Forensic Accounting
Eric J. Johnson, CPA, CIA
&
Lysa Park, CPA
What is Forensic Accounting

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Ask Enron and WorldCom!!
Legally accurate accounting.
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accounting that is sustainable in some adversarial
legal proceeding, or within some judicial or
administrative review.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
What is Forensic Accounting

Focus is:
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the evidence of economic transactions and
reporting
the legal framework which allows such evidence
to be suitable to the purpose(s) of establishing
accountability and/or valuation
In other words:
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the identification, interpretation, and
communication of the evidence of economic
transaction and reporting events
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
What is Forensic Accounting

Department of Labor Statistics Job Description

Some public accountants specialize in forensic
accounting—investigating and interpreting white collar
crimes such as securities fraud and embezzlement,
bankruptcies and contract disputes, and other
complex and possibly criminal financial transactions,
such as money laundering by organized criminals.
Forensic accountants combine their knowledge of
accounting and finance with law and investigative
techniques in order to determine if illegal activity is
going on. Many forensic accountants work closely with
law enforcement personnel and lawyers during
investigations and often appear as expert witnesses
during trials.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
What is Forensic Accounting


often mistakenly assumed to be exclusively
associated with "negative" applications, such
as bankruptcy, fraud, business disputes, or
matrimonial divorce.
may also be applied in "positive" assurance
engagements such as due diligence reviews,
business valuations, audit committee
advisory services and enterprise risk
management.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
What is Forensic Accounting


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Forensic accounting is applied to the
evidence of first order activities, not
secondary systems of controls.
Analysis includes the crucial aspect of
recognizing the implications of evidence that
has been obtained.
Additional protocol extensions are employed
to forecast or predict future conditions based
on known past transactions or events.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
What makes a Forensic
Accountant?
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Background in accounting
Background in Information Systems
Preference to certifications:
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CPA
CIA
CFE
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Obtaining the credential involves passing a four-part,
10.5-hour exam that covers law, financial transactions,
investigation, criminology and ethics
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Opportunities

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The forensic field of accounting, currently
enjoying a plethora of opportunities, is on the
hunt for technically proficient, intellectually
curious, persistent, creative and discrete
CPAs.
Fortune 500 Companies
FBI
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Opportunities

Starting salaries, Svendson says, can range
between $50,000 and $60,000. After that, “It
depends on how well you’ve progressed. Sixfigure salaries are not unusual, and they go
much higher the higher up you get.”
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
Adelphia
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Interesting case involving father/son defendants.
Father John Rigas and son Timothy convicted on
federal charges of conspiracy, bank fraud and
securities fraud.
Consequences?
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Father, John Rigas = 15 years in prison.
Son, Timothy Rigas = 20 years in prison.
Rigas family forfeits $1.2 Billion in assets to settle cases
brought by federal regulators.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
Adelphia, continued
 Consequences?
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Scheme resulted in tax fraud – failing to report
and pay income taxes on funds the pair diverted.
Three of John Rigas’ other children are being
charged as part of the tax fraud.
Adelphia has been sold to Time Warner and
Comcast for more than $17 Billion.
IRS Special Agent Peter Alvarado Quote: “They are not
above the law.”
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
Enron
 Instigated much of the reporting legislation we know
as Sarbanes-Oxley.
 Trials pending January, 2006 on federal charges of
fraud and conspiracy for:
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Former Chairman and CEO Kenneth Lay
Former CEO Jeffrey Skilling
Chief Accounting Officer Richard Cousey
Consequences?

Finance Chief Andrew Fastow pleaded guilty to conspiracy
charges (turned evidence), faces 10 years.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
Enron, continued
 Consequences?
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Andrew Fastow reached his plea bargain only after working
out a plea bargain for his wife.
Lea Fastow, wife of Andrew, served one year on tax
charges – has been released.
Mrs. Fastow only person charged not employed by Enron
at time scandal broke.
Mrs. Fastow’s attorney attempted reduced sentence when
Martha Stewart received 5 months – unsuccessful.
Former treasurer Ben Glisan pleaded guilty – serving 5
years.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
HealthSouth
 Founder (and fired) Chief Executive Richard
Scrushy charged with fraud, false corporate
reporting and making false statements to
regulators.
 First CEO charged under Sarbanes-Oxley
reporting law.
 HealthSouth case was the law’s first court
test.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
HealthSouth, continued
 Consequences?
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Accounting scheme resulted in $2.7 Billion overstatement
in earnings – company near bankruptcy.
Since 2003, 15 former HealthSouth executives have
pleaded guilty to charges.
Scrushy blamed massive accounting scheme on
subordinates.
“SOX” first court test failed – Scrushy acquitted on all
charges.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
Tidbits
Martha Stewart Living Omnimedia
 Founder Martha Stewart sentenced to 5
months in prison, 5 months house arrest.
 Convicted of conspiracy, obstruction of
justice, making false statements.
 Former Merrill Lynch broker, Peter
Bacanovic, was also sentenced to 5 months.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
Tidbits, continued
Tyco
 Former Chief Executive Dennis Kozlowski and
former CFO Mark Swartz were convicted on 22/23
counts of grand larceny, conspiracy, securities fraud,
and falsifying business records.
 Prosecutors accused the two of conspiring to
defraud Tyco in order to fund extravagant lifestyles.
 The two each face up to 30 years in prison.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting –
Applications and Consequences
Tidbits, continued
WorldCom
 Former CEO Bernard Ebbers was convicted in
March 2005 of federal fraud and conspiracy
charges.
 Massive accounting fraud estimated at $11 Billion.
 Ebbers was sentenced to 25 years in July 2005.
 Finance Chief Scott Sullivan was sentenced to 5
years in prison.
 Company now operating as MCI.
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA
Forensic Accounting
Questions?
Francis Tuttle Advisory Committee for
Computers and Accounting, Fall 2005
Eric Johnson, CPA, CIA & Lysa Park, CPA