DETECTION: RED FLAGS AND TARGETED RISK ASSESSMENT. Learning Objectives. Corporate Governance and Fraud. Management s Responsibility. The Role of the External Auditor. Boards of Directors and Audit Committees. Internal Auditors. Fraud Detection. Understanding the Business. The Internal Control Environment. The Use of Red Flags to Detect Fraud. Tips and Complaints. Behavioral Red Flags. Analytical Anomalies. Accounting Anomalies. Internal Control Irregularities and Weaknesses. The Power of Nonfinancial Numbers. Using Red Flags as a Basis for Further Investigation. Targeted Fraud Risk Assessment. Targeted Fraud Risk Assessment in a Digital Environment. Prevention and Deterrence in a Digital Environment. Digital Evidence. Detection and Investigation in a Digital Environment. Review Questions. Endnotes. CHAPTER 8 DETECTION AND INVESTIGATIONS. Learning Objectives. Investigations: Who, What, Where, When, How, and Why. Predication. The Fraud Triangle: Opportunity, Perceived Pressure, and Rationalization. M.I.C.E. The Problem of Intent: Investigations Centered on the Elements of Fraud. The Definition of Evidence. Evidence Sources of the Act, Concealment, and Conversion. Documents. Bank, Credit Card, and Investment Statements. Invigilation. Interviewing and Interrogation. Surveillance and Covert Operations. Confidential Sources and Informants. CTRs, SARs, and FinCen 8300. E-mail. Data Mining, Pattern Recognition, and Other Digital Tools. Other Physical Evidence. Evidence Sources Specific to Concealment. Altered Documents. General Ledger, Journal Entries, and Reconciling Items. Tax Returns. Evidence Sources Specific to Conversion. Locating Hidden Assets and Unknown Sources of Income. Concealed Offshore Financial Accounts, Transactions, and Loans. Indirect Methods of Income Reconstruction. Databases, Sources of Information, and Extra-organization Intelligence. Internet Searching. Relevance, Reliability, and Validity. Work Papers: The Organization of Evidence and Analysis. Review Questions. Endnotes. CHAPTER 9 EFFECTIVE INTERVIEWING AND INTERROGATION. Learning Objectives. Introduction to Interviews and Interrogations. Interviews in Fraud Examinations. Interviews in Fraudulent Financial Statements and Tax Returns. Overview of the Interview and Interrogation Process. Preparation and Planning. General Approach to Conducting Interviews. Interviews of Witnesses. Three Stages of Interviewing: Introduction, Body, and Close. Two Stages of Interrogations: Introduction and Admission-Seeking. Five Types of Interview and Interrogation Questions. Introductory Questions. Informational Questions. Closing Questions. Assessment Questions. Admission-Seeking Questions. Judging Deception. Physiology of Deception. Verbal Cues to Deception. Nonverbal Cues to Deception. Ability to Judge Deception. Joe Wells Ten Commandments for Effective Interviews. Comprehensive Guidelines: Information Collected in Interviews. Review Questions. Endnotes. CHAPTER 10 USING INFORMATION TECHNOLOGY FOR FRAUD EXAMINATION AND FINANCIAL FORENSICS. Learning Objectives. The Digital Environment. Overview of Information Technology Controls. IT Audits and Assurance Activities. Digital Evidence. Tools Used to Gather Digital Evidence. Recovering Deleted Files. Recovering Deleted E-mail. Restoring Data. Detection and Investigation in a Digital Environment. Data Extraction and Analysis Software Functions. Data Extraction and Analysis Software. Graphics and Graphics Software. The Association Matrix. Link Charts. Flow Diagrams. Timelines. Other Graphical Formats. Case Management Software. Review Questions. Endnotes. SECTION IV. FRAUD SCHEMES. CHAPTER 11 CASH RECEIPT SCHEMES AND OTHER ASSET MISAPPROPRIATIONS. Learning Objectives. Skimming Schemes. Sales Skimming. Receivables Skimming. Proactive Computer Audit Tests for Detecting Skimming. Cash Larceny Schemes. Larceny at the Point of Sale. Larceny of Receivables. Cash Larceny from the Deposit. Proactive Computer Audit Tests for Detecting Cash Larceny. Noncash Misappropriation Schemes. Misuse of Noncash Assets. Unconcealed Larceny Schemes. Asset Requisitions and Transfers. Purchasing and Receiving Schemes. False Shipments of Inventory and Other Assets. Other Schemes. Concealing Inventory Shrinkage. Altered Inventory Records. Fictitious Sales and Accounts Receivable. Write-Off Inventory and Other Assets. Physical Padding. Preventing and Detecting Noncash Thefts that Are Concealed by Fraudulent Support. Proactive Computer Audit Tests for Detecting Noncash Misappropriations. Review Questions. CHAPTER 12 CASH DISBURSEMENT SCHEMES. Learning Objectives. Billing Schemes. Shell Company Schemes. Billing Schemes Involving Nonaccomplice Vendors. Personal Purchases with Company Funds. Proactive Computer Audit Tests for Detecting Billing Schemes. Check Tampering Schemes. Forged Maker Schemes. Forged Endorsement Schemes. Altered Payee Schemes. Concealed Check Schemes. Authorized Maker Schemes. Concealing Check Tampering. Proactive Computer Audit Tests for Detecting Check Tampering Schemes. Payroll Schemes. Ghost Employees. Falsified Hours and Salary. Commission Schemes. Proactive Computer Audit Tests for Detecting Payroll Fraud. Expense Reimbursement Schemes. Mischaracterized Expense Reimbursements. Overstated Expense Reimbursements. Fictitious Expense Reimbursement Schemes. Multiple Reimbursement Schemes. Proactive Computer Audit Tests for Detecting Expense Reimbursement Schemes. Register Disbursement Schemes. False Refunds. False Voids. Concealing Register Disbursements. Preventing and Detecting Register Disbursement Schemes. Proactive Computer Audit Tests for Detecting Register Disbursement Schemes. Review Questions. CHAPTER 13 CORRUPTION AND THE HUMAN FACTOR. Learning Objectives. Corruption Schemes. Bribery. Illegal Gratuities. Economic Extortion. Conflicts of Interest. Proactive Computer Audit Tests for Detecting Corruption. The Human Factor. Greed. Wages in Kind. Unreasonable Expectations. Understanding Fraud Deterrence. Review Questions. Endnote. CHAPTER 14 FINANCIAL STATEMENT FRAUD. Learning Objectives. Accounting Principles and Fraud. Fraud in Financial Statements. Conceptual Framework for Financial Reporting. Responsibility for Financial Statements. Users of Financial Statements. Types of Financial Statements. Fraudulent Financial Statement Schemes. Defining Financial Statement Fraud. Costs of Financial Statement Fraud. Fictitious Revenues. Timing Differences. Concealed Liabilities and Expenses. Improper Disclosures. Improper Asset Valuation. Detection of Fraudulent Financial Statement Schemes. Deterrence of Financial Statement Fraud. Reduce Pressures to Commit Financial Statement Fraud. Reduce the Opportunity to Commit Financial Statement Fraud. Reduce Grounds for Rationalizing of Financial Statement Fraud. Review Questions. Endnotes. SECTION V. FINANCIAL LITIGATION ADVISORY SERVICES AND REMEDIATION. CHAPTER 15 CONSULTING, LITIGATION SUPPORT, AND EXPERT WITNESSES: DAMAGES, VALUATIONS, AND OTHER ENGAGEMENTS. Learning Objectives. Consulting, Litigation Support, and Expert Witnesses. Professional Standards and Guidance. Engagement Issues and Professional Responsibility. Types of Consulting and Litigation Support Activities. Tools and Techniques: General Discussion. Commercial Damages. Legal Framework for Damages. Types of Commercial Damages. The Loss Period. Economic Framework for Damages. Quantifying Lost Revenues and Increased Expenses. Determining Lost Profits. Determining Incremental Costs. The Time Value of Money. Communicating and Defending the Results of Commercial Damage Estimates. Valuations. Overall Engagement Considerations. The Types of Valuation Engagements. Measures of Value. Determining Market, Fair Market, and Fair Value. Discounted Earnings and Cash Flows. Estimating the Risk-Adjusted Discount Rate. Forecasting Income and Cash Flows. Asset Valuation Models. Market and Accounting-Based Comparables Models. Valuation Discounts and Premiums. Other Ownership Interests Subject to Valuation. Conclusion of Value. The Valuation Report. Personal Injury, Wrongful Death, and Survival Actions. Losses: Personal Injury. Losses: Wrongful Death and Survival Cases. Analysis of Earnings Losses. Analysis of Lost Employment Benefits Associated with Lost Earnings. Analysis of Lost Nonmarket Services. Analysis of Medical and Life-Care Costs. Injured Children, Homemakers, and Retired Persons. Review Questions. Endnotes. CHAPTER 16 REMEDIATION AND LITIGATION ADVISORY SERVICES. Learning Objectives. Introduction to Remediation. Recovery of Money and Other Assets. Identification of Money and Assets for Recovery. Following versus Tracing the Money. Legal Methods for Recovery of Assets. Support for Criminal and Civil Court Actions. Fact Witnesses versus Expert Witnesses. Supporting the Investigation. Evaluation of the Evidence. Report Writing. Credibility. Deposition Testimony. Direct Examination. Cross-Examination. Restructure the Internal Control Environment. Overview of an Anti-Fraud Environment. Internal Control Policies and Procedures. Risk Assessment and Internal Control. The Importance of Corporate Governance. The Risk of Management Override. Early Reaction to Symptoms. AICPA Statement on Auditing Standard (SAS) No. 99, "Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting". AICPA Statement on Auditing Standard (SAS) No. 99, "Risk Factors Relating to Misstatements Arising from Misappropriation of Assets". Lessons Learned. Review Questions. Endnotes. APPENDIX A REFERENCES AND RESOURCES. APPENDIX B FRAUD ACTS. GLOSSARY. INDEX.