Forensic Accounting &
The Fraud Environment
Main Line Association For Continuing Education
6-20-13
North American Forensic Accounting LLC
901 Dawn Avenue, Suite A, Ephrata, PA 17522
717-466-6800
dave@naforensics.com
NORTH AMERICAN
FORENSIC
ACCOUNTING LLC
TODAY’S DISCUSSION
Forensic Accounting – Increasing Demand
Fraud Theories
Case Studies
Check Preparation
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Forensic accounting
From Wikipedia, the free encyclopedia
Forensic accounting, forensic accountancy or financial
forensics is the specialty practice area of accountancy
that describes engagements that result from actual or
anticipated disputes or litigation. "Forensic" means
“suitable for use in a court of law”, and it is to that
standard and potential outcome that forensic
accountants generally have to work.
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INCREASING DEMAND FOR FORENSIC
ACCOUNTANTS
•
Greed
• Opportunity
• Economic factors
 Layoffs
 Recession fueled bankruptcies
 Underemployment
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•
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
Extensive travel: (2 to 3 weeks per month – 16 years)
49 of the 50 states
Brazil
Australia
Canada
England
•
•
•
•
•
•
•
•
Have been threatened – multiple locations
Items thrown at me
Endured physical hardships at various locations
Moved from hotel to hotel in the middle of the night
Wheel lugs loosened on rental car
Harassed by unmarked vehicle – Canada
Ticked / harassed by police – Canada
Individual who assisted me in one case – tires slashed / brake line
cut / serious accident
• Protection order from suspect
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ACCOUNTING LLC
FRAUD TRIANGLE
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FORENSIC
ACCOUNTING LLC
FRAUD TRIANGLE
• Opportunity – weaknesses in internal controls
• Pressure – personal financial problems, unrealistic
performance goals
• Rationalization – justification for fraudulent activities
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FORENSIC
ACCOUNTING LLC
The “Trust” Factor
“People are going to trust one
another right up to the time they
are caught.”
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FORENSIC
ACCOUNTING LLC
REPORT TO THE NATIONS
REPORT TO THE NATIONS
ON OCCUPATIONAL FRAUD
AND ABUSE (ACFE)
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FORENSIC
ACCOUNTING LLC
ACFE 2012 Report
• Estimated $3.5 Trillion in fraud losses (worldwide)
• 87% of occupational fraud incidents is through misappropriations
• 65% of frauds perpetrated by males and $ amount is significantly
higher than females
• 39% of the fraud are perpetrated by accounting or operations
personnel
• Frequently committed by perpetrators aged 36 to 45, dollar amount
increases significantly for fraud committed by individuals over 60
(trust factor)
• #1 detection method – employee tips
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FORENSIC
ACCOUNTING LLC
DIFFERENCES: AUDITS vs. FRAUD AUDITS
2008 ACFE Report to the Nation on Occupational Fraud & Abuse
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ACCOUNTING LLC
KEY ELEMENTS IN FRAUD SCHEMES
• All occupational fraud schemes have four key elements in common.
The activity:
1. Is clandestine
2. Violates the perpetrator’s fiduciary duties to the victim
organization
3. Is committed for the purpose of direct or indirect financial benefit
to the perpetrator
4. Costs the employing organization assets, revenue or reserves
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ACCOUNTING LLC
OUTSIDE INFLUENCES
• An organization cannot control what affects
an individual outside of the work environment
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ACCOUNTING LLC
EXTERNAL AUDITORS
• Long term analysis of frauds from 1998
through 2010 (Reuters):
a) Auditors sometimes did not question
documents that appeared to be fabricated
b) Auditor trusted managements’ word that
no fraud had occurred
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EXTERNAL AUDITORS - continued
c) Most common auditor failings were lack
of competence and diligence. Lack of
professional skepticism, and failure to
assess and respond to fraud risks.
d) Time and budget constraints, fear of
alienating clients
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ACCOUNTING LLC
BARRY WEBNE - STORY
Question – would you hire someone as
your CFO who previously embezzled $1.0
million and spent time in prison?
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FORENSIC
ACCOUNTING LLC
WHY DO THEY STEAL?
• Unspeakable problem (usually financial) that can be resolved by
“borrowing” the money
• Economic distress
• Elaborate lifestyle
• Compulsive behavior – substance abuse/gambling problem
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FORENSIC
ACCOUNTING LLC
ADDITIONAL CONSIDERATIONS
• Thefts by embezzlers are rarely detected
• If detected, the crimes are seldom prosecuted
• Sentences are usually light
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FORENSIC
ACCOUNTING LLC
QUANTIFYING THE IMPACT OF FRAUD
Considerations:
• The effect of fraud on the management of the organization can be a
devastating distraction from the normal operations of running the
business
• Depending on the size of an organization, fraud can cripple the
financial structure and jeopardize the future operations of
a business
• Many companies carry inadequate levels of insurance coverage for
employee dishonesty
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FORENSIC
ACCOUNTING LLC
UNDERSTANDING THE FRAUD
CYCLE
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FORENSIC
ACCOUNTING LLC
CASE STUDIES
Fraud Case Studies
• Family Business
• Insurance Agency
• Construction Company
• Legal Association
• Community Bank
• Manufacturer
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FORENSIC
ACCOUNTING LLC
FAMILY BUSINESS
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FORENSIC
ACCOUNTING LLC
FAMILY BUSINESS
Background
- External accountant
- long term relationship
- family run business – 275 employees
- IRS issues / questions
Discovery
- Meeting with new CPA firm
-Start of the investigation
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FORENSIC
ACCOUNTING LLC
FAMILY BUSINESS (continued…)
Discovery
- Meeting with new CPA firm
-Start of the investigation
- Offer by suspect
Investigation
- Transfers from business checking account
- Paper vs. electronic records
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FORENSIC
ACCOUNTING LLC
FAMILY BUSINESS (continued…)
Investigation
- Checks drawn to pay “payroll taxes”
 Credit card companies
 US Treasury
 PA Dept. Revenue
 Encoding
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FORENSIC
ACCOUNTING LLC
FAMILY BUSINESS (continued…)
Investigation
- Quantification
- Insurance claim
Outcome
- Sentencing
- Restitution
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FORENSIC
ACCOUNTING LLC
BANK ELECTRONIC TRANSFER
XYZ BANK HISTORY CHECKING
DATE
4/16/2006
4/16/2006
4/16/2006
4/16/2006
4/17/2006
4/18/2006
4/19/2006
4/19/2006
4/21/2004
4/21/2006
4/22/2006
DEPOSITS
BALANCE
CHECKS
$ 4,150.00
$ 47,969.02
$ (28,290.42)
$ (11,084.99)
$ (9,312.33)
$ (3,500.00)
(135.00)
$
(65.18)
$
(723.60)
$
$ 10,717.83
$ 99,713.52
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$
$
$
$
$
65,760.13
69,910.13
117,879.15
89,588.73
78,503.74
$
$
$
$
$
$
$
69,191.41
65,691.41
65,556.41
65,491.23
64,767.63
75,485.46
175,198.98
DESCRIPTION
VENDOR PAY
SWEEP LOAN ADVANCE
XYZ BANK LOAN TRANSACTION
XYZ BANK LOAN TRANSACTION
AMERICAN EXPRESS ELEC REMIT
061108061025841
CHECK NUMBER 496801
CHECK NUMBER 526801
CHECK NUMBER 561081
TRANSFER DR FROM 1673131363
DEPOSIT
SWEEP LOAN ADVANCE
NORTH AMERICAN
FORENSIC
ACCOUNTING LLC
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FORENSIC
ACCOUNTING LLC
CHECK - MEMO LINE
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FORENSIC
ACCOUNTING LLC
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FORENSIC
ACCOUNTING LLC
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FORENSIC
ACCOUNTING LLC
INSURANCE AGENCY
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FORENSIC
ACCOUNTING LLC
INSURANCE AGENCY
Background
- Insurance agency
- Sole shareholder
- 10 to 15 employees
- Bookkeeper tenure 7 months
Discovery
- Income tracking
- Meeting with the bookkeeper
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FORENSIC
ACCOUNTING LLC
REMITTANCE REPORT
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FORENSIC
ACCOUNTING LLC
AUDIT TRAIL
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FORENSIC
ACCOUNTING LLC
VOIDED/DELETED TRANSACTIONS
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FORENSIC
ACCOUNTING LLC
INSURANCE AGENCY (continued…)
Investigation
- Fraud theory
- Insurance receipts/income
- Software tracking
- Documents
- Chain of custody
- Quantification
- Insurance claim
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FORENSIC
ACCOUNTING LLC
INSURANCE AGENCY (continued…)
Status
- Civil complaints
- Sale of business lines
- Loss of business
- Sale of building
- IRS issues
Outcome
- Did justice prevail?
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FORENSIC
ACCOUNTING LLC
CONSTRUCTION COMPANY
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FORENSIC
ACCOUNTING LLC
CONSTRUCTION COMPANY
Background
- Electrical contractor
- Vice President
Discovery
- Red flags
- Compelling evidence or sloppy recordkeeping?
- Cost accounting records – journal entries
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FORENSIC
ACCOUNTING LLC
CONSTRUCTION COMPANY (continued…)
Investigation
- Fraud theory
- Inventory
- Outside vendor
- Invoice template
- Dumpster diving
- Interviews
- Quantification
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FORENSIC
ACCOUNTING LLC
CONSTRUCTION COMPANY (continued…)
Investigation continued
- Personal bank records
Motive
- Greed / girlfriend
Outcome
- FBI – DOJ report
- Sentencing
- Full restitution
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FORENSIC
ACCOUNTING LLC
LEGAL ASSOCIATION
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FORENSIC
ACCOUNTING LLC
LEGAL ASSOCIATION
Background
- 600+ attorneys
- Bookkeeper
- Audited financial statements
Discovery
- Red flags – bank statement
- Forgery – checks and notary signature
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FORENSIC
ACCOUNTING LLC
LEGAL ASSOCIATION (continued…)
Opportunity
- Trust and “Family”
- Lunch breaks
- Position
Investigation
- Fraud theory
- Bank statements
- Bank reconciliation
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FORENSIC
ACCOUNTING LLC
BANK STATEMENT
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FORENSIC
ACCOUNTING LLC
ALTERED TRANSACTIONS
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FORENSIC
ACCOUNTING LLC
ACTUAL BANK STATEMENT
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FORENSIC
ACCOUNTING LLC
ACTUAL BANK STATEMENT
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FORENSIC
ACCOUNTING LLC
LEGAL ASSOCIATION (continued…)
Investigation continued
- Interview
- Quantification
- Theft duration – 4 years
Motive
- Financial pressures
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FORENSIC
ACCOUNTING LLC
LEGAL ASSOCIATION (continued…)
Outcome
- Full restitution
- No prosecution
- Subsequent events
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FORENSIC
ACCOUNTING LLC
LEGAL ASSOCIATION (continued…)
Outcome
- Full restitution
- No prosecution
- Subsequent events
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FORENSIC
ACCOUNTING LLC
COMMUNITY BANK
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FORENSIC
ACCOUNTING LLC
COMMUNITY BANK
Background
- Small town
- VP Bookkeeping / IT – 25 year employee
- Audited financial statements
- FDIC audits
Discovery
- FDIC audit – sample selection
- Confession
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FORENSIC
ACCOUNTING LLC
COMMUNITY BANK (continued…)
Opportunity
- Position and Trust
- Knowledge of internal controls
- FDIC bank examiner 2003
Investigation
- Fraud theory
- Audit trail documentation
- Quantification
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FORENSIC
ACCOUNTING LLC
COMMUNITY BANK (continued…)
Investigation continued
- Credit card cash advances
- Theft – 4 years
- Credit history checks
Motive
- Financial pressures
- QVC
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FORENSIC
ACCOUNTING LLC
COMMUNITY BANK (continued…)
Outcome
- FBI prosecution
- Federal prison sentence
- Full restitution
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FORENSIC
ACCOUNTING LLC
MANUFACTURER
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FORENSIC
ACCOUNTING LLC
MANUFACTURER
Background
- Blackmail scheme
- Outside trucking firm
- Inside transportation supervisor
Discovery
- Excel spreadsheets
- “The bookcase”
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FORENSIC
ACCOUNTING LLC
MANUFACTURER (continued…)
Investigation continued
- Trucking invoices
- Imbedded kickbacks
Motive
- Financial pressures ?
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FORENSIC
ACCOUNTING LLC
MANUFACTURER (continued…)
Investigation continued
- Trucking invoices
- Imbedded kickbacks
Motive
- Financial pressures ?
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FORENSIC
ACCOUNTING LLC
MANUFACTURER (continued…)
Outcome
- $2.7 million
- Insurance claim
- Death
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FORENSIC
ACCOUNTING LLC
FRAUD TRIANGLE
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FORENSIC
ACCOUNTING LLC
TO BE CONTINUED
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FORENSIC
ACCOUNTING LLC
CHECK PREPARATION
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FORENSIC
ACCOUNTING LLC
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FORENSIC
ACCOUNTING LLC
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FORENSIC
ACCOUNTING LLC
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www.naforensics.com
www.facebook.com/northamericanforensicaccountingllc
Main Line Association For Continuing Education
6-20-13
North American Forensic Accounting LLC
901 Dawn Avenue, Suite A, Ephrata, PA 17522
717-466-6800
dave@naforensics.com