FORENSIC ACCOUNTING

“provide expertise in matters involving arbitration support, including the making up of Statements, Reports, and

Memorials on Account Books, on disputed Accounts and Claims for

the purpose of laying before Arbiters, Courts or Counsel.”

$123,103 = $1,658,325;

$257,287 = $3,465,924;

$195,677 = $2,547,616;

$218,057 = $2,871,072;

$140,534 = $1,893,139;

$104,000 = $1,417,374

$13,853,450

Net worth method (value of assets owned – liabilities owed)

Expenditure method (tracing & documenting monies spent for

everything)

FORENSIC ACCOUNTING TODAY

OverviewPart 1What does a Forensic Accountant do?

Who hires Forensic Accountants?

What situation calls for a Forensic Accountant?

What methods are used by Forensic Accountants?

How is the testimony of the Forensic Accountant used in court?

FORENSIC ACCOUNTING TODAYOverviewPart 2White collar crime on the riseCurrent Forensic Accounting case: Worldcom

What were the findings?What were the damages?What were the punishments for the offenders?

PART 1What does a Forensic Accountant do?

Unlike a traditional auditor who verifies compliance with GAAP the Forensic Accountant will take a much closer look at financial statements and will check for irregularities.

PART 1Who hires Forensic Accountants?

Public Sector:

IRS

FBI

State and local police

Private Sector:

Private Investigation firms

Large Corporations

- (e.g. banks, insurances, other companies)

PART 1What situation calls for a Forensic Accountant?- Tax disputes, especially VAT and Payroll tax- Conduct of directors- Insolvency investigations- each time there is a suspicion of fraud or employee

theft (expense reimbursements)- occasionally divorce cases

PART 1What methods are used by Forensic Accountants?

Direct Method:

also known as transactional method, includes:

- investigation of canceled checks, invoices, contracts, agreements, public records and notices

- interviews of management and employees.

PART 1What methods are used by Forensic Accountants?

Indirect Methods:

• Cash T Method: compares cash received/cash spent

• Source and Application of Funds Method: compares

lifestyle spendings vs. assets and investments

• Net Worth Method: compares assets to liabilities

• Bank Deposit Method: compares known sources against unknown sources

PART 1How is the testimony of the Forensic Accountant

used in court?

PART 1How is the testimony of the Forensic Accountant

used in court?

A Forensic Accountant can either be used as a “witness of fact” or as an “expert witness”

PART 1How is the testimony of the Forensic Accountant

used in court?witness of fact – can only provide evidence on what they saw, did or heardexpert witness – as an expert must demonstrate an undisputable level of expertise in accounting and related areas they are giving evidence on, the experts opinion matters to the court

PART 1How is the testimony of the Forensic Accountant

used in court?

PART 1How is the testimony of the Forensic Accountant

used in court?Evidence given by Forensic Accountant should be very specific and must be:

• reasoned and supported by proper documentation• Opinion must corroborate that information• Techniques used, must be documented

e.g: interviews should be backed up by questionnaires and methods used to discover fraud should be disclosed

PART 2White collar crime on the rise?White collar crime has grown exponentially over the last decades

National comparison:

1970: Cost of white collar crimes annually $ 5 billion

1990: Cost of white collar crimes annually $ 100 billion

Per the Association of Certified Fraud Examiners (ACFE):

current annual cost of white collar crimes are estimated to be around $994 billion annually

every third household becomes the victim of white collar crime

PART 2Current Forensic Accounting Case: Worldcom

What were the findings?

- Wrongly classified expenses of $3.8 billion as capital expenditures without authorization or paper trail, which included $ 500 million for computer expenses

- Overstatement of assets

- $2.8 billion were moved from reserves into revenues

- Inflated net income

- Overstating there revenues

- Neglect of General Accepted Accounting Principles

PART 2Current Forensic Accounting Case: Worldcom

What were the damages?Damages to employees:

- Decrease in retirement funds, funds dropped from

$ 642.3 million to $ 18.7million

- At least 17,000 jobs were lost

Damages to investors:

- Decrease in share prices from $ 64.5 a share to < $ 1.00

Other damages:

- Demise of Arthur Anderson

PART 2Current Forensic Accounting Case: Worldcom

What were the punishments for the offenders?

Scott SullivanCFO, CPA and treasurer board member

Sentenced to 5 years in prison as part of a plea

deal

PART 2Current Forensic Accounting Case: Worldcom

What were the punishments for the offenders?

Bernard EbbersCEO

Sentenced to 25 years in prison

PART 2Current Forensic Accounting Case: Worldcom

What were the punishments for the offenders?- Other indictments included:

- Buford Yates, Director of Accounting

- Betty Vinson, Director of Management Reporting

- Troy Norman, Director of legal entity reporting

- Worldcom had to pay $ 750 million to the SEC which was

distributed to investors as compensatory damages

Where are we going from here?

GROWTH IN FORENSIC ACCOUNTING

http://www.ibisworld.com/media/2013/08/21/accountants-uncover-opportunity-in-forensics/

THE INDIVIDUAL TECHNOLOGY

Think Outside the Book

What is a controller?

An individual who has responsibility for all accounting‐related activities within a firm. Prepares financial statements Prepares operating budgets Prepares governmental reports Taxes Compliance

Prepares technical accounting processes

Our presentation

Defense Procurement process through which authorities in the field of

defense acquire the various goods, services or works they need in order to perform their duties and missions.

Air Force What processes and parameters must they

consider when purchasing their equipment?

More to it

Real world activities and responsibilities go much deeper than what a simple book or website definition can provide More to it than “cost‐drivers” and bottom line

A few illustrations to clarify my point Southpark My job

The Air Force Mission Statement “Fly, fight and win … in air, space and cyberspace.” Formed in 1947

Headquartered at the Pentagon in Washington, DC

One of the three lines of defense Subject to the Department of Defense

Regulations

Organization Decision Makers

Mike McCord – Under Secretary of Defense (Comptroller) and Chief Financial Officer

Debra Lee James –Secretary of the Air Force

Richard T. Ginman –Director of Defense Procurement and Acquisition Policy

Main Duties

Mike McCord Debra Lee James

Advisor to the Secretary of Defense on all budgetary and financial matters

Preparation and execution of budgets

Fiscal, cost, operating, and capital property accounting

Progress and statistical reporting

Responsible for domestic, international, and contingency contract policies

Acquisition policies Oversight of the DoD

5000.1 and 2 Oversight of the

DFARS and FAR Oversight of the

purchase program Co‐leader to the

pricing and contracting community

Organizing, training, equipping and providing for the welfare of more than 690,000 active duty, Guard, Reserve and civilian Airmen and their families.

Oversees the Air Force's annual budget of more than $110 billion.

The construction, outfitting, and repair of military equipment.

Richard T. Ginman The act of acquiring goods and services from contractors, federal arsenals, and shipyards to support military operations

Applies to the design, engineering, construction, testing, deployment, sustainment, and disposal of weapons or related items from a contractor (acquisitions and procurement used interchangeably)

System is heavily regulated and upheld to various statutes by the Department of Defense

Procurement Defined

Title 10 Federal Regulations of the Department of Defense

1) Federal Acquisitions Regulations (FAR) Applies to entire federal government

2) Defense Federal Regulations Acquisitions (DFAR) Applies only to the Department of Defense

3) Individual DoD Component Regulations Berry Amendment Buy American Act

Three Step Procurement Process for the Defense Branches

The Joint Capabilities Integration and Development System

The Planning, Programming, Budgeting, and Execution System

The Defense Acquisition System Milestones A) Technology maturity and risk reduction B) Engineering and manufacturing development C) Production and development

Procurement Three Step Process Continued

1 ) THE JOINT CAPABILITIES INTEGRATION AND DEVELOPMENT SYSTEM

Process by which the Air Force identifies, assesses, and prioritizes what capabilities it requires to fulfill its mission

Created in 2003 and fundamentally changed the way the Air Force developed its requirements Threat based approach prior to this

This process is now a capabilities based approach which identifies the needs that are set by the National Military Strategy, National Defense Strategy, and Quadrennial Defense Review

Annual four step process that develops the Air Force’s proposed budget for all acquisitions (i.e. procurement of items)

Planning Programming Budgeting Execution

2) THE PLANNING, PROGRAMING, BUDGETING AND EXECUTION SYSTEM

3) THE DEFENSE ACQUISITION SYSTEM

Management process the Air Force develops and uses to buys items This program is tailored as much as possible to the

specific products being acquired Milestone gates A, B, and C must be passed

before a product is deemed ready to proceed

3) THE DEFENSE ACQUISITION SYSTEM CONTINUED

Passing Milestone A – Technology Maturity and Risk Reduction Phase Must have approval from the Milestone Decision

Authority (MDA) Must submit a cost estimate The program must have full funding for the length

of the Future Years Defense Program If contracted then must have a Request for

Proposal

Passing Milestone B – Engineering and Manufacturing Development Phase Must have full funding for the length of the Future

Years Defense Program An independent cost estimate must be submitted

to the Milestone Decision Authority (MDA) Risk must be mitigated Milestone Decision Authority (MDA) must

approve and update the Acquisition Strategy

3) THE DEFENSE ACQUISITION SYSTEM CONTINUED

Passing Milestone C – Production and Deployment Phase Product must be sustainable Must pass development testing and operational

assessment Estimated cost must be within the cost caps Must have full funding for the length of the Future

Years Defense Program Capability and Production Document must be

approved Milestone Decision Authority (MDA) must

approve the updated Acquisition Strategy

3) THE DEFENSE ACQUISITION SYSTEM CONTINUED Buy American Act

The Buy American Act is a federal legislation that requires the U.S. government to prefer U.S. made domestic products over foreign goods

In certain government procurements, the reliance on domestic products may be waived if the domestic product is more expensive than an identical foreign product by 50%

Air Force Exemptions

Foreign products can be purchased when the head of the agency makes a determination that domestic preference would be inconsistent with public interest

2.Foreign products can be purchased when there is non‐availability of these articles because it cannot be manufactured, mined, or produced in the U.S

3. Foreign products can be purchased when the domestic products are sold at unreasonable cost

4. Foreign products can be purchased specifically for commissary resale

Problem to Controllers

Controllers and managers have been protesting this act for many years

“A pre‐depression era act that is no longer viable with the rise of world production”

No longer about cost analysis Implications of non‐cooperation range from

penalties to no longer being able to bid on products

Severely limits ability to chose products and costing from a global market

Berry Amendment

The Berry Amendment is a statutory requirement that restricts the DoD from using funds for procurement of food, clothing, fabrics, fibers, yarns, other made‐up textiles, and hand or measuring tools that are not grown, reprocessed, reused, or produced in the United States

This maintains the security and safety of the products, while boosting those businesses in the United States

Problem to Controllers

Controllers have trouble interpreting amendment because of its nature

Many subsections and each department has different rules

Many government contractors do not know or understand Barry Amendment

Hard to get correct procurement bids that “check all the boxes”

How This Relates

The Buy American Act and the Berry Amendment shows how controllers must not only worry about costing, but the red tape these acts and amendments push

It makes the cost drivers much different and hard to judge, because they in certain situations buy some things in America and some foreign depending on the regulation

This makes costing very difficult and decisions on what products to use for these procurements cannot be based just upon what cost drivers give them the most profitable result

How This Relates

These acts can cause The Air Force and DoDto spend more than usual and cause their expenses and cost drivers to rise

Even though it provides American businesses to be more profitable, the extra money it takes to buy these items comes from the American taxpayers wallet

Class Vote

Should the Berry Amendment and Buy American Act still be in use today?

Sources

http://www.acq.osd.mil/dpap/cpic/ic/docs/QAUSDoDProcSystem‐200811.pdf

http://www.acq.osd.mil/dpap/ops/biography.html

http://www.defense.gov/bios/biographydetail.aspx?biographyid=175

http://www.af.mil/AboutUs/Biographies/Display/tabid/225/Article/467806/deborah‐lee‐james.aspx

http://dag.dau.mil/pages/default.aspx

http://www.pepperlaw.com/publications_update.aspx?ArticleKey=565

http://www.dau.mil/pubscats/pubscats/AR%20Journal/arq99/smyth.pdf