Forensic Accounting - Saint Louis University

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“You Can’t Always Get What You Want…”
Forensic Accounting: Issues and Implications
Presented to:
Accounting 614 – Seminar - Accounting and Society
St. Louis University
April 6, 2010
Thomas E. Hilton, MS, CPA/ABV/CFF, ASA, CVA
Anders Minkler & Diehl LLP
St. Louis, MO 63101
[email protected]
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Forensic Accountant
“ An accountant who performs an orderly analysis,
investigation, inquiry, test, inspection, or
examination in an attempt to obtain the truth and
develop an expert opinion.”
- Forensic Examiner
May/June 2001
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Definition of Forensic Accounting
• The use of accounting for legal purposes
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Definition of Forensic Accounting
Forensic accounting services are non-attest services that
involve the application of special skills in accounting, auditing,
finance, quantitative methods and certain areas of the law,
and research and investigative skills to collect, analyze, and
evaluate evidential matter and to interpret and communicate
findings, and consist of :
→ Litigation services
→ Investigative services
Source: AICPA Interpretation 101-3
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Financial Audit
• A sampling activity that tests the system of internal
controls rather than the detail.
Forensic Audit
• An analysis of the detail of a specific aspect of the
accounting records to detect and explain observed
aberrations.
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Forensic Skill Sets
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Fundamental Forensic Knowledge
• Basic civil and criminal law
• Federal and State Rules of Evidence
• Federal and State Rules of Civil Procedure
• Basics of alternative dispute resolution, negotiation,
arbitration and mediation
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Fundamental Forensic Knowledge
• Interviewing
• Research
• Written and oral reporting
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Specialized Forensic Knowledge
• Asset tracing
• Bankruptcy and Insolvency
• Computer forensics and data mining
• Economic damages
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Specialized Forensic Knowledge
• Valuation
• Fraud investigations
• Family Law
• Shareholder disputes
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Certified in Financial Forensics
(CFF)
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Shareholder
Disputes
Specialized
Forensic
Knowledge
Asset
Tracing
Bankruptcy &
Insolvency
Family
Law
CPA
Core Skills
Computer
Forensics
and Data
Mining
Fraud
Investigations
Valuation
Economic
Damages
Fundamental
Forensic
Knowledge
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Evidence
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Evidence is anything that can cause
another person to believe that a fact or
proposition is true or false
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Role of Forensic Accountant
Rule 702 - Federal Rules of Evidence
“If scientific, technical, or other specialized knowledge will assist the
trier of fact to understand the evidence or to determine a fact in
issue, a witness qualified as an expert by knowledge, skill,
experience, training, or education, may testify thereto in the form of
an opinion or otherwise.” (Emphasis added)
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Types of Evidence
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•
Direct
Circumstantial
Real
Documentary
Testimonial
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David Duncan
Arthur Andersen
Houston, TX
“If it’s destroyed in the course of normal policy and
litigation is filed the next day, that’s great.. we’ve
followed our policy and whatever there was that
might have been of interest to somebody is gone
and irretrievable.”
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Walter Van de Vijer
Royal Dutch Group
April 2004
“I am sick and tired of lying about the extent of our
reserve issues and the downward revisions that
need to be done because of far too aggressive
projections.”
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Business Damage Claims
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Common Elements of Business
Damage Claims
• Harmful act has occurred
• Harmful act has reduced the plaintiff’s earnings or stream
of economic value
• Principle of economic equivalence
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Lost Profits vs. Loss of Business Value
Loss of Business Value:
•
Destruction of Business
•
Temporary Impairment
•
Slow Death
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Loss of Business Value
Destruction of Business:
$2,000,000
Expected Profits
Profits
$1,600,000
$1,200,000
Lost Profits
$800,000
Actual Profits
$400,000
$0
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Lost Profits
Temporary Impairment:
Expected Profits
Profits
$1,600,000
$1,200,000
Lost Profits
$800,000
$400,000
Actual Profits
$0
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Lost Profits vs. Loss of Business Value
Slow Death Scenario:
$2,000,000
Expected Profits
Profits
$1,600,000
$1,200,000
$800,000
Lost Profits
Actual Profits
$400,000
$0
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Fraud
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Types of Irregularities
Financial Irregularities
Errors
Fraud
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Conditions Generally Present
When Fraud Occurs
• Incentive/Pressure
• Opportunity
• Attitude/Rationalization
Statement on Auditing Standards (SAS) No. 99
Consideration of Fraud in a Financial Statement Audit
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The Fraud Triangle
Source: SAS 99
Opportunity
Circumstances that allow a
misrepresentation to occur.
Attitude / Rationalization
Incentive / Pressure
A frame of mind that justifies the
misrepresentation.
A reason to misrepresent.
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The Fraud Diamond
Source: December 2004/The CPA Journal
Incentive
Opportunity
Rationalization
Capability
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The Components of Capability
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•
•
•
•
•
Position/Function
Knowledge
Confidence/Ego
Coercion Skills
Effective Lying
Immunity to Stress
Source: Wolfe & Hermanson
The CPA Journal
December, 2004
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Ethical Implications
Character: Constellation of a person’s
virtues and vices
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Ethical Implications
• Ethics
• Social Responsibility
• Moral Judgment
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Ethical Implications
Fundamental Principles
– Dignity of every human person
– Common Good
– Subsidiarity
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Ethical Implications
Michael Novak “The Spirit of Democratic Capitalism”
– Capitalism is the one economic system that lifts the
greatest numbers out of poverty
– Capitalism is itself not selfish, exploitive or unequal
– Capitalism cannot exist in a void – it requires an
underlying moral edifice – a knowledge of right and
wrong
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Thank you for your attention!
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