Forensic Accounting and
Fraud Investigation
CPE Edition
Stephen Pedneault
Frank Rudewicz
Michael Sheetz
Howard Silverstone
Table of Contents
Preface ................................................................................................................................................... v
Chapter 1 – Forensic Accounting ......................................................................................................... 1
Learning Objectives ............................................................................................................................. 1
What Is Forensic Accounting................................................................................................................ 1
Why Has Forensic Accounting Become the Buzz? ............................................................................... 2
Introduction to a Profession ................................................................................................................. 3
Applications for Forensic Accounting.................................................................................................... 3
A Third Dimension: Contexts within Each Area of Specialization .......................................................... 6
Conclusion........................................................................................................................................... 8
Suggested Readings ........................................................................................................................... 9
Review Questions .............................................................................................................................. 10
Review Answers ................................................................................................................................ 11
Chapter 2 – Fraud in Society............................................................................................................... 12
Learning Objectives ........................................................................................................................... 12
What Is Fraud? .................................................................................................................................. 12
Types of Fraud .................................................................................................................................. 15
Other Types of Financial Fraud .......................................................................................................... 17
Sarbanes-Oxley ................................................................................................................................. 18
What the Numbers Tell Us about Fraud ............................................................................................. 19
Categories of Occupational Fraud ...................................................................................................... 20
Drawing Conclusions ......................................................................................................................... 21
Society’s Perception of Fraud ............................................................................................................ 22
Who Commits Fraud?—Profile of the Typical Fraudster ..................................................................... 23
The Social Consequences of Economic Crime ................................................................................... 27
Conclusion......................................................................................................................................... 27
Suggested Readings ......................................................................................................................... 27
Review Questions .............................................................................................................................. 28
Review Answers ................................................................................................................................ 30
Chapter 3 – Understanding the Basics of Financial Accounting....................................................... 32
Learning Objectives ........................................................................................................................... 32
Where It All Begins ............................................................................................................................ 32
The Five Accounting Cycles............................................................................................................... 34
Journals: Subsidiary and General ...................................................................................................... 39
Conclusion......................................................................................................................................... 40
Suggested Readings ......................................................................................................................... 40
Review Questions .............................................................................................................................. 41
Review Answers ................................................................................................................................ 42
Chapter 4 – Forms of Entities ............................................................................................................. 44
Learning Objectives ........................................................................................................................... 44
Basics of Business Structures ............................................................................................................ 44
Sole Proprietorships .......................................................................................................................... 44
Partnerships ...................................................................................................................................... 45
Corporations ...................................................................................................................................... 47
Business Enterprises in the Global Environment ................................................................................ 48
Conclusion......................................................................................................................................... 51
Suggested Readings ......................................................................................................................... 51
Review Questions .............................................................................................................................. 53
Review Answers ................................................................................................................................ 54
Table of Contents
Chapter 5 – Fundamental Principles of Financial Analysis ............................................................... 55
Learning Objectives ........................................................................................................................... 55
Good Analysis = Due Diligence? ........................................................................................................ 55
Why Perform Financial Analysis? ....................................................................................................... 57
What and Whom Can You Trust?....................................................................................................... 57
Other Factors to Consider .................................................................................................................. 57
Financial Analysis for the Non-Expert................................................................................................. 58
To the Future ..................................................................................................................................... 63
Conclusion......................................................................................................................................... 64
Suggested Readings ......................................................................................................................... 64
Review Questions .............................................................................................................................. 65
Review Answers ................................................................................................................................ 66
Chapter 6 – The Role of the Accounting Professional ....................................................................... 68
Learning Objectives ........................................................................................................................... 68
The Importance of Accounting Professionals in the Investigation........................................................ 68
The Audit Process ............................................................................................................................. 71
Internal Controls ................................................................................................................................ 74
Conclusion......................................................................................................................................... 75
Review Questions .............................................................................................................................. 77
Review Answers ................................................................................................................................ 79
Chapter 7 – Business as a Victim ....................................................................................................... 81
Learning Objectives ........................................................................................................................... 81
Introduction........................................................................................................................................ 81
Employee Thefts................................................................................................................................ 81
Fraudulent Billing Schemes ............................................................................................................... 86
Fraud Committed by Outsiders .......................................................................................................... 86
Management Thefts ........................................................................................................................... 87
Corporate Thefts................................................................................................................................ 89
Identity Theft...................................................................................................................................... 90
Conclusion......................................................................................................................................... 91
Suggested Readings ......................................................................................................................... 92
Review Questions .............................................................................................................................. 93
Review Answers ................................................................................................................................ 94
Chapter 8 – Business Villains ............................................................................................................. 96
Learning Objectives ........................................................................................................................... 96
Introduction........................................................................................................................................ 96
Organized Crime and Business.......................................................................................................... 96
Money Laundering ........................................................................................................................... 102
Conclusion....................................................................................................................................... 106
Suggested Readings ....................................................................................................................... 107
Review Questions ............................................................................................................................ 109
Review Answers .............................................................................................................................. 110
Chapter 9 – The Investigative Process ............................................................................................. 112
Learning Objectives ......................................................................................................................... 112
Introduction...................................................................................................................................... 112
Case Initiation.................................................................................................................................. 112
Case Evaluation .............................................................................................................................. 113
Solvability Factors............................................................................................................................ 114
Goal Setting and Planning ............................................................................................................... 115
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Table of Contents
Investigation .................................................................................................................................... 121
Background ..................................................................................................................................... 121
Conclusion....................................................................................................................................... 127
Suggested Readings ....................................................................................................................... 127
Review Questions ............................................................................................................................ 128
Review Answers .............................................................................................................................. 130
Chapter 10 – Interviewing Financially Sophisticated Witnesses ..................................................... 132
Learning Objectives ......................................................................................................................... 132
Introduction...................................................................................................................................... 132
The Interview ................................................................................................................................... 132
Interviewing Financially Sophisticated Witnesses ............................................................................. 143
Conclusion....................................................................................................................................... 145
Suggested Readings ....................................................................................................................... 146
Review Questions ............................................................................................................................ 147
Review Answers .............................................................................................................................. 148
Chapter 11 – Proving Cases through Documentary Evidence ........................................................ 150
Learning Objectives ......................................................................................................................... 150
Introduction...................................................................................................................................... 150
Document Collection........................................................................................................................ 151
Document Organization ................................................................................................................... 160
The Process of Proof ....................................................................................................................... 163
The Logic of Argument..................................................................................................................... 164
Proof through Inference ................................................................................................................... 167
Conclusion....................................................................................................................................... 170
Suggested Readings ....................................................................................................................... 170
Review Questions ............................................................................................................................ 173
Review Answers .............................................................................................................................. 175
Chapter 12 – Analysis Tools for Investigators ................................................................................. 177
Learning Objectives ......................................................................................................................... 177
Introduction...................................................................................................................................... 177
Why Use Analysis Tools at All?........................................................................................................ 177
Associational Analysis ..................................................................................................................... 178
Temporal Analysis ........................................................................................................................... 192
Conclusion....................................................................................................................................... 196
Suggested Readings ....................................................................................................................... 197
Review Questions ............................................................................................................................ 198
Review Answers .............................................................................................................................. 199
Chapter 13 – Inferential Analysis ...................................................................................................... 201
Learning Objectives ......................................................................................................................... 201
Introduction...................................................................................................................................... 201
How Inferential Analysis Helps ......................................................................................................... 201
What Is an Inference Network? ........................................................................................................ 202
Investigative Inference Analysis ....................................................................................................... 204
The Key List .................................................................................................................................... 208
Constructing an Investigative Inference Chart .................................................................................. 208
Plotting the Chart ............................................................................................................................. 211
Some Tips for Charting Success ...................................................................................................... 214
Applying the Chart to the Investigative Process ................................................................................ 214
Conclusion....................................................................................................................................... 215
Suggested Readings ....................................................................................................................... 216
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Table of Contents
Review Questions ............................................................................................................................ 218
Review Answers .............................................................................................................................. 219
Chapter 14 – Documenting and Presenting the Case ...................................................................... 221
Learning Objectives ......................................................................................................................... 221
Introduction...................................................................................................................................... 221
Creating a System ........................................................................................................................... 221
The Casebook System..................................................................................................................... 221
Report Writing.................................................................................................................................. 226
Testifying as a Financial Expert ....................................................................................................... 228
Conclusion....................................................................................................................................... 238
Suggested Readings ....................................................................................................................... 238
Review Questions ............................................................................................................................ 240
About the Authors ............................................................................................................................. 242
Glossary ............................................................................................................................................. 243
Index .................................................................................................................................................. 245
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