Forensic Accounting
Learning Studio
Mrs. Massey
What is the significance of this date…..
May 20, 2002
Introduction Week 1
Week 1
What is Forensic Accounting?
Introduction Week 1
What is Forensic Accounting?
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When someone commits fraud
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Fraud is theft
Profiting from deceit or trickery
Theft of funds or information
Use of someone’s assets without permission
$2.9 trillion is lost every year due to fraud
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Names such as Enron and Bernie Madoff part of cultural Literacy
Forensic Accountants can help stockholders and employees whose life savings may be
preserved.
Introduction Week 1
What is Forensic Accounting?
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Not all forensic accounting centers around fraud
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Commercial litigation
Calculating damages that can run into billions of dollars
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BP Oil Spill
Searching for hidden assets
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Divorce
Property that has stolen by fraudulent signatures
Protect estate of elderly person targeted by someone looking to make a quick buck off someone else
Introduction Week 1
Investigating Forensic Accounting
Accountants:
Gather, analyze, record, summarize, report, and interpret financial
transactions for an entity. Using GAAP (Generally Accepted
Accounting Principles)
Auditor:
Works independent of an entity, examines the data, objectively and
systematically. GAAP
Introduction Week 1
Forensic Accounting
• Combination of special accounting and
auditing techniques are used to gather and
present information for courts or other legal
matters.
• Crime attorneys will often look at suspect’s tax
returns in case the original accusation doesn’t
stick, they will try tax fraud i.e. Al Capone
Introduction Week 1
What is Fraud?
• Theft
• Stealing
• Profiting by deceit or trickery
• Theft of funds or information
• Use of another’s assets without permission
Introduction Week 1
Directly or Indirectly
• Someone can steal something outright or can encourage stealing
• Fraud can also take the form of not caring when you know someone else is
stealing
• Fraud requires at least some form of intent to commit the wrong or to go
along with the wrong
• Errors in judgment are not fraud.
• Since fraud does not involve physical violence it is called white collar crime
Introduction Week 1
Who Commits Fraud?
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Business committing fraud on individuals
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Credit card company’s computing your finance charge incorrectly, maybe only by a penny,
calculate that penny by the number of cards, could be a tidy sum
Individuals committing fraud on business
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Ever take home office supplies?
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Insurance fraud or filling out false insurance claims or lying on the application
Buying an outfit for a particular even and then returning the day after the event: store has
to pay for the salesperson to sell, take the return, and restock, and the dress is now used.
Mortgage fraud could be lying about the applicant’s income or inflating the value of the
home.
Individuals committing fraud on individuals
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Selling an unnecessary life insurance policy
Unnecessary
Introduction Week 1 repairs done to their home
Why does Fraud Occur?
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Motivation
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Principal motivators:
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Need: Low on money, debt
Adrenaline: High of getting away with something
Rationalization
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“They owe me, I work hard, they pay me very little, so I am just going to take”
“They won’t miss it”
Executives may rationalize that falsifying financial reports is acceptable because doing so maintains the
company stock increases and shareholders are happy, saves jobs
Opportunity
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Sometimes fraud is just easy to commit
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Not using a firewall invites hackers in
Expertise
Week 1
• Introduction
Old days:
safe-cracking
• Computer expertise
The Incidence of Fraud
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Fraud schemes are costly
Fraudsters leave footprints behind: Living beyond their means
Frauds have a long incubation period: Takes time for them to be found
Frauds are similar globally
Tips are key in detecting fraud
Executive level fraud is the most damaging
Small Business are especially vulnerable
Introduction Week 1
Week 2 and Week 3
Getting to Know the Most Common Fraud Schemes
Getting to Know the Most Common Fraud Schemes Week 2
Preying on Vulnerable Populations
• Robbing the Poor – Unethical practice of convincing people who couldn’t
really afford mortgage loans that they could (SubPrime Mortgage). Their
products had low adjustable rates that eventually ballooned over time.
Applicants were also encouraged to lie on applications.
• Scamming the Sick – phony cures for deadly diseases
• Taking advantage of the elderly – Some elderly are easily talked into signing
documents they don’t understand
• Circling Surviving Spouses-widowed spouses usually in an emotional
vulnerable state, overwhelmed by financial or other concerns.
Getting to Know the Most Common Fraud Schemes Week 2
Picking Investor’s Pockets
• Mailed flyers and advertisements promising riches from investing in gold,
penny stocks, foreign stocks, systems for investing when market is going up
or down
• Distressed real estate
• Free seminars or luncheons that expound on the only proven system for
getting rich
• The only ones getting rich from these schemes are the promoters!
Getting to Know the Most Common Fraud Schemes Week 2
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Doing Business with Bribes
Ever heard of greasing someone’s palm in order to get special consideration?
Companies offering bribes to conduct business
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Company offer bribe to speed up processing of an application-relatively minor
Company offers a bribe to be allowed to create dangerous conditions for its employees or
the public.
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Ex: faulty equipment passing inspection so company can keep operating. Can have and has had
deadly results
In some foreign companies bribery is not illegal and is considered a normal
business practice. U.S. companies doing business abroad are not allowed to
engage in bribery even if it is legal in the country they are doing business. Violation
of FCPA or Foreign Corrupt Practices Act which prohibits bribes to foreign officials
for retaining business.
Getting to Know the Most Common Fraud Schemes Week 2
Breakfast Bribery
A CPA firm once represented a large, popular catering establishment during an IRS
audit. One morning, the client had a breakfast event and there was a lot of leftover
food. The catering staff was well trained. Anyone on the premises was to be well fed!
They brought large platters of bagels, cheeses, and salads into the room where they
were working with the IRS agent. The staff didn’t intend to offer a bribe; feeding
people is just what they did. However, later that day the IRS agents’ supervisor
showed up to do a surprise inspection. He declared the food an attempt to bribe a
government official, which was a felony. He ordered the food to be taken away and
warned the agent, the firm, and the client that if he ever saw this type of activity
again they would all go to jail.
-Forensic Accounting, Part I: Investigating Forensic Accounting,Frimette Kass-Shraibman, Vijay S. Sampath p. 36
Getting to Know the Most Common Fraud Schemes Week 2
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Laundering Money
When money that is earned by illegal means is made to look like it has come from a
legal source
Organized crime and drug traffickers
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Cash is taken out of the U.S. and deposited in foreign countries. The best are those
countries with bank secrecy laws, investigators can’t get any information about the
accounts The money is moved from country to country. After traveling around for awhile,
the money is transferred to a U.S. entity under the guise of a loan from a foreign contact.
A company is set up that does no actual business. The “dirty” money is put into the business
as sales. Taxes are paid on the revenue, after which the money comes out “clean” and
available for use.
A criminal may control a small legitimate business. The “dirty” money is deposited into that
business and reported as sales. Taxes are paid, after which the money can be used.
Getting to Know the Most Common Fraud Schemes Week 2
Combatting Money Laundering
• Several laws have been enacted to combat money laundering
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Cash transactions over $10,000 must be reported to the IRS
Win over 10,000 in Las Vegas and cash in the chips over $10,000, the casino will ask you
for your social security number to report the transaction.
If you try to pay cash for a car, over $10,000 the dealer will ask for your social security
number and report it to the IRS
If a bank suspects transactions to be broken up for the $10,000 that are not routine, the
bank will report it to the IRS
It is illegal to transport more than $10,000 cash in or out of the U.S. without a customes
declaration
Getting to Know the Most Common Fraud Schemes Week 2
Perpetrating Construction Fraud
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Happens when a contractor does not complete a project according to the
specifications of the contract, does not build the project according to the
relevant building codes, or bills inappropriately.
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Cleanup after the World Trade Center after 9/11 was somewhat disorganized. Several
building and demolition contractors were assigned to areas to clean up but there were
no clear boundaries. Workers would arrive for their shifts, sign in at an onsite trailer,
and go to work. The payroll journal with each bill would be the proof of the expenses.
A city worker whole examining these bills found that one worker supposedly worked
for two contractors at the same time. When an investigation was performed it was
found that the companies did not commit the fraud, the worker did. He took
advantage of the disorganization.
Getting to Know the Most Common Fraud Schemes Week 2
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Subprime or Predatory Lending
These two problems, related to mortgages, often go hand-in-hand
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Subprime lending occurs when a mortgage is given to a homeowner who shouldn’t be
eligible for that mortgage. The homeowner may not make sufficient income or cannot
make a sufficient down payment, or the home can be appraised for more than it is
worth.
Predatory lending is when a homeowner is talked into taking out a mortgage he
doesn’t need or can’t afford. Also considered predatory are interest rates and fees that
are substantially higher than the homeowner could have received from a reputably
lender.
Victims of these types of lending are usually desperate or lack financial sophistication.
These types of practices were a part of the U.S. financial crises of 2008.
Getting to Know the Most Common Fraud Schemes Week 2
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Taking Advantage of Employees
Some common rackets run by bad employers:
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Violations of wage and hour laws-An employee that works more than 40 hours is entitled to 1.5 times
their hourly rate for any time in excess of 40 hours. This goes for employees who earn a weekly salary
(depending on their level of responsibility in the company) as well as those who earn an hourly wage.
Employers who violate this law usually tell employees they are not eligible for this because they are on
salary.
1099 vs. W-2: When an employer pays an employee they assume many tax and insurance obligations.
To save $, an employer treats an employee like an independent contractor, leaving them free of these
obligations. At the end of the year giving them a 1099 instead of a w-2, and lists the gross amount
paid under “fees”
Discriminatory benefits: Employer benefit packages. Employers must make benefits, if they offer
them, to employees who work more than 1,000 hours per year. Pension plans can get more expensive
as employees get older, to save money companies fire employees who plans get to expensive.
Safety violations: Employers may disregard safety rules such as rest breaks, safety equipment, fire
drills, emergency lighting in favor of keeping work going.
Getting to Know the Most Common Fraud Schemes Week 2
Frauds Committed against Businesses
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Sometime businesses are on the receiving end of fraud
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Employee theft: misappropriation or embezzlement-the appropriation of entrusted
asset’s for one’s own use.
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Using the copy machine for personal use, or taking office supplies home
Or as serious as diverting cash
Getting to Know the Most Common Fraud Schemes Week 2
Vendor and Customer Fraud
• A customer who opens up a credit line and then has no intention of paying
for it
• A vendor taking a deposit for an order and then disappearing.
Getting to Know the Most Common Fraud Schemes Week 2
Insurance Fraud
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When someone files a claim with an insurance company to get benefits they are not entitled to.
When someone intentionally causes an insurance company to pay out money that shouldn’t be paid out.
The Coalition Against Insurance Fraud estimated that insurance fraud costs about $80 billion per year. The
insurance companies do not bear this expense, policyholders do in the form of higher rates.
Examples of Insurance Fraud:
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A doctor bills an insurance company for procedures they were never performed.
Someone stages a car accident in order to file an injury claim against the other driver’s insurance company.
To collect cash from the insurance company, an insured, reports a car or boat stolen when it’s not, or reports a phony fire or
robbery.
It’s a criminal offense to file a phony insurance claim, and filing a false police report is also a crime, so
people perpetrating insurance fraud are taking a whole lot of risk.
Getting to Know the Most Common Fraud Schemes Week 3
Bilking the Government
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The government is big and bulky and subject to political pressures it has a hard time controlling frauds, despite its many
efforts.
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Tax Fraud: Evading paying taxes, signing a tax return you know has untrue information, intimidating a government employee who is
enforcing the tax law.
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April 15th tax day
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IRS audits: randomly chosen, computer flags including your occupation, mortgage interest in relation to income, dependent statuses, charity giving
Fraud on tax returns can be not reporting all your income, deducting too many expenses reducing your taxable income.
Sales Tax: Sales tax can be collected on sales of an item but not turned into the government and the retailer does not report the
income
Employment taxes: passing employees off as independent contractors
Transfer pricing: the price at which goods are exchanged between two separate accounting systems within the same holding
company
Getting to Know the Most Common Fraud Schemes Week 3
Jersey Stores
To avoid paying sales tax on clothing, some New Yorkers would get into their cars and go to New Jersey, where
there is no sales tax on clothing. The State of New York started sending tax agents to New Jersey malls to write
down the license plate numbers of New York cars in the parking lots. The state would then send the owners of
those cars audit notices. To conduct these audits, it would get copies of credit card statements and compute
the use tax on charges from out of state (the use tax can be levied on goods and services when the sales tax
isn’t paid.) When New Yorkers found out about this situation, the state took a big hit in the media. The public
was incensed that New York State would sneak around New Jersey this way. Now the state has added a line to
its personal income tax form for the use tax. As a taxpayer, you’d better write something down on that line
even if its $0. If you leave it blank, the state just may decide to audit you to determine if you’ve failed to pay
any sales tax.
-Forensic Accounting, Part I: Investigating Forensic Accounting,Frimette Kass-Shraibman, Vijay S. Sampath p. 45
Getting to Know the Most Common Fraud Schemes Week 3
Week 4
To prepare for our final project we will be playing Clue to help with our ideas
for our own Clue Game.
Profiles that were discussed Week 3:
Character Identities
Weapons
Location
CEO - Brandon
Fake Financial Statements Boardroom
Computer Geek/Hacker Nick
Computer
Scuzzy basement room
Mobster - Kayla
Foreign Bank Account
Dog Grooming Shop or
front for illegitimate
business
Teenage Girl – Teenage
Item w/no receipt or
Planning our final project Week 4
Girl
expensive item returning
Retail Store/Mall
Waiter - Marc
Restaurant
Cell Phone taking Photos
of Credit Cards
Week 4
• Game of Clue is played. Ideas discussed: How can we make this game into
one that will display Forensic Accounting Concepts
Clue Week 4
Corporate Tax Rates
• Here’s where corporate fraud can possibly come in. Let’s say the corporate
tax rate on Mars is 15% and the U.S. rate is 35%. If the transfer price is high,
the Martian division makes more money than the U.S. division. For every $
of profit transferred to Mars, saves $.20 in tax. Artificially increasing the
Martian price is fraud. The U.S. and international conglomerates have
forensic accountants working to determine what a fair price is for the
transfer of goods.
Common Fraud Schemes, Week 5
Contract Fraud
We talked about contractor fraud earlier, the potential for contract fraud can happen
from anywhere, contractors can be hired for just about anything. Military research,
Medical Research, Hospital Management, School Management etc. Especially when
it is contracted by a government agency the risk of fraud is always there.
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Contractors may deliver substandard goods
Contractors may overbill
Contractors may charge items to these contracts that aren’t used for contracted
work
Common Fraud Schemes, Week 5
Medicare and Medicaid Fraud
Medicare is a federally sponsored program that provides medical care for the elderly an d recipients
of Social Security. Medicaid provides medical for the poor. Both programs are riddled with fraud.
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Ex: A sham operation opens up in a storefront and somehow gets lists of seniors and their
Medicare billing information. The fraudsters than bill Medicare for wheelchairs and walkers that
were never provided. They often close up shop before even being discovered.
Sometimes doctors and clinics bill for procedures that were never performed. To combat this
the Medicare and Medicaid computers are programmed to look for excessive billing by
providers.
Unfortunately there are people who lie about their financial situations as well to get covered by
these programs so they can get benefits, this is fraud as well.
Common Fraud Schemes, Week 5
Social Security Fraud
Social Security is a federal benefits program started during the Great Depression to provide
benefits to retires, widows and widowers, orphans and people who can’t work due to
disability. Whenever the government gives away money, fraudsters line up to collect their
share. Some common types are:
• Concealing work activity while receiving benefits
• Receiving benefits for a child not under that person’s care
• Failing to notify SSA of a death and continue to receive benefits
• Concealing a marriage or assets
• Residing overseas and collecting SSA payments
Common Fraud Schemes, Week 5
Social Security Fraud
These deceits can be accomplished in many ways:
• Making false statements on claims
• Concealing material facts or events that affect eligibility for benefits
• Misusing benefits (receiving money to benefit an orphan but using it for other purposes)
• Buying or selling Social Security Info
• Bribing SSA employees
A Social Security Number is a critical piece of information. No one should ever give out this
information unless required to do so by law. Only give to a place of employment AFTER being
hired. If a medical office or another business asks for this information question why.
Common Fraud Schemes, Week 5
The Ponzi Scheme
In this type of fraud, a fraudsters steals money to create the illusion of being legitimate so they
can continue to steal money. Here is how it works:
• Stef needs money. So she approaches Katrina and tells her that she can invest her money
and earn an interest rate of 10%. Katrina believes her and hands her $100.
• Stef doesn’t really invest Katrina’s money, she spends it. But she needs to give Katrina her
interest, so Stef approaches Brandon with the same deaql, Brandon believes her and gives
her $200. Stef puts $110 in Katrina’s account and $90 in her pocket.
• Uh oh, now Brandon wants to withdraw the money. Stef finds Nick and convinces him to
invest money. Nick gives her $400, part of which Stef uses to put principal back into
Brandon’s account
The Ponzi schemer keeps up an elaborate scheme of borrowing from one to pay another. At
some point the scheme gets too big to handle and the schemer can’t find enough new investors
to pay off the old, when that happens the stuff hits the fan.
Common Fraud Schemes, Week 5
Charles Ponzi
• Charles Ponzi and the Original Ponzi Scheme – Otherwise known as the Rob
Peter to pay Paul Schemes
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Italian immigrant, came to the U.S. in 1903 with $2.50 in his pocket
Started a business buying and selling postal coupons promising investors 50% return
Received glowing reports from the SEC
About 40,000 investors, about $15 million in Ponzi scheme in 9 mo. between 1919-1920
Scheme collapsed eventually and he was sent to jail for 5 years and then received
another sentence for 9 years which he skipped out on
Ended up in Brazil where he spent his last years in poverty and sickness
Common Fraud Schemes, Week 5
Interesting Ponzi Schemes
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Charles Ponzi and the Original Ponzi Scheme
Dona Branca, the People’s Banker
The “Double Shah”
Lou Perlman: ‘N Sync and ‘N Investors’ Pockets
European Kings Club
Bernie Madoff: How he “Made Off” with $50 billion
Yilishen Tianxi: Ant Farming Scheme
Sergey Mavrodi, the Scammer who got himself elected to the Russian Parliament
Social Security
Common Fraud Schemes, Week 5
Arts and Crafts Day
• Today we will work collaborately on our game design
Forensic Accounting Clue Design Day, Week 6
Forensic Accounting – Litigation Support
• Forensic Accountants play 3 roles in commercial litigation
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Consultant: Advising the client on technical accounting or financial issues. Providing
discovery assistance, gathering, and providing business facts, and calculating damages.
Expert witness: formulating an expert opinion based on your area of expertise.
Arbitrator: a trier of facts, you play the role of judge and jury in rendering your decision
Forensic Accounting – Litigation Support, Week 7
Business Valuation
• Business Valuation
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Value their stock – required maybe by a potential purchaser of the business
Value of a company’s assets and liabilities-two parties may have differing views and
opinions you need to settle
Value a company’s stock value or purchase price due to a disgruntled stockholder
Value of a private business due to divorce proceedings or total value for estate tax , gift
tax when shares are passed from one generation to the next
Forensic Accounting – Litigation Support, Week 7
Standards of Value
• How much a business or asset is worth
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Fair market value – The amount of money that a buyer may reasonably offer, and a seller
accepts
Investment value – refers to the value of the investment to a particular investor, the
number reflects the specific attributes of that investor
Intrinsic value – refers to the true worth of the business based on the evaluation of the
available facts, also estimating the future income the business will generate and then
discounting it to what that means for the present value
Forensic Accounting – Litigation Support, Week 7
Premise of Value
• Going concern value – Does the company have a strong chance of survival? If
it does it needs to be valued accordingly. What is the value of a company’s
intangible assets (those that don’t have a physical existence such as patents,
copywrights, intellectual property-a mind is a terrible thing to waste).
• Liquidation value – Companies that are worth more dead than alive.
Liquidation refers to the estimated amount if the company was broken up
and its assets sold.
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Orderly liquidation – assets are sold over a reasonable amount of time
Forced liquidation – assets are sold quickly, such as at an auction.
Forensic Accounting – Litigation Support, Week 7
Estimating Environmental Damage
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BP Oil Disaster – 2010 – 2,500 square miles of an oil slick causing severe damage to
marine and wildlife habitats. This disaster crippled the fishing and tourism
industries and cause environmental risks to hundreds of miles of beaches, estuaries,
and wetlands.
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Analyzing the total present and future costs of the environmental damage, penalties, and
insurance related calculations.
Calculating damages from bodily injury, death, property damage, business interruption
claims
Negotiating settlements and identifying costs incurred by the company
Filing insurance claims
Providing expert testimony
Forensic Accounting – Litigation Support, Week 7
Other Business Examinations
• Auditor Malpractice – financial statements provided by a company doesn’t
accurately depict their financial situation
• Calculating Business Interruption – Key machinery that may break down and
disrupt or interrupts business must be calculated for insurance purposes
• Tallying construction-related damages – large projects that may go through
changes that weren’t anticipated. (Ex: “The Big Dig”, Boston – very
expensive highway project, primarily due to delays and cost over-runs)
• Avoidance Actions in Bankruptcy – Sum of a company’s debts is greater than
it’s fair value of assets (simply-they can’t pay their bills)
Forensic Accounting – Litigation Support, Week 7
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Dealing in Divorce
Divvying up the assets
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Equitable distribution – what constitutes a fair, reasonable, equitable division of the assets
Community property – property acquired by the couple during marriage
Marital Home
Retirement plans – pensions, 401K plans, bonuses, stock options
Investments – stocks, bonds, mutual funds, money market, cd’s
Cash and Life insurance policies
Vehicles and household items
Businesses
Forensic Accounting – Litigation Support, Week 7